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Instant Analysis: Reynolds American Inc. Launches NextGen Products Subsidiary

By Rich Duprey – Jan 11, 2016 at 8:46AM

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Tobacco company sees vapor technology as a big growth industry.

What happened?
Tobacco giant Reynolds American (RAI) continues to look to a future beyond just cigarettes and announced it's created a separate division called RAI Innovations that's tasked with developing next-generation vapor and tobacco products.

Does it matter?
Cigarette usage remains in decline. Although industry data suggests Reynolds enjoyed a 4% increase in sales in December, fueled in part by a 5% increase from its Newport menthol brand it acquired when it bought Lorillard, the vast bulk of the increase was the result of price increases it instituted in November.

Altria (MO 1.66%) and Reynolds control nearly 90% of the U.S. tobacco market, with Imperial Tobacco owning another 10%. Altria's Marlboro brand owns almost 44% of the market by itself, while Newport maintains a 13% market share (and a 38% ownership position over the entire menthol cigarette market).

The protracted drop in volumes is causing Reynolds and the other tobacco companies to look to other products like electronic cigarettes and vapor systems to boost growth. Last month, Reynolds signed an agreement with British American Tobacco (BTI 2.25%) that will see them collaborate globally on research and development activities, regulatory matters, and scientific and manufacturing issues on next-gen vapor products. Reynolds owns top-selling e-cig brand Vuse, which recently unveiled four new brand extensions, while British American Tobacco bought European e-cig maker CHIC Group last September.

As cigarette volumes fall, the tobacco giants hope reduced-risk vapor products will sustain them, but electronic cigarettes have run into a regulatory wall of resistance, and Nielsen data suggests sales fell almost 15% last month.

Reynolds says the new division will allow it to centralize new-product development in these areas as consumer preferences continue to evolve.

Although the tobacco companies are committed to finding new growth streams, opposition to anything tobacco makes advancing products, even those that offer reduced risk but are still reliant upon tobacco- or nicotine-based, a difficult challenge.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not 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.

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Stocks Mentioned

Reynolds American Inc. Stock Quote
Reynolds American Inc.
Altria Group Stock Quote
Altria Group
$46.58 (1.66%) $0.76
British American Tobacco Stock Quote
British American Tobacco
$41.27 (2.25%) $0.91
Nielsen Holdings Stock Quote
Nielsen Holdings
Imperial Brands PLC Stock Quote
Imperial Brands PLC
$25.66 (1.04%) $0.27

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