"Hot" does not begin to describe Reynolds American Inc. (RAI). The holding company holds the #2 spot among US makers of cigarettes and smokeless tobacco through RJR Tobacco (smokeless) and American Snuff. RJR Tobacco produces many of the top-selling cigarette brands: Camel, Doral, Kool, Pall Mall, Newport, Salem, and Winston. It also makes and markets smoke-free Camel tobacco products. American Snuff offers moist snuff under the value-priced Grizzly and premium Kodiak brands. RAI businesses include cigarette makers Santa Fe Natural Tobacco and Lorillard, and nicotine gum maker Niconovum. RAI is the result of a merger of R.J. Reynolds Tobacco and Brown & Williamson, a subsidiary of British American Tobacco that owns 42% of RAI.
Reynolds American (RAI) operates through the R. J. Reynolds Tobacco Company (aka RJR Tobacco), which accounts for more than 80% of its total sales and ranks as the second-largest cigarette maker in the US. Its familiar brands include Camel, Pall Mall, Winston, Cool, Doral, and Salem. RAI's smokeless tobacco business, American Snuff, represents 9% of sales, while Santa Fe Natural Tobacco (8% of sales) manufactures and sells cigarettes and other tobacco products under the Natural American Spirit brand. Santa Fe products are made from all natural, additive-free tobacco. RAI's Niconovum USA subsidiary (acquired in 2009) makes nicotine replacement gum, mouth spray, and pouches under the Zonnic brand name in Sweden. R.J. Reynolds Vapor Company makes electronic cigarettes under the VUSE name for limited distribution.
The company's Lorillard subsidiary (pocketed in 2015) makes Newport, Kent, Old Gold, and True cigarette brands as well as SKYCIG e-cigarettes.
RJR Tobacco’s manufacturing plants are in the Winston-Salem, North Carolina area, while American Snuff’s facilities are in Memphis, Tennessee; Clarksville, Tennessee; and Winston-Salem, North Carolina. Santa Fe’s manufacturing plant is in Oxford, North Carolina and Lorillard produces cigarettes in Greensboro, North Carolina.
Sales and Marketing
RJR Tobacco distributes its cigarettes primarily through a combination of direct wholesale deliveries from a local distribution center and public warehouses throughout the US. Its largest customer is McLane Company, one of the nation's largest distributors of grocery and tobacco products. McLane accounted for 31% of the tobacco products maker's revenue in 2014, while sale to distributor Core-Mark accounted for about 11%.
RAI reported advertising costs of $140 million, $110 million, and $72 million for 2014, 2013, and 2012, respectively.
RAI has struggled to grow sales in its core business amid the decline in cigarette smoking in the US. However, in 2014 the company reported a 3% increase in revenues thanks to a 1% growth in RJR Tobacco due to higher net pricing; a 5% growth in American Snuff due to higher pricing and an increase in moist snuff volume.
Net income increased by 14% in 2014 due to higher selling, general, and administrative expenses and the cost of products sold.
RAI’s operating cash flow increased by 24% in 2014 due to cash generated from pension and postretirement.
Sales and profits in the US cigarette industry and RJR Tobacco are under assault from falling consumption, increases in state excise taxes and governmental regulations and restrictions, such as marketing limitations, public smoking bans, and more. In response, RAI is seeking to transition its customers from cigarettes to the use of its smokeless tobacco products, such as Camel Snus (small pouches filled with tobacco that users stick between the cheek and gum). Indeed, in contrast to the declining US cigarette market, US moist snuff volumes grew about 2% in 2014. Profit margins on these smokeless products are generally higher than of cigarettes.
The company is also looking to the fast-growing market for electronic cigarettes (aka ecigs) for growth. To that end, it is exploring a potential acquisition of smaller rival Lorillard, which owns blu eCigs, and the popular Newport brand of menthol cigarettes, along with the Kent and True brands, among others. The multi-billion dollar deal is almost certain to face antitrust scrutiny. As such, both Lorillard and Reynolds are exploring the sale of certain assets and brands in the UK's Imperial Tobacco Group.
RJR Tobacco’s marketing approach uses a retail pricing strategy, including discounting at retail, to defend certain brands’ shares of market against competitive pricing pressure.
In 2014, the company sold Reynolds Building to a partnership consisting of PMC Property Group and Kimpton Hotels & Restaurants, for $7.8 million.
Mergers and Acquisitions
In mid-2015, RJR Tobacco completed its acquisition of Lorillard, Inc., the maker of Newport brand cigarettes, for a total of $27.4 billion. The combination of two of the nation's oldest and biggest tobacco companies created a formidable #2 to rival Altria Group Inc., owner of Philip Morris USA. The companies sold the Kool, Salem, Winston, Maverick and blu eCig brands to Imperial Tobacco Group for $7.1 billion to ease regulatory concerns about competition.