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Japan Tobacco faces stiff challenge in trying to light up sales for discount brand

The U.S. subsidiary of Japan Tobacco International is aiming to add more toes to its footprint through testing the parent company’s global discount cigarette brand in the Triad and Carolinas.

LD by L. Ducat comes in red, blue, green and silver packs in up to 10 styles. Its $2.81 price per pack is between 60 to 80 cents lower than the top discount brands of R.J. Reynolds Tobacco Co. (Pall Mall) and Philip Morris USA (L&M).

LD packs have been available on a limited basis since March, including at Hanes Mart Discount Tobacco at 370 E. Hanes Mill Road in Winston-Salem.

JTI describes LD as “a brand with reliable quality at an everyday price. It’s the No. 1 international value cigarette brand in the world.”

“It offers a competitive price and a high-quality product, giving a better choice to adult smokers.”

The marketing and selling of LD, which originated in Russia, represents a full-circle U.S. branding initiative by JTI.

The subsidiary was formed in 1999 as part of Japan Tobacco Group’s $8 billion purchase of the non-U.S. rights to Reynolds’ cigarette brands, including Camel and Winston.

JTI’s other U.S. brands are discounts Wave and Wings. Altogether, JTI has a 0.34 percent U.S. market share.

By comparison, Pall Mall has the No. 4 overall brand at 7.8 percent market share.

There also are a number of second- and third-tier manufacturers, whether branded or private label, that have focused on the discount market as many smokers sought — and stuck with — a lower-cost option during the economic downturn that began in fall 2008.

When asked why it is marketing and selling LD in just the Carolinas, JTI said that “with a deep tobacco history, the Carolinas are the ideal place to introduce LD by L. Ducat.”

“After evaluating LD by L. Ducat’s success in North and South Carolina, JTI USA will look into launching the brand nationwide,” possibly as early as 2017, the company said.

Competitor to Pall Mall

Sales of LD have been limited primarily because many convenience stores and tobacco shops participate in the Reynolds every-day-low-price program.

The program is a voluntary retailer contract that provides pricing discounts to retailers of up to $4 a carton, or 40 cents a pack, off Reynolds’ best-selling brands.

In order to get the discount, retailers must agree that Pall Mall will be the lowest-priced cigarette in their stores. The current participation rate is 60 percent.

Bonnie Herzog, a Wells Fargo Securities analyst, projects Reynolds could reach 75 percent participation now that it had tied access to Newport, the top-selling menthol brand, to the program.

Jacob McConnico, a spokesman for R.J. Reynolds Tobacco Co., said the manufacturer is aware of the LD entrance into the Carolinas.

“We are confident in Pall Mall’s competitive position that offers adult smokers the value proposition of long-lasting taste and premium quality tobacco at an attractive price,” McConnico said.

Pat Shehan, owner and operator of the Tarheel Tobacco retail chain, said he does not carry LD because of his participation in the Reynolds program.

“Their representatives called on me a couple of weeks ago and said they were having moderate success,” Shehan said.

“I think it will do well in non-EDLP stores, in part because they have hired former Commonwealth Brands sales representatives, so they have the retail and wholesale contacts to make it easier to gain distribution.”

Market share goals?

JTI did not provide a response when asked about its U.S. market share goals.

It entered the U.S. electronic cigarette sector in 2015 when it bought Logic Technology Development LLC. At last count, Logic was fourth in market share at 14.4 percent.

By comparison, R.J. Reynolds Vapor Co.’s Vuse is the top-selling e-cig at 35.7 percent.

Japan Tobacco’s interest in the U.S. market may be bigger than just introducing LD.

There have been analyst and media reports since November that Imperial Brands Plc may be up for sale, with British American Tobacco Ltd. the potential top suitor in a deal possibly worth $67 billion.

Imperial spent $7.1 billion in 2015 to buy four U.S. traditional cigarette brands (Kool, Maverick, Salem and Winston) and blu eCigs from Reynolds American Inc. and Lorillard Inc.

In the deal, Imperial’s ITG Brands LLC subsidiary acquired the bulk of Lorillard’s operations, including a Greensboro workforce of about 1,700 and about 2,900 overall.

ITG announced April 22 plans to eliminate 375 production jobs in Greensboro — about one-third of the production workforce — in preparation for the June 24 end of a reciprocal manufacturing agreement with Reynolds.

“We’ve long believed there would be further consolidation in the global tobacco industry with the four leading players reduced to three,” Herzog said. “A deal is very probable, and the most likely scenario is that BAT acquires Imperial.”

In a BAT acquisition scenario, Herzog said Imperial would let go of ITG Brands in a tax-free spin to shareholders and also divest brands in certain global markets to address antitrust concerns. Herzog said a potential spin transaction could command a valuation of up to $12 billion.

Internationally, Imperial is a distant fifth at 4.9 percent. China National Tobacco, which is privately held, owns 44.2 percent of the global market share, according to research firm Euromonitor. Among publicly traded companies, Imperial trails Philip Morris International (14.6 percent), BAT (10.7 percent) and Japan Tobacco (8.9 percent).

BAT likely would need to sell off ITG Brands to gain U.S. regulatory approval since it owns 42 percent of Reynolds.

Imperial’s U.S. market share jumped from 4 percent to 10 percent through the Reynolds-Lorillard deal, enabling ITG Brands to replace Lorillard as the smallest member of the Big 3 U.S. manufacturers.

However, since the close of the deal, ITG Brands’ market share has slipped to 7.7 percent, according to Herzog’s research. Imperial and ITG Brands said they are increasing Winston marketing to bolster U.S. sales.

Another, less likely, possibility is ITG Brands being bought by Liggett Vector, if it has the financial means to acquire a larger rival. Liggett has a 3 percent U.S. market share.

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