Most investors will know that the United States domestic tobacco market is controlled by three main companies: Altria (NYSE: MO ) Reynolds American (NYSE: RAI ) and Lorillard (NYSE: LO ) . However, most investors are unaware of the fourth-largest tobacco company operating within the United States, Commonwealth Brands
Commonwealth Brands was bought out by global tobacco giant Imperial Tobacco (NASDAQOTH: ITYBF ) back in 2007 and, as of yet, the company has failed to make a significant impact on the market even with its international backer.
However, after six years of waiting it would appear that Imperial is ready to throw its weight behind Commonwealth and start stealing market share from the likes of Altria, Reynolds, and Lorillard.
In particular, during an interview with CNBC after the recent release of Imperial's fiscal full-year results, CEO Alison Cooper stated that Imperial saw huge potential within the US market and the company was looking to drive sales growth within the region. She also revealed that during the last year or so, Imperial had put in place a new sales team for the US market and redeveloped the company's product offering. Both of these actions were ahead of a major sales drive planned by the company.
Domestic manufacturers should be worried as Imperial is a force to be reckoned with. Indeed, Imperial has a huge amount of firepower behind it. During fiscal 2013 the company reported revenue of more than GBP 28 billion, or $45 billion at current exchange rates, which is more than the revenue of Altria, Lorillard, and Reynolds combined.
Actually, $45 billion in sales would be approximately the same as two years' worth of sales for Altria, or five-and-a-half years' worth of Reynolds' sales. If Imperial decides to aggressively attack the market shares of the domestic tobacco companies, it could leave the domestic companies fighting for their lives.
Keeping an eye out
While the domestic tobacco market is yet to feel the full force of Imperial's sales drive, volumes are falling and costs are being cut to keep profits rolling in.
Altria, for example, has been forced to grapple with the general cigarette sales decline affecting the whole industry. In particular, for the first nine months of this year Altria's total volume of cigarettes sold declined 3.6%. The general decline has forced the company to restructure, and so far the company is in line to achieve $400 million in annualized cost savings as of this year.
The question is if Imperial starts to grab market share, how much more fat can Altria cut out?
Lorillard is the exception when it comes to declining sales and the need to cut costs. Indeed, during the first nine months of this year Lorillard's cigarette sales only declined a minuscule 0.1%, with the majority of this decline being felt within the value segment of the company's cigarette offering. In particular, during the nine months to September the company's value cigarette sales declined 5.1%, while sales of full price brands expanded 0.6%.
These rising sales volumes were not because more people started smoking but due to the fact that Lorillard's share of the menthol cigarette market has expanded nearly 1% so far this year. As Reynolds American is the only other major menthol player in the US market, we can assume that Lorillard is stealing some of its share from Reynolds.
If I had to pick one company, I would say that Reynolds is most at risk from this invasion from Imperial. As covered above, it would appear that the company is already losing menthol share to Lorillard. The company's market share in general is declining faster than the shares of its peers.
For the nine months ending September, Reynolds' total volume of cigarettes sold within the US declined 6.3%, faster than the industry-average decline of 4.1% reported for the same period.
So overall, Imperial Tobacco's new sales drive into the US domestic cigarette market could prove troublesome for domestic companies Altria, Lorillard, and Reynolds American. However, it will be interesting to see how this sales drive by Imperial works out over the next few quarters and I am hesitant to place any bets just yet.
That said, if I was forced to pick a winner I would say that thanks to its international exposure, Imperial has the ability to dominate the market.
Tobacco companies aren't the only investments that pay great dividends
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.