R. J. Reynolds Suit Uncovers Cigarette Discounting Schemes

Press enter to search
Close search
Open Menu

R. J. Reynolds Suit Uncovers Cigarette Discounting Schemes

WINSTON-SALEM, N.C. -- Hoby Anderson, owner of DWI Wholesale in Russell, Ky., says he isn't afraid of R.J. Reynolds Tobacco Co.

"I've got a slingshot, and I'm waiting for them," Anderson said in a journalnow.com report.

R.J. Reynolds Tobacco Co. alleges in a federal civil-racketeering lawsuit that Anderson and other cigarette wholesalers and retailers conspired to swindle it out of more than $20 million by manipulating the company's discounting and coupon program.

Anderson, a former representative in the Kentucky legislature, said in a journalnow.com report that he hasn't done anything wrong.

"They'll find out running over somebody may not be as easy they think," he said in the report.

The suit, filed in U.S. District Court in Statesville on Sept. 23, opens a window into the world of cigarette discounting by the major tobacco companies.

According to the journalnow.com report, discounting is the largest promotional expenditure for big cigarette companies, and it plays a crucial role in keeping customers loyal and in attracting smokers to switch. The major tobacco companies paid $10.8 billion to retailers in discounts in 2003, up 37 percent compared with 2002, according to the Federal Trade Commission.

The majors fought a price and promotion war for about two years to combat the growth of small, deep-discount cigarette-makers that were eating into their market share. Although the discounting and promotions war began to ease last year, discounts are still a huge part of promoting key brands for the majors, according to journalnow.com .

"Consumers are very price sensitive for their cigarette purchases," Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va., told journalnow.com .

Bonnie Herzog, an analyst at Citigroup, said in the journalnow.com report, "Overall, we view this lawsuit as a positive move for RAI and for the wholesale community that has been abiding by RAI's programs, as RAI is signaling to the wholesale and retail community that RAI is vigilant and serious about their buydown programs."

Discounting and in-store advertising are among the few marketing and promotional tools the big tobacco companies have left since marketing restrictions were part of a legal settlement with the states in 1998, according to the report.

The September lawsuit also shows how critical it is for Reynolds to control the way its cigarettes are sold, reported journalnow.com .

"R.J. Reynolds' retail marketing program, and therefore its ability to effectively market and promote its cigarettes in a heavily competitive industry, has been, and continues to be, irreparably damaged by Defendants' conduct," Reynolds said in a motion asking the court to stop several wholesalers and retailers from selling Reynolds products, journalnow.com reported.

The suit, which named 20 individuals, wholesalers and retailers in North Carolina, Tennessee, Kentucky and Virginia, alleges that Reynolds is not the only major cigarette-maker to be hurt by the suspected scams.

"Defendants and their co-conspirators also have engaged in similar fraudulent schemes against other tobacco manufacturers, who operate similar marketing programs," the suit says in the journalnow.com report.

Reynolds, the maker of Camel, Kool, Salem and Winston cigarettes, alleges that the wholesalers and retailers abused its coupon and buydown discounting programs through elaborate schemes, according to the journalnow.com report.

Reynolds, like other major cigarette companies, has marketing contracts with retailers in which the retailers prominently display Reynolds brands and advertising materials in their stores. In return, the retailers get an amount of money for each carton sold or that it is expected to sell each month. The retailers under contract are also able to buy cigarettes at a discount through wholesalers who have contracts with Reynolds. Reynolds promotes certain brands by discounting, or "buying down," the retail price of the cigarettes. A contracted retailer will order Reynolds brands that are being discounted from a contracted wholesaler. The retailer is obligated to pass on the discount to customers, reported journalnow.com .

Under the terms of its contract, the retailer also cannot sell these cigarettes to anyone but consumers. But Reynolds claims in its suit that did not always happen. In one example, journalnow.com reported that Reynolds alleges that Market Basket Food Stores Inc. of Taylorsville, N.C., bought discounted Reynolds cigarettes with no intention of selling them to its customers at the lower price. Instead, the suit alleges, it sold them to non-contracted retailers, wholesalers and "fourth-tier" wholesalers for a price above the discounted price, and claimed the difference as a profit. So-called fourth-tier wholesalers are non-contracted Reynolds wholesalers who sell deep-discount cigarettes made by companies other than the big three tobacco companies.

Retailers and wholesalers who bought from Market Basket then sold the cigarettes, even though they were not supposed to be dealing in discounted Reynolds cigarettes, Reynolds claims in the journalnow.com report.

The Sept. 23 lawsuit is not Reynolds' first court bid to stop suspected abuse of its promotional programs. The defendants in a 2000 lawsuit paid a "significant amount" to Reynolds to settle the case, David Howard, a Reynolds spokesman told journalnow.com .

Danny Hileman, who owns four tobacco stores in Virginia, and is also being sued, told journalnow.com that he sold only one order of Reynolds products to a retailer friend as a favor. He said he did not make any money on the sale because he sold it for the discounted price.

The retailers and wholesalers have not filed a legal response to the suit. Reynolds said that the damages from the suit could be tripled if it is successful in the action. It is still investigating alleged schemes, and more individuals, retailers and wholesalers could be added to the suit, journalnow.com reported.