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Traditional cigarette sales remain on decline in December

R.J. Reynolds Tobacco Co.’s gain in Newport sales and increased pricing were not enough to help the company defy an overall industry sales decline during December.

Reynolds experienced a 2.4 percent drop-off during a four-week period that ended Dec. 31, slightly above the industry’s 1.9 percent decrease, according to Nielsen data released this week.

The Big Three U.S. manufacturers — Reynolds, Philip Morris USA and ITG Brands LLC — all raised their list prices in November by 8 cents a pack. The list price is what wholesalers pay manufacturers for their products. The increases typically are passed on to customers.

Newport, the top-selling menthol cigarette and No. 2 cigarette overall, had a 0.2 percent drop during the period. Sales are up 0.8 percent year over year.

Reynolds spent $29.25 billion in June 2015 to buy Greensboro rival Lorillard Inc., essentially to acquire Newport.

Since the completion of the deal, Reynolds has increased sharply the amount of marketing for Newport. By comparison, Lorillard was content with a status-quo market share of about 12 percent.

Wells Fargo Securities analyst Bonnie Herzog projects Newport increasing its market share to at least 15 percent.

Herzog said she projected overall industry sales to have declined by 2.5 percent during 2016. Her forecast for 2017 is a decline of 3.4 percent.

Sales of Top 10 super-premium cigarette Natural American Spirit were up 12.1 percent over the four-week period.

By comparison, Camel, the No. 3 traditional cigarette brand, was down 4.2 percent. Pall Mall, the No. 4 brand, fell by 9.6 percent, as more smokers have more disposable income to spend on higher-priced options.

Marlboro, the top-selling traditional cigarette brand, was off 2.4 percent. Its market share is at 46.8 percent.

Herzog said ITG Brands’ cigarette sales have stabilized in recent months, down 1.1 percent over the four-week period.

ITG’s market share was 7.5 percent, down from 10 percent in June 2015 when it acquired three Reynolds brands (Kool, Salem, Winston) and one Lorillard brand (Maverick) brand as part of parent company Imperial Brands Plc’s $7.1 billion purchase from Reynolds.

“Overall, Imperial continues to underperform the industry,” Herzog said.

Turning to sales of electronic cigarettes, Herzog said e-cig and vaporizer sales exceeded $4 billion in 2016. She is projecting growth of another $400 million in 2017.

Nielsen data tracks the e-cig mass channel and convenience store marketplace. Vaporizers, which typically are lower in price, are sold mostly in tobacco and vapor shops where Nielsen has limited tracking.

Tobacco products introduced into the marketplace after Feb. 15, 2007 — including almost every e-cig and vaporizer — have to retroactively go through additional Food and Drug Administration requirements to prove they don’t cause public harm. That includes providing more detail on liquid nicotine ingredients and manufacturing details.

Some smaller e-cig manufacturers have either gone out of business since the FDA regulations debuted Aug. 8, or are selling off inventory in anticipation of shutting down.

“Our outlook for 2017 is more cautious for the total vapor category given stifled innovation due to FDA regulations, as well as expected increased competition from iQOS given its superior heat-not-burn technology,” Herzog said.

In December, Philip Morris International has entered the FDA regulatory gauntlet to have its electronically heated cigarette, branded as Marlboro HeatStick, reviewed as a potential reduced-risk product.

“We continue to expect iQOS to be commercialized in the second half of 2017,” Herzog said. Reynolds recently completed a test market in Japan for Core, its latest heat-not-burn version.

Herzog said the top market share of R.J. Reynolds Vapor Co.’s Vuse brand dropped from 35.7 percent to 33.6 percent.

Blu eCigs, sold by ITG Brands, remained second at 17.4 percent, while the MarkTen XL product of Altria Group Inc. was third at 15.7 percent.

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