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    RJR Overhauls Retail Contracts

    New marketing strategy offers fewer benefits to retailers, according to reports.

    WINSTON-SALEM, N.C. -- Responding to what it terms a "dramatically changed marketplace," R.J. Reynolds Tobacco Co. has terminated all its U.S. retail contracts and is planning to introduce retooled programs July 1.

    The retail shake-up is akin to an opening salvo in what is expected to be a wider transformation in how the cigarette maker does business, the Triad Business Journal reported yesterday. RJR typically modifies its retail contracts about once every other year, but the rapidly changing retail climate surrounding the tobacco category prompted the cigarette maker to revisit its strategy about a year ahead of schedule. Letters to retailers informing them of the changes began going out last week, the report said.

    "We are fundamentally rethinking all aspects of our business, including our sales programs," said Reynolds spokeswoman Maura Payne. "We are shifting spending, reallocating resources into programs we believe will be able to help us compete more effectively in the future."

    The "rethinking" that Payne was referring to was discussed April 25 by Reynolds Chairman Andy Schindler. In a conference call with analysts, he let it be known that eroding profits weren't being ignored and that Reynolds managers were contemplating major strategic changes, which he hasn't elaborated on, the report said.

    The retailing overhaul should be seen as part of Reynolds' "broader effort that will ultimately materialize in terms of [re-evaluating] everything they do," David Adelman, an analyst with Morgan Stanley in New York, the Triad Business Journal.

    Payne declined to provide specifics on what the retail changes would encompass. But she said that under review are policies on profit-bonus payments to retailers who sell certain quantities of Reynolds brands, on returned goods, and on supplying the so-called "industry fixture," the display cases behind the counters of retailers that sell cigarettes which today are dominated by U.S. leader Philip Morris and its Marlboro brand.

    Retail contracts are important in the tobacco business in so much as companies spend most of their promotional budgets on point-of-sale advertising and retailer incentives. Because tobacco advertising is limited in this country -- billboard and broadcast advertising is banned, for example -- stores are the industry's leading point of contact with smokers.

    Peter Sodini, CEO of Sanford-based The Pantry, which operates more than 1,200 convenience stores in the Southeast, told the Triad Business Journal that Reynolds' new contracts provide fewer benefits to retailers. After more than a year of battling Philip Morris on buydowns and incentives, Reynolds appears to be taking its foot off the accelerator. But that doesn't necessarily mean Reynolds brands will get poorer play in convenience store counters, Sodini said.

    "It's not a boom for us," Sodini said. "There are a fair number of changes ... But that industry has been going through some real trauma in the last 12 months."

    In retail venues, complicating matters for players like Reynolds is that Philip Morris wields restrictive contracts with retailers that dictate product placement. In a legal battle last year, Reynolds and other Philip Morris competitors like Greensboro-based Lorillard Tobacco Co. unsuccessfully argued that Philip Morris was illegally using market power to keep smokers from seeing their products by virtue of such retail programs. The case is under appeal.

    At present, the report said, Winston has a 4.55 percent share of the market and Salem 2.29 percent. Stronger are Camel at 6.04 percent and Doral at 5.72 percent. Reynolds overall holds 22.9 percent of the cigarette market, compared with Philip Morris' more than 50 percent.

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