Lorillard CEO Talks RAI Merger, Impact on C-stores

GREENSBORO, N.C. -- The news that Reynolds American Inc. (RAI) was buying Lorillard Inc. may have shaken up the tobacco industry a bit, but all should remain business as usual for convenience store retailers once the deal closes in the first half of 2015.

In an interview with CSNews Online Tuesday afternoon, Murray Kessler, Lorillard's chairman, president and CEO, detailed why all four companies involved in the transaction -- Lorillard, RAI, Imperial Tobacco Group plc and British American Tobacco (BAT) -- believe the deal "is good for competitors, good for shareholders, good for customers and good for consumers."

In the Details

The deal, which was announced on July 15, has a lot of moving parts. Under the structure, Winston-Salem, N.C.-based RAI buys Greensboro-based Lorillard for $27.4 billion and keeps the Newport brand, which represents 90 percent of Lorillard's existing sales and profitability, as well as the True and Old Gold brands, Kessler explained.

United Kingdom-based BAT, RAI's largest shareholder, will maintain its 42-percent ownership in RAI through an investment of approximately $4.7 billion, as CSNews Online previously reported.

After that transaction closes, Imperial Tobacco will pay $7.1 billion for the Winston, Kool and Salem brands from RAI and the Maverick and blu eCig brands from Lorillard. These acquisitions will build on Imperial's existing U.S. portfolio at Commonwealth-Altadis, which currently accounts for a 3-percent share of the U.S. market, principally through the USA Gold brand.

In addition, United Kingdom-based Imperial will acquire Lorillard's infrastructure, which includes the company's manufacturing facility, headquarters offices, research and development facility, and approximately 2,900 employees -- "importantly, including the majority of Lorillard's national sales force," Kessler said, noting that a small percentage of the sales force will move to RAI in high-development Newport markets where RAI has less coverage.

"This is the part that most people don't understand," he added. "The net result is [that] this is a transaction that loses very few jobs in total, the vast majority of people maintain jobs, and synergies are obtained."

Everybody Wins

As for the benefits for each company, RAI gets a much stronger portfolio; it sells off non-strategic brands and picks up Lorillard's flagship brand, Newport. As a result, RAI becomes a 32-percent market share company and get cost savings by selling off Lorillard's infrastructure to Imperial. From Reynolds' standpoint, the company now has a portfolio that is 90 percent strategic, according to Kessler.

He also pointed out that Newport and Camel -- what will be the two leading brands in the newly combined company -- are not competitor brands. They have different demographics and geographic skews. Camel tends to sell in the West and Newport tends to sell in the East. Camel tends to be more of a suburban brand, while Newport tends to be more of an urban brand. Also, Camel tends to be more driven by non-menthol and Newport tends to be driven by menthol.

"They complement each other, which is beautiful, and they supplement each other's weaknesses, which allows them to go more competitively against [The Altria Group Inc.]," Kessler added.

From Imperial's standpoint, it becomes a strong No. 3 competitor in the U.S. tobacco industry and an approximate 10-percent market share company with the Winston, Kool, Salem, Maverick, USA Gold and blu eCigs brands.

"It has a stated strategy to invest significantly in those brands to grow U.S. market share, which means strong customer programs, brand marketing and importantly, where they lacked the expertise and the manpower to do it, they now have this well-trained organization from Lorillard combined with their existing Commonwealth organization. The sales force triples in size," said Kessler, adding that Imperial also gets the management expertise and the factories that know how to make the brands. "They [can] use all that management know-how and their investment to make [Imperial] a competitive company."

The Retailer Standpoint

As for the deal's affect on convenience store retailers and other purveyors of tobacco, Kessler told CSNews Online that customers will now have three strong companies and more brands competing than they do today. In addition, No. 1 market-share holder Altria gets a little more competition.

"There will be more brands vying for shelf space and investing for shelf space," he said. "...And that's good news for retailers."

Acknowledging that he cannot speak for RAI or Imperial, Kessler said both companies generally speaking "are going to want their investments to pay out and to grow these brands and show they did the right thing."

Retailers should continue to benefit from high-quality trade programs, and spending against the brands should mean competitive prices for consumers and additional growth in the industry with good margins for retailers, he explained.

As for trade programs, RAI, Lorillard and Altria all have different structures, but at the end of the day, they all boil down to a retail price and they all tend to be pretty close to each other, Kessler added.

"For a lot of places, this will be an improvement," he said. "Newport, in the West, is pretty weak. And now [that] you will have the two together, hopefully the brands will be able to generate even stronger programs and support for retailers."

Salem, Kool and Winston have very little shelf visibility. Part of the transaction, Kessler said, is designed to give these brands space and a chance to get their fair share. "There is no doubt in my mind that [Imperial] will be coming with stronger programs on those brands than there have been in years. As a result, I think customers will benefit from that," he said. "Net-net you pick up, minimally, three brands vying for shelf space vs. today that get little shelf space. Usually that means there are retailer incentives that go along with that."

According to Kessler, retailers have asked if they are going to lose the Lorillard programs and the answer is no. The retailer programs are based on carton sales, and the carton sales aren't going away, he said.

In addition, retailers barely have any programs -- if any -- on Commonwealth-Altadis brands and now they will.

"When I talk to the top retail companies, they think the market will be competitive and, generally speaking, they don’t expect any kind of a negative impact," Kessler said.

Meanwhile, the smaller retail companies weren't aware that the Lorillard sales force stays intact, the management team will still be around and most of the representatives that have called on the retail owners for years will still be calling on them, he added.

"This was not a program that was designed to lose a lot of people jobs. And with that means a lot of category expertise remains," Kessler concluded.