Big Tobacco Grows as Reynolds, Lorillard Merger Seeks New Industry Opportunities

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Reynolds American and Lorillard are combining to make for a tougher competitior in a declining industry. But will the combination of the two tobacco giants be able to do more than that?

After a year of talks, Reynolds agreed to buy its smaller rival, Lorillard, for $27.4 billion, creating a company whose tobacco brands include classics such as Camel and Pall Mall as well as Natural American Spirit and Grizzly smokeless tobacco. Reynolds also has launched the Vuse e-cigarette.

But even in a business as crippled as selling cigarettes, the combining parties had to make some antitrust concessions. They sold a group of brands—including Cool, Salem and Winston cigarettes and Blu e-cigarettes—to another player, Imperial Tobacco, for $7 billion.[more]

Of course, the number of smokers has declined dramatically over the decades since the adult populace walked around in a haze of cigarette smoke and every other advertisement on television said things like, “I’d walk a mile for a Camel.” About 43 percent of Americans smoked in 1965, but only 18 percent do now.

The industry’s remaining companies and brands are under an ever-increasing onus of marketing regulations and “sin taxes” that produce more headwinds for its primary product than just about any other business faces. That’s what happens to a business whose products cause cancer, nicotine addiction and all sorts of other maladies and which now simply annoy most non-users rather than serve as part of the unavoidable backdrop of life.

Yet Reynolds and Lorillard are merging to make for a stronger No. 2 to industry leader Altria Group, whose Marlboro brand alone accounts for nearly half of all cigarette sales in the United States. The merged entity will achieve about $800 million in cost savings as well, meaning that the combination will greatly enhance the Reynolds-Lorillard competitive position.

And there are pockets of growth available for tobacco companies still. Because e-cigarettes involve nicotine, they’ve quite adeptly become major players in the “vape” market, with Vuse taking a 17 percent share in the e-cigarette market in Colorado since it was introduced in that state last year and Blu leading the pack as the largesy e-cig maker. With e-cigarettes still largely unregulated due to unanswered questions about their affect on health, tobacco brands are firing on all cylinders to launch and expand emerging brands like Blu in what has become the fastest-growing part of the tobacco industry. 

Reynolds-Lorillard is also poised to take advantage of growth in sales of menthol cigarettes, though the Food & Drug Administration has said that it considers menthol cigarettes to be more harmful than other types of cigarettes and may seek restrictions on their sale.

Even in the wake of this big merger, for tobacco companies, there are frying pans, fires and not much else.

• Connect with Dale on Twitter: @daledbuss

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