Part 1: Special Tobacco Analysis: - can big tobacco maintain market share??

November 1, 2009 - Cigarettes' big three—Altria, R.J. Reynolds and Lorillard—are facing aggressive challenges from down trading and segment shifting in the convenience-store channel. The nation's top three brands—Marlboro, Camel and Newport—are battling to hold onto market position in the convenience channel, some six months since Congress approved a record increase in the federal excise tax (FET) to finance expansion of the national children's insurance program, SCHIP.

Based on an exclusive survey conducted by CSP (Convenience Store / Petroleum) Daily News and UBS Tobacco Analyst Nik Modi, Lorillard appears to be the safest of the three.

Responding to the survey question asking, "Are you seeing substantial trade down from the big three premium brands?" half of the survey respondents said yes.

Asked which of the three premium brands are seeing the most negative pressure, about 40% named Marlboro specifically, and another 40% cited Camel or other Reynolds' brands such as Winston and Salem, products for which Reynolds has deliberately reduced support. Only Lorillard's Newport appeared relatively unscathed with less than 10% of respondents citing it as being under pressure.

"Newport is facing less down trading pressure relative to Marlboro and Camel because they have the most loyal consumer base," Modi said of Newport's strength in the menthol market, where it is now facing a fresh challenge from upstarts Blend 54 by Altria and Reynolds' Camel Crush. Modi noted that to date, Marlboro continues to wield power in the cigarette trade, with 42% market share. He added that Newport represents about 10% and Camel with 8%.

The survey is the second in an exclusive partnership between CSP and Modi concerning tobacco trends in the convenience-store channel. Earlier this year, CSP and Modi partnered on a three-month impact study on the FET increase's effect on tobacco sales. That report showed some down trading and total category sales declines but indicated that industry's worst fears had not come to fruition.

The more recent survey was conducted in early October and includes nearly three-dozen convenience chains representing more than 10,000 stores in the United States and featuring some of the industry's largest companies.

"Marlboro has lost the most in our stores while we remain fairly even in overall pack sales," said one East Coast operator. "Winston and Salem have declined," noted a Midwestern merchant. "Virginia Slims, Newport and Winston" have seen sales declines, said yet another retailer.

The study dovetails with another Modi conducted, this time with the National Association of Tobacco Outlets, of the tobacco-shop sector. When aggregating results from the CSP and NATO surveys, Modi reported that 46% of respondents identified Marlboro as the premium brand under the most pressure, with Camel at 36% and Newport at 18%.

This may not be surprising when considering that Marlboro represents more than 50% of total cigarette sales and is universally regarded as the industry's single-most dominant brand.

Most industry experts and players agree the April 1 FET spike was a game changer. The across-the-board tobacco levy hit roll-your-own and cigars especially hard. It also hiked cigarette carton prices to the point that many retailers swiftly downsized their carton inventory in return for more single packs.

Now six months have passed, and retailers are reporting a general decline in cigarette unit sales, but solid volume. Probing more specifically, many of the changes seen in the total tobacco category appear to be driven more by local tastes and state taxation.

Some comments from survey respondents: "Price is very strong in most of my market, rural America," stated one Midwestern retailer. "The fourth tier has taken lots of share from RJR, especially. Majors like Newport and Marlboro are slightly [affected], compared to most of the other major brands." "Our version of a sub generic is now the No. 3 brand in our chain," an East Coast merchant said. "Consumers," said a Texas operator, "are purchasing more packs instead of cartons. Still consuming the same, but opting for lower register rings at a time." And in perhaps a surprising statement in light of the mid-tier cigarette squeeze across much of the country, one retailer noted, "For our chain, the mid-tier is continuing to gain volume momentum at the expense of premium and low tier. Manufacturers are trying to swing it back to premium as they did in early summer. Too early to tell if premium will grow share this time with Marlboro Medium and Newport on extra deep discount."

The two surveys—CSP's and NATO's—netted 93 respondents. Modi noted that c-stores as a channel represent roughly 70% of all U.S. tobacco sales at tobacco-only outlets constitute about 10% of total domestic sales. "We believe these surveys could be helpful tools for retailers," Modi said, "to compare what they are seeing to the national average."

[In Part 2 of this series tomorrow, CSP Daily News looks at recent tobacco promotional strategies. Also, to hear how recent changes in tobacco taxes and regulations are affecting one tobacco-shop retailer, watch today's CSPTV.]

Reference: Special Tobacco Analysis, Pt. 1
Big Tobacco Fights for Share … CSP/Modi survey of retailers shows Marlboro, Camel battling market pressures by Mitch Morrison, CSP Daily News, 10/29/2009.