Cigarette Sales May Be Off, But Lorillard Still Rolls On
Friday, December 2nd, 2011
Fewer Americans smoke cigarettes these days, but Lorillard Inc. is betting it can buck the trend. Last year, as part of a decades-long decline, the percentage of U.S. adults who smoke dropped below 20%. Altria Group Inc. and Reynolds American Inc., the two largest U.S. tobacco companies by sales, have begun diversifying into smokeless tobacco products, which are less harmful than cigarettes, according to studies. Meanwhile, the federal government continues to tighten cigarette regulation, and it’s considering a crackdown on menthol brands, which account for 90% of Lorillard’s sales.
But Lorillard, maker of the Newport brand, is sticking to a strategy of selling only cigarettes, and so far it’s paying off: Cigarette shipments at the No. 3 U.S. tobacco company are up for the second year in a row, and revenue rose 9.1% to $4.85 billion in the 2011 nine months. Volume, meanwhile, rose 7.4% in the period, while it sank roughly 5% at both Altria and Reynolds. Lorillard’s overall share of the U.S. cigarette market is up to 14% from 11% in 2008.
The performance has shown up in Lorillard’s stock price, which is up 37% this year.
Lorillard’s strategy is being spearheaded by Murray Kessler, who became Lorillard’s chief executive in September 2010 after heading UST Inc., a smokeless tobacco company acquired by Altria in 2009. Mr. Kessler doesn’t smoke cigarettes, preferring snuff, a habit he picked up at his previous job. But one of his first decisions at Lorillard was to kill a proposed smokeless tobacco product.
In an interview at Lorillard’s Greensboro, N.C., headquarters, where ashtrays filled with cigarette butts are still common, the 52-year-old Mr. Kessler said it could be decades before smokeless products, which are growing but are less than a tenth of U.S. tobacco sales, surpass cigarettes. “I’m not sure I’m still on this planet at that time,” he added.
Still, Lorillard’s wager comes as the government is mulling special curbs on the use of menthol. Anti-smoking groups say the mint flavoring masks the cigarettes’ harsh taste, making it easier to start smoking and harder to quit. A Food and Drug Administration panel concluded in March that eliminating menthol cigarettes would benefit public health, but it stopped short of recommending a ban. In coming weeks, the FDA is expected to publish results of a scientific peer review on menthol’s effects, but it has no deadline for reaching a decision.
Shutting down the $25 billion menthol-cigarette industry would eliminate billions of dollars in U.S. tax receipts, jeopardize thousands of jobs and spawn a black market, Mr. Kessler said. “You would create havoc the likes of which this country hasn’t seen since Prohibition.”
Menthol is no more harmful than other cigarettes, he said, adding that he expects the FDA’s menthol review process to be “very long.”
Lorillard’s critics agree an immediate ban is unlikely. “You can’t just tell millions of people to go cold turkey, so it would have to be a phase-out,” said Ellen Vargyas, general counsel at Legacy, an anti-smoking group.
Meanwhile, Mr. Kessler, who became chairman in January, sees big opportunities in cigarette markets that the company has never fully tackled since its founding in 1760.
Lorillard recently stepped up Newport menthol sales efforts west of the Mississippi River after focusing for decades on the Eastern Seaboard, where its market share is roughly twice as big.. It has also been promoting a milder version of menthol cigarettes called Newport “Gold.”
Lorillard is the market leader in menthol, but that category accounts for only about 30% of U.S. cigarette sales. Late last year, the company launched a nonmenthol version of Newport in red packaging instead of green, and it quickly gained a 1% market share, driving much of Lorillard’s growth this year.
It has also been winning over smokers with its fast-growing Maverick discount brand, and it plans to roll out another nonmenthol line that will be milder than its Newport “Reds.”
“They’re much bigger ponds to fish in,” Mr. Kessler said.
But the company’s two larger rivals have already plumbed those markets, making growth tougher. Altria, owner of Marlboro, the leading cigarette, has a 49% market share in cigarettes. Reynolds, which boasts the Camel cigarettes and Pall Mall brands, has a 27% share.
Lorillard has benefited because its smokers are younger on average, although how much younger is in dispute. A federal survey published in 2009 showed 45% of smokers 12 to 17 years old used menthol brands. Lorillard notes that other data show that under-age smoking rates are lower in states where menthol’s market share is higher.
Newport cigarettes are also popular among African-American adult smokers, about 80% of whom prefer menthols. Unlike Altria and Reynolds, Lorillard still advertises cigarettes in magazines, including those targeting African-Americans.
David Adelman, a tobacco analyst at Morgan Stanley, says Lorillard’s smokers are more urban and less likely to switch to smokeless products such as snuff, in which tobacco is held in the mouth between the gum and cheek. “It’s pretty unacceptable to spit walking down Fifth Avenue,” the analyst noted.
Altria CEO Michael Szymanczyk told investors recently that the company can capitalize on consumer shifts to smokeless products by investing in snuff brands such as Copenhagen and Skoal.
Altria, which also has a 27% stake in brewer SABMiller PLC and has acquired some wineries as it diversifies beyond cigarettes, has “just begun unlocking the potential that exists in our businesses,” he added.
Reynolds, which owns the Grizzly and Kodiak snuff brands, also markets spit-free tobacco pouches called snus and oval-shaped lozenges called orbs. It notes that profit margins on smokeless products are roughly 50%, compared with 30% for cigarettes.
Smokeless “makes commercial sense, and it’s the right thing to do,” CEO Daniel Delen told investors last month.







