Please ensure Javascript is enabled for purposes of website accessibility

Instant Analysis: Reynolds American Inc. Launches NextGen Products Subsidiary

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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
371%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.