Free Packs Put on Pause: Reynolds’ Trial End of Promotion Poses Risks, Analysts Say

By Richard Craver, Winston-Salem Journal, N.C.

Feb. 20–Smokers in North Carolina and 24 other states will have to get through March without free packs of cigarettes from R.J. Reynolds Tobacco Co.

The company is putting its buy-some, get-some-free strategy — a staple of cigarette marketing for years — on the shelf to better evaluate the promotion and pricing of growth brands Camel, Kool and Pall Mall as industry sales slowly decline.

Seth Moskowitz, a spokesman for Reynolds, said that the test markets are in the South and along the Eastern seaboard. The free promotions will end with stock being shipped Monday.

“That is sort of a test because obviously we are offering similar values to consumers through cents off, but it is not a free-product promotion,” Susan Ivey, the company’s chairwoman and chief executive, said during the company’s Feb. 7 conference call with analysts.

“We will evaluate that. We will also evaluate the competitive arena because we will not make ourselves unilaterally uncompetitive by discontinuing the promotions.”

Ivey said that Reynolds’ “ultimate goal” is overall share growth.

“But not at the expense of over promoting, over discounting and achieving short-term share gain at the expense of short-term profit,” she said.

Analysts said that the strategy is risky because smokers are accustomed to getting one or more packs free in specially promoted products at retail, and they could switch brands when the freebies go away.

“My inclination is that Reynolds may be serving a long-term vision of profitably delivering tobacco pleasure by attempting to remove costly subsidies of the cigarette product form per se,” said Michelle Roehm, an associate marketing professor at Wake Forest University.

“It is risky in the short term, as customers used to the deal may be frustrated. But again, I suspect the long-term may be the driving consideration.”

David Howard, another Reynolds spokesman, said that the company is “very confident” in gaining market share with its growth brands, particularly through such recently introduced products as Kool XL, Camel No. 9 and Camel Signature. Reynolds also this week introduced new packaging for Camel.

“It’s not about growing market share, period, but growing market share profitably and being smart about it,” Howard said.

The decision comes as Reynolds and other tobacco manufacturers are putting more promotional emphasis on smokeless products, such as snuff and snus. Philip Morris USA has trimmed its promotional spending on Marlboro in recent years because of its ranking as the top U.S. cigarette brand.

Bruce Davidson, a tobacco analyst for Blue Oar Securities PLC of London, said that all major tobacco companies “are concerned about their cost bases and have reduction programs. They all have plans for alternative tobacco products.”

“This seems to suggest that the gravy train that was the U.S. tobacco industry no longer exists, and they need to work hard for what they earn,” he said. “So Reynolds’ action may prompt nuclear disarmament.

“Can they do this without any damage?” Davidson said. “The only way to find out is to try it and see. They would not have even tried it a decade ago.”

Stephen Pope, the chief global-market strategist for Cantor Fitzgerald Europe, said that a saving on an advertising or promotional dollar in the United States “can be redirected to less-restrictive areas where there is a growing, not shrinking, customer base.”

“I really think that this marks the start of the hammering of the final nail in the coffin for tobacco promotions in the USA,” he said.

— Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.

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