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    RAI Highlights Its 'Total Tobacco' Strategy

    The tobacco company looks to innovation in OTP as it moves forward.

    WINSTON-SALEM, N.C. -- Innovation and driving growth brand equity are key elements of Reynolds American Inc.'s (RAI) total tobacco strategy.

    The Winston-Salem, N.C.-based tobacco company, highlighted its total tobacco strategy in the context of the evolving consumer and the current regulatory environment at its annual Investor Day held in New York Nov. 12.

    According to Bonnie Herzog, managing director of beverage, tobacco and consumer research at Wells Fargo Securities, President and CEO Daniel Delen characterized RAI as having the best exposure to tobacco's "emerging markets"-- OTP categories such as smokeless tobacco, vapor (e-cigarettes) and nicotine replacement -- all having margins that are higher than traditional cigarettes. As declines continue to hit the cigarette category, the company believes it can "right the ship" as consumers move to these emerging tobacco categories, Herzog explained.

    "We are optimistic that RAI will be able to 'operationalize' innovation to build long-term sustainable growth in total tobacco," she added.

    However, despite the buzz swirling around the OTP category, RAI said it will continue to spend 80 percent of its brand support budget and 90 percent of other resources such as research and development on combustibles.

    Two flagship cigarette brands highlighted at RAI's Investor Day -- Camel and Pall Mall -- continue to be an integral part of the company's strategy, according to Herzog. Specifically, 63 percent of RAI's cigarette volume in the third quarter of 2012 was driven by growth brands versus 24 percent in 2004. Also, Grizzly continues to lead the smokeless category with its compelling consumer value proposition.

    "RAI's key brand focus should allow it to balance and optimize volume and drive trial, market share, consumer loyalty and profitability using innovative product line extensions and compelling, relevant marketing," Herzog said.

    In addition, RAI's Natural American Spirit brand continues to generate robust growth. "Based on our valuation, we think the business could be worth [approximately] $3.7 billion on a standalone basis," she added.

    Herzog explained that RAI has been successful with repositioning brands, creating excitement, driving trial for new products and categories, and incorporating technology into its products as a way to increase the value proposition for consumers. "We believe, RAI's ability to "operationalize" innovation is a leading competitive advantage," she added.


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