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    Retailers Stuck Between Tobacco Contracts

    Philip Morris and RJ Reynolds' merchandising contracts leave retailers with tough decisions.

    NEW YORK -- Divide and conquer seems to be the strategy that tobacco manufacturer R.J. Reynolds is implementing to gain ground on competitor Philip Morris' space on retailer shelves. Meanwhile, Philip Morris will increase its presence in the category with Marlboro Smooth, a menthol cigarette currently rolling into stores with the slogan "Menthol like no other," according to Brandweek, a sister publication of Convenience Store News

    The ad agency handling the product introduction is Chicago-based Leo Burnett. Marketing will center around point-of-purchase displays, discount coupons and mail-in offers being sent to a database of more than 26 million adult smokers.

    According to the Brandweek report, Smooth will accompany Marlboro Menthol -- the number two menthol cigarette -- in an attack on the top menthol brand -- Lorillard's Newport, which saw market share grow in 2006 from 8.4 percent to 8.9 percent, according to the Maxwell Report. Reynolds also introduced two menthol offerings recently, Camel No. 9 and Kool XL.

    As Smooth hits the shelves, the company's in-stock guarantee will be in place. Those retailers at the highest tiers of the company's Retail Leaders program will offer consumers $2-off coupons for the next carton purchased at the store, if the store has an out of stock of a Marlboro product the customer wants. In addition, the Retail Leaders program offers participating stores monetary incentives for prime shelf position and prominent display, Brandweek reported.

    Reynolds is also raising the stakes for retailers. Its Retail Partners merchandising program previously allowed retailers to sign merchandising contracts with both Philip Morris and Reynolds, while collecting incentives from Reynolds and still giving Philip Morris the dominant space on shelves. Now, retailers will not receive buy-downs from Reynolds unless they give the company prominent shelf space.

    "It's impossible to have the best of both programs," a tobacco chain buyer told Brandweek. "You have to go with one program or the other, and RJR feels it will work in their favor."

    Similar sentiments were expressed at Convenience Store News' Tobacco Roundtable, held in February. "You have to make a decision on which manufacturer you are going to align with now," said Jerry Weger of Sheetz Inc. (see Convenience Store News, March 26 issue for the full article).

    "You used to be able to max out both contracts," added Rick Zamarchi of Tesoro Corp. "Now they [Philip Morris and R.J. Reynolds] are drawing lines in the sand, and it's tough to max out both contracts."

    The decision will be difficult for those stores that have an even mix of revenue from the manufacturers. One buyer told Brandweek that she will lose anywhere from $1 to $1.50 on a carton of Marlboro, compared to a competing retailer that earns more from larger discounts and buy-downs by signing a Philip Morris contract. The result -- Marlboro brand cigarettes might cost customers 10 cents more in her store, the report stated.

    However, by signing with Reynolds, she collects as much as $9 per carton for the Doral brand and $9.50 for the Pall Mall brand. In contrast, Philip Morris' incentives are approximately $8 per carton.

    Reynolds also raised its "product availability incentive" payments -- bonuses that encourage retailers to order extra inventory to avoid out of stocks -- to 25 cents per carton, compared to five cents per carton with Philip Morris' contract.

    This isn't the first time that Philip Morris and Reynolds have sparred over shelving issues. In 1999, Reynolds, along with the Brown and Williamson and Lorillard tobacco companies filed a lawsuit against Philip Morris' retail merchandising programs.

    The judge, Frank W. Bullock Jr., dismissed the case in May of 2002, ruling that Philip Morris' Retail Leaders program was not anti-competitive and does not restrain competition in the marketplace.

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