RAI Relies on New Product Launches To Bolster Revenues
Reynolds American Inc. promoted a number of innovative smoke-free tobacco products which are about to be launched to the U.S. market, in attempt to rise the tobacco company’s performance and retain consumers in the segment.
RAI latest products, among which are an electronic cigarette and nicotine replacement treatment, are being introduced as the company deals with a challenging trade environment driven by to slipping demand for conventional cigarettes. Cigarette sales have been shrinking for several years, partly due to economic downturn and high unemployment which leads to less disposable income in adult consumers.
Reynolds American has been more affected in past quarters than its major rivals, Altria Group Inc. (MO) and Lorillard Inc. (LO). The company, No. 2 U.S. tobacconist behind Altria, has recorded drop in market share during the last six consecutive quarters on year-over-year basis.
The tobacco producer raises profitability by reducing expenses and lifting prices, yet also considers an advantage to operating margin by developing new products. During the investor conference held last week, President and CEO Daniel Delen, admitted cigarettes have the lowest operating margins rates among all products RAI markets.
It means the more innovative products Reynolds American introduces to the market, the larger potential to increase profitability. Mr. Delen declared the firm’s latest nicotine replacement treatment and electronic cigarettes that are hitting the market should both account for higher margins within the long term versus cigarettes.
The group’s electronic cig product, named Vuse, is coming to a market that is having a high rate of consumer trial yet “exceptionally” low conversion rate, said Mr. Delen. He added consumers generally try to use the electronic cigarette, using them for a while, but usually return to smoking conventional cigarettes.
Although 80 percent of tobacco consumer aged 21 and up know about e-cigs, RAI noted just 5.9% of young adults over 18 have admitted to try these products– which higher than those who tried using snus and snuff products. That means there is a higher chance more users will try electronic cigs.
Reynolds American is also pitching into the $1 billion market of nicotine replacement treatments, which is led by Nicorette brand made by Johnson & Johnson and some generic brands. RAI said almost all these products, which are typically sold in large amounts of up to 200 a pack, are usually available only in drug stores.
The company has entered the market with a test-launch in Iowa, introducing a product, named Zonnic, a mint-flavored gum, which comes in 10-item packs, resulting in a more affordable cost. Zonnic is mainly sold at gas stations and convenience stores, priced in the same price-category as premium cigarette brands.
RAI President Delen said, despite challenging economic conditions, and rigorous battle for market share, the company will continue to promote Camel and Pall Mall brands, since according to market reports, consumers have consolidated around famous brands, instead of switching to cheaper generic ones.