R.J. Reynolds (NYSE:RJR) investors may have been muttering the crisis-mode quote, "Smoke 'em if you got 'em," after the company reported a wider quarterly loss Tuesday. The numbers show that, among other things, the impact of discounters is beginning to take its toll on RJR's fortunes.

The Big Tobacco concern said its fourth-quarter loss worsened due to the impacts of discount cigarette providers and its ongoing restructuring efforts. RJR reported a net loss of $136 million, or $1.62 per share, as compared to a net loss of $59 million, or $0.69 per share, in the same quarter last year. Also dismal was RJR's 12% fall in net sales, to $1.23 billion from $1.41 billion, based both on lower shipments and promotional pricing.

RJR's mighty, but even though it says its Camel, Winston, Salem, and Doral brands are four of the top 10 cigarette brands in the U.S., overall sales have been flagging. In fact, not so long ago, RJR decided to greatly reduce marketing expenditures on its Winston and Doral brands in order to refocus marketing resources to its stronger brands, Camel and Salem. It competes with many of the high-profile brands associated with Altria (NYSE:MO), such as Marlboro and Merit, as well as a whole variety of discounted smokes.

Deep discounting of cigarettes is nothing to underestimate. Although it's easy to see the population of die-hard smokers as a cash cow, rising prices and higher taxes have made cigarette smoking a luxury habit for some smokers in some regions. For example, a carton of premium cigarettes, such Camel or Marlboro, reportedly now run about $70 per carton in New York City (which translates into $7 a pack). Talk about a customer base that's got a craving for a deal.

If there's one ray of hope that isn't already included in the 2004 guidance, it's the company's pending merger with British American Tobacco (NYSE:BTI), which is expected to gain approval by the middle of this year. RJR declined to give any potential impacts of the deal as of yet, but Fool Rick Munarriz commented on the possible upside of the transaction back in October.

In the restructuring, RJR hopes to achieve $1 billion in cost savings by 2005. So far, it garnered $400 million in savings in 2003, an amount that is ahead of schedule, according to its conference call (transcript courtesy of CCBN StreetEvents). Another $400 million in cost savings are scheduled for 2004.

Other than that, RJR's got its work cut out for it, between litigation, price competition, and smokers trying to quit, not to mention ongoing public health flak. But RJR's made it this far, and the upcoming acquisition should make the playing field an interesting one.

Can RJR fight both Altria and the discounters? Talk about it with other Fools on the R.J. Reynolds or Altria discussion boards.

Alyce Lomax does not own shares of any of the companies mentioned. She welcomes your feedback via e-mail.