Reynolds American’s New Products Should Bolster Bottom Line

Reynolds American Inc. promoted a number of new smoke-free products that are striking the domestic market, attempts that should raise the cigarette company’s bottom line while also preserving consumers in the category.

The corporation’s new products, which consist of e-cigarettes and nicotine replacement therapy, are being released because Reynolds American deals with a challenging operating environment caused by dropping demand for regular cigarettes. Cigarette volumes have been decreasing for years, in part because of a weak economy and high unemployment that sets pressure on consumer disposable income.

Reynolds American Logo

Reynolds American Inc.

Reynolds American has confronted greater challenges in current quarters than its main rivals Altria Group Inc. and Lorillard Inc.

Reynolds American, the No. 2 local cigarette maker after Altria, has revealed lower cigarette market share on a year-over-year basis for the previous six consecutive quarters.

Reynolds American increases profitability by cutting costs and boosting prices, but also sees a benefit to operating margin by releasing new products. President and Chief Executive Daniel Delen said cigarettes have the smallest operating margins of all products the firm markets.

Reynolds American is focusing on margins of at least 50 percent for the new products – above the 34 percent Reynolds American revealed overall in the third quarter.

Though 80 percent of tobacco consumers over the age of 21 know about e-cigarettes, Reynolds American said only 5.9 percent of those over the age of 18 have stated to use those products – already higher than stated usage of moist snuff and snus. That indicates there is a higher possibility more customers will try e-cigarettes.

Reynolds American is also dealing with the $1 billion nicotine replacement therapy market, which is led by Johnson & Johnson’s Nicorette brand and private label products. Reynolds American said those products, which are marketed in big amounts of 100 or 200 per pack, are usually offered in drug stores.

Reynolds American entered the market with a limited launch in Iowa. The firm’s product is called Zonnic, a gum with a mint taste that is marketed in 10-count packages, enabling for a more affordable price. Zonnic is mainly marketed at convenience stores and gas stations. The price for a pack is similar to premium-priced cigarettes.

Investors and experts have fretted about the strength of the profits domestic cigarette companies can produce among raised price promotions as tobacco companies fight to win or defend market share. Mr. Delen assured experts the industry’s about $14 billion earnings pool is strong because products like moist snuff and snus can rise to help balance declines for regular cigarettes.

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