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Soaring prices dim sales.

Ever since the Surgeon General's landmark report 20 years ago, cigarette manufacturers have relied on savvy marketing to successfully offset adverse publicity and challenges to the public acceptability of smoking. But last year the industry encountered an entirely new problem--price-sensitivity--and found it an issue too hot to extinguish. The result: Domestic shipments tumbled 4.6% to under 600 billion units.

The spark igniting the retail pricing problem was a doubling of the federal excise cigarette tax on Jan. 1, 1983, which apparently gave many smokers reason to pause before shelling out close to $1 a pack. Contributing to the precipitous slide in unit movement was heavy buying by distributors in late 1982 to lessen the excise tax bite. In the wake of this worrisome slippage, the Tobacco Institute has been actively lobbying on behalf of the cigarette manufacturers to curb any further tax hikes at the state and local levels.

While consumer resistance to higher prices continues to test the industry's marketing skills, aggressive couponing and heightened trade promotions have helped prevent any appreciable erosion during 1984's first quarter. In fact, four of the six major cigarette manufacturers produced slight gains during the first quarter of 1984 vs. the same period a year ago. "We were extremely pleased with our performance in a volatile marketplace," says Rich Medwar, manager of national accounts for Philip Morris, which surpassed R.J. Reynolds last year in market share and secured the number one position.

Yet despite the optimistic overtones, no one expects the industry to fully rebound this year from the sharp sales falloff. "Anyone who says we're going to experience growth in 1984 is looking through rose-colored glasses," says Richard Orcutt, senior vice president of sales at Lorillard. "But I don't think the industry will be off more than a share point, which is considerably better than last year's performance." Even more bearish in his outlook is John Maxwell, a widely noted analyst until recently with Lehman Brothers Kuhn Loeb, and now associated with A.G. Becker, who estimates a unit drop of about 2%.

While the enormity of last year's price increases had a choking effect on unit sales, dollar volume for cigarettes was on the plus side in supermarkets, climbing just under a percentage point to $7.1 billion. And with cigarettes maintaining steady gross margins, retailers were rewarded with the same high returns the category has historically provided.

Still, manufacturers admit they can ill afford to become complacent. For starters, current pricing conditions offer little hope of immediate growth for an industry that's already mature.

Equally troublesome, the category's brightest performer in recent years, the low-tar segment, dimmed considerably in 1983 as it reached consumption capacity as long feared. "We appear to be in a transition stage now as to where any future growth may come from," says Martin Orlowsky, vice president of marketing at R.J. Reynolds. "There's no doubt that smokers are showing renewed interest in full-flavored cigarettes, and as consumer preferences change, so must we."

By covering all the bases, R.J. Reynolds hopes to recover from its depressed performance in 1983, a year that saw its four leading brands receive less-than-rousing receptions at the point-of-purchase. Buoyed by an impressive first quarter performance by three of its brands, led by a unit jump of 4.2% for Salem, the company is moving aggressively ahead on several fronts. Surge in generics

By introducing Century last July, the 25-pack "value" brand, R.J. Reynolds was able to entice a large chunk of both value-conscious and price-sensitive smokers. Where it is available--the rollout has been restricted to 33 states due to a taxing problem--Century has reached or neared the coveted 1% share mark. (Since many states tax on multiples of 10 cigarettes, R.J. Reynolds is keeping distribution limited to those regions that tax on a per unit basis.) Meanwhile, retailers who carry Century began making room this past January for two brand extensions, full-flavor and low-tar 100s.

If R.J. Reynolds' entry into the 25-pack segment was dramatic, it didn't raise as much clamor as its recent decision to reposition Doral into the generic field. R.J. Reynolds, along with all the major producers, has been tracking the unbranded cigarette segment ever since Liggett & Myers began testing the concept in select supermarkets back in the late 1970s. But when the price gap that exists between brands and no-names reached 30% last year, helped by Liggett's bold decision to swallow about 50% of the excise tax increase, any skepticism over generic's growing popularity rapidly turned into a begrudging respect by the branded manufacturers.

"Our initial view was that generic cigarettes could eventually grow to 5%," says R.J. Reynolds' Orlowsky. "Now we see it accounting for anywhere from 7% to 10% of the market." If the first quarter performance is any indication of shifting consumer preferences, then R.J. Reynolds may see its projection unfold before the year is out. Generic cigarettes reached a 4.4% market share, up a whopping 75% from 2.5% in the first quarter of 1983, according to Maxwell.

