What Will RAI-Lorillard Merger Mean for C-store Retailers?

NATIONAL REPORT — A lot of questions surround the planned merger of Reynolds American Inc. (RAI) and Lorillard Inc. and the expansion of Imperial Tobacco Group plc to a larger portion of the U.S. tobacco business, but what convenience store retailers really want to know is what's in it for them.

The industry is still waiting to see if the deal gets final federal approval. Under the proposed deal structure, Winston-Salem, N.C.-based RAI will buy Greensboro, N.C.-based Lorillard for $27.4 billion and keep the Newport brand, which represents 90 percent of Lorillard's existing sales and profitability, as well as the True and Old Gold brands. United Kingdom-based British American Tobacco, RAI's largest shareholder, will maintain its 42-percent ownership in RAI through an investment of approximately $4.7 billion.

Once 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. Hereafter, Imperial’s new U.S. subsidiary will be known as ITG Brands LLC and be based in Greensboro.

The companies involved continue to expect the deal — first announced on July 15, 2014 — to close in the first half of 2015. If regulatory issues remain outstanding as of July 15 of this year, the "end date" of the merger would automatically be extended by six months, according to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC.

Industry insiders believe the top U.S. tobacco companies, commonly referred to as the “Big Three,” are poised to see some big changes — notably a new player and a shift in power — once these transactions close. Up to this point, the order has been Richmond, Va.-based Altria Group Distribution Co., followed by RAI and then Lorillard.

If all goes according to plan, post-merger ITG Brands will be a broader No. 3 player in the tobacco business compared to what Lorillard ever was, according to David Bishop, managing partner of Balvor LLC, a sales and marketing firm based in Barrington, Ill. For the most part, he explained, Lorillard was a cigarette manufacturer that eventually moved into electronic cigarettes with its April 2012 acquisition of blu, but kept that separate.

ITG Brands will be a different story. Post-merger, it will have a much broader and deeper bench. It picks up an e-cigarette in the United States with an established brand. The company already has a market share presence in cigars. And while it is not in smokeless tobacco today, its parent company does have products internationally that ITG could possibly introduce into the U.S. market, very similar to what Swedish Match did with General snus.

"I see [ITG Brands] really stepping into that third position more broadly. That is, not just in cigarettes, but in tobacco primarily because of its existing portfolio and presence in cigars and cigarettes," said Bishop, whose firm provides analytic, consulting, research and sales support services to retailers and product suppliers.

As for RAI, the acquisition of Newport will be an extremely beneficial addition to its portfolio.

"Newport is the No. 2 cigarette brand. It is a brand that has continued to grow market share for the last several years. It is a brand that really has, for the most part, gone against the industry trend for year-over-year decline in pack sales," Bishop told CSNews Online. "It does complement what Reynolds does offer already in the menthol space, and [Reynolds] can benefit by helping accelerate distribution and national availability of Newport with its own sales force."

Other predictions on shifts that will take place post-merger include:

• ITG Brands will increase support of and leverage the strength of the Winston brand to go national. Up to now, it has been more regionalized in a couple pockets of the country.
• ITG Brands will leverage the national scope that blu eCigs has.
• Retailers will benefit from now-tougher competition between Altria and Reynolds.
• C-store operators will face a tougher choice between retailer programs: Altria's Marlboro Leadership Price (MLP) program vs. Reynolds' Every Day Low Price (EDLP) program.
• ITG Brands will likely assume the position Lorillard played in the No. 3 spot in terms of having more accommodating and retail-friendly programs, being more flexible and more willing to work with retailers.

Overall, from the perspective of the retailer, increased competition in the tobacco supplier community is good, Bishop said. It will make their pricing that much more competitive, helping draw more consumers from the respective markets into their stores because of that promotional activity.  

"While Altria is still No. 1, you now have a faster, stronger No. 2,” he noted. “To that end, that is better for the retailer because now they have more viable options to consider. Because of that, the market power begins to shift; though it doesn’t flip, it starts to shift. That is a net positive for the retailer."

For much more on the future of tobacco, look in the April issue of Convenience Store News.