Altria’s special offers to drive Reynolds American and Lorillard to get defensive

Altria

Reynolds American Inc. and Lorillard Inc. claimed strategies to get aggressive on cigarette pricing to fight special offers provided by competitor Altria Group Inc., which has been winning market share as total volumes drop.

Altria often is the number one when it relates to pricing decisions as it controls about half the entire domestic tobacco market. The company intended to raise market share and increase volume by providing special offers that reduce the price for some of its tobacco products.

In the first two quarters of the year, Altria’s overall tobacco market share increased, showing profits by Marlboro and discount L&M products and volume performing better than the broader industry’s drop.

Executives at Reynolds American and Lorillard predicted that the special offers have gotten more bothersome in recent months. They both blamed a rival without directly naming Altria for their actions to take pricing actions on some of their own brands.

Though domestic cigarette makers have achieved success in enacting price raises in recent years to help balance volume drops, that pricing power has lessened as Altria’s special offers are driving Reynolds American and Lorillard to get defensive.

Some analysts said that offering more promotions could damage revenue growth over the next several quarters. Reynolds American and Lorillard both only managed to record a small boost in third-quarter earnings, and Altria reported a 3% revenue boost.

Reynolds American’s said that it would use an earlier technique to keep price points on Camel and Pall Mall largely steady.

Daniel Delen, President and Chief Executive, said that the cigarette maker would aim special offers around particular brands. But Mr. Delen also expects to sustain the brand equity built into premium-priced brands, especially in Camel. That indicates there are some limitations to how much profitability Reynolds American is ready to cede to get market share.

Lorillard said that there is difference between the price of premium-priced Newport and rival brands and while volume has been minimally affected, the company needs to change.

Chief Executive Murray Kessler stated that Lorillard would never decide to price Newport as low as its rivals, saying that while smokers could buy a competitor product for between 80 cents to $1.50 per pack less than Newport in the third quarter, the company saw only a small hit to volume.

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