How Big Tobacco's Trying to Regain Lost Ground in the U.S.

With the Big Apple in the grip of a new anti-smoking law enacted late last month, some cigarette makers are seeing an opportunity to shore up their top lines — a smokeless opportunity.

Quick to capitalize on the situation, Reynolds American (NYSE: RAI  ) has launched print-ad campaigns in some national newspapers to promote Camel Snus, for those who love tobacco but hate smoke.

In an environment that's becoming increasingly hostile toward smoking, Reynolds America knows that clever marketing is key to an intelligent, sustainable, and successful business strategy. Other tobacco giants are following suit quickly.

Tobacco in the no-smoke zone
Cigarette makers have long been testing out alternative tobacco products. Today, they're plunging even deeper into it — perhaps out of necessity, but also because that's where the most innovation is taking place.

This segment is stacked with competition. British American Tobacco (AMEX: BTI  ) sells similar products, and it says that Swedish and Norwegian adults alone consume more than 240 million cans of smokeless tobacco every year.

Thanks to a large takeover several years back, Altria's (NYSE: MO  ) U.S. Smokeless Tobacco Company is the world's leading manufacturer of moist smokeless tobacco. When reporting their first-quarter results, U.S. Smokeless Tobacco and Philip Morris USA said they believed volumes within the smokeless category to have grown by an estimated 7% in the first quarter of 2011.

A company seemingly on the cutting edge of the industry, Star Scientific (Nasdaq: CIGX  ) , markets dissolvable smokeless-tobacco products, the first of their kind on the commercial market.

This is a very competitive industry that may get even more competitive in the near future.

Thank you for not smoking
The market for snus and snuff is already big, with the United States and Scandinavia being the largest regional markets. Swedish Match has estimated that more than 1.5 billion cans are sold annually, with around 30 million to 40 million in the U.S. market. (The U.S. moist snuff market in particular has grown significantly in the past 10 years.) Slap on an average price tag of roughly $5 per can (my own estimates), and you can see how big a business this really is.

In terms of overall share in the U.S. market for snus and snuff, Altria claimed an estimated 56% by volume in 2010, while Reynolds stood at 30.3%.

The market for smokeless tobacco in the United States is forecasted to grow at a compounded annual growth rate of 7% between 2010 and 2012. Considered together with the government's increased emphasis on stricter smoking bans, this segment should continue to grow.

While cigarette volumes have declined in the U.S., moist snuff volumes grew at an average rate of around 6% annually in the past five years. Even better, moist snuff products generally render higher profit margins than cigarettes do. Combined with tougher regulations in their core businesses, this reality explains why more and more tobacco companies are interested on focusing on such smokeless products.

The key lies in how well the companies market these products and generate profits from their sales.

Looking forward
New York's citywide smoking ban makes smoking illegal in the city's 1,700 public parks and beaches, along with several plazas. And at the national level, the FDA is continuing to study measures to curb tobacco use. In the past few months, the agency has contemplated limiting or banning menthol and other mint-flavored cigarettes. Such a move would hit companies heavily reliant on menthols, including Lorillard (NYSE: LO  ) .

Amid stricter regulation and even outright bans on smoking, it makes a lot of sense for the tobacco companies to diversify their product base. Keep an eye on Reynolds by adding it to your watchlist, so you can watch future developments in the industry.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Altria. Motley Fool newsletter services have recommended writing puts in Lorillard. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 10, 2011, at 1:30 AM, mm5525 wrote:

    Buy PM instead of any USA-based tobacco company and save yourself the headache. The Marboro Man dominates overseas. The article above is exactly why PM was spun out of MO back in 2008.

  • Report this Comment On June 13, 2011, at 12:50 PM, BillGodshall wrote:

    Since ALL smokefree tobacco/nicotine products marketed in the US (including moist snuff, snus, electronic cigarettes, nicotine gums and lozenges) are 99% less hazardous than cigarette smoking, public health also benefits when tobacco companies and smokers switch to or substitute smokefree alternatives instead of cigarettes.

    Switching to smokefree tobacco/nicotine products reduces smokers health risks nearly as much as quitting all tobacco/nicotine use.

    Several million male smokers in the US and Sweden have already quit smoking by switching to smokeless tobacco, and about a million smokers worldwide have quit smoking by switching to electronic cigarettes.

    But unfortunately for public health, honesty and ethics, for the past 25 years government health agencies and anti tobacco extremists vehemently oppose cigarettes smokers reducing their health risks by switching to far less hazardous smokefree alternatives, and have deceitfully mislead smokers and the public to inaccurately believe that smokeless tobacco products and e-cigarettes are just as hazardous as cigarettes.

    During the past two years, the FDA and anti tobacco extremists attempted to ban e-cigarettes while keeping far far more hazardous tobacco cigarettes legally accessible to high school seniors.

  • Report this Comment On June 14, 2011, at 5:25 PM, Teacherman1 wrote:

    Not trying to pick a fight, but wasn't there something in the news a few years back about getting your kicks by putting tobacco in your mouth causing throat and tounge cancer.

    I may be wrong, since I am getting older and my memory is not what it used to be, but thougt I would throw this out for consideration.

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