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.
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.