With a list price comparable to generics, Doral will receive no traditional marketing support after the launch period. What R.J. Reynolds hopes to capitalize on, in addition to its popular price, is the public's familiarity with the Doral name. Introduced in 1968, Doral was replaced with a lower-tar version called Doral II in 1979 in the hope that the brand's lackluster movement would improve. It didn't, at least not enough to satisfy R.J. Reynolds, which led to the company's decision to reformulate the product again and reposition it as a challenge to Liggett's low-priced brand.

Liggett, for its part, isn't overly concerned with R.J. Reynolds' maneuver. In fact, the way Hal Grant, vice president of marketing and sales at Liggett's Gary Tobacco unit, sees it, the generic segment will be the focus of more attention now that Doral has been repositioned, which could be a plus. The thing that does concern Liggett executives is the use of unbranded cigarettes as a loss leader by many supermarket operators, a strategy they consider unnecessary and potentially detrimental to the long-term efficacy of the category. "When the price spread is kept at $1.80, it's big enough to entice price-conscious smokers and still be plenty profitable to retailers," claims Grant.

With the introduction of generics and 25's, it appears that the industry's long immunity to pricing pressures has been somewhat diminished. Whether it is in the areas of generic products or value-added proposals, there are clear indications that consumers are responsive to special offers being made by the manufacturers. Philip Morris has significantly increased its use of on-carton incentives and multiple-pack promotions to support its marketing strategies. And while Philip Morris won't say whether it's planning to enter the generic fray, it is continuing to watch current developments and at the same time explore numerous opportunities that are compatible with its brand-image development approach. New market niche

Two areas of particular interest to branded manufacturers are the upscale cigarette market and the women's segment. Despite lackluster performances in 1983--Philip Morris' Players brand attained a 0.7% share, the highest among new brands--producers consider the luxury packs as a fast-growing segment. Following a successful test run in Florida early this year, R.J. Reynolds mounted a major national rollout of Sterling Special Blend in April. Elegantly packaged and sporting a unique 94 millimeter international length, the company is counting on Sterling's upscale appeal to open a new market niche of premium cigarettes at popular prices.

Meanwhile, Lorillard's Satin, which opened with a bang when it was introduced nationally in February 1983, closed the year with a whimper holding less than half a share point, disappointing by industry standards. "We went back to the drawing board and redesigned the package to achieve a higher degree of elegance," says Orcutt, adding that the new look is intended to spur greater sales. Satin, which is targeted toward the women's segment, was reintroduced this past May and is being supported by a major advertising blitz.

American Brands is banking on the women's segment to give its slumping Carlton family of brands a sorely needed shot in the arm when it unveils its luxury-packaged Carlton Slims, now in test markets. Despite dropping into fifth place last year behind Lorillard among the major cigarette manufacturers, American has been marginally successful in rejuvenating its Lucky Strike franchise, which until 1983 had been on a downside for 16 years. The king-size, low-tar filter version, introduced last September, was joined this February by a 100 brand. Lucky Strike Lights is expected to go national this summer.

While brand proliferation won't approach the frenzied pace of past years, retailers will continue to feel the pressure of having to carry an inordinate amount of brand styles. The cigarette makers, for their part, contend the category doesn't get the space it deserves. Retail selling space devoted to the cigarette category has not kept pace with either larger stores or customer satisfaction. To achieve a level of 99% customer satisfaction, today a retailer needs to carry 168 packings and needs a merchandising facility that will accommodate up to 220 rows. In support of this proposition is the fact that the contribution of cigarettes to a retailer's bottom-line profits is substantial when compared to other dry grocery items.

In those outlets where merchandising of cigarettes has extended beyond the endcap to in-line, retailers are discovering they have better control over inventories as well as greater merchandising flexibility. Moreover, most of the cigarette manufacturers offer an attractive monetary incentive for selling in-line.

Even the traditional endcap has been improved, equipped with a wraparound display section that provides additional space for stocking a wider variety of brands. The one wrinkle: In the wake of last year's stiff price hikes, more smokers are opting to buy single packs over cartons to soften the bite to their pockets. In some instances, the ratio of carton sales to single packs has reached the 60-40 level.

While cigarettes dominate the tobacco category, representing over 98% of department sales, supermarkets still ring up over $100 million a year in sales of cigars, chewing tobacco and snuff. In recent years, however, the cigar segment has performed modestly at best, registering flat sales in 1983. American Brands, which operates an American Cigar division, believes recent trends might indicate that the market has bottomed out. "In each of the five months through February of this year, cigar sales were on the rise," says Daniel Conforti, public information manager for American Brands.

After a year of stalled growth, chewing tobacco and snuff experienced relatively healthy sales last year, thanks in part to heightened advertising and the public's growing concern over smoking.
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Title Annotation:tobacco products
Publication:Progressive Grocer
Date:Jul 1, 1984
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