U.S. cigarette makers seen adding smokeless tobacco


  • World
  • Thursday, 09 Feb 2006

By Brad Dorfman

CHICAGO (Reuters) - The makers of Marlboro and Camel cigarettes could soon go smokeless, supplementing sagging U.S. cigarette sales volume with smokeless tobacco, analysts say. 

Altria Group Inc.'s Philip Morris USA and Reynolds American Inc. could both enter the smokeless tobacco market soon, either through an acquisition or with their own new product, analysts said in the past week. 

"Our trade contacts indicate Reynolds American has already developed a product and will enter the market with Camel, possibly in conjunction with the Daytona 500 in mid-February," Bonnie Herzog, analyst at Citigroup Investment Research, said last week in a research note. She repeated that idea on Wednesday. 

The idea of cigarette makers entering the smokeless market has been long rumored, with UST Inc., which makes Skoal and Copenhagen, or Conwood Sales Co., which makes Kodiak and Grizzly, seen as possible acquisitions. Conwood is a holding of Chicago's Pritzker family. 

The reason is simple -- U.S. consumption of cigarettes has fallen almost every year since hitting a peak of 640 billion cigarettes in 1981, according to the U.S. Department of Agriculture. Consumption fell 2.6 percent in 2005, to 378 billion cigarettes, the USDA said. 

Cigarette demand has been hit by restrictions on smoking in public places, increased consumer awareness of the dangers of smoking and higher prices. Prices have risen because of taxes and increases taken by cigarette makers to help pay billions of dollars to U.S. states as part of a 1998 legal settlement. 

"If you're not able to cover the (settlement) payments with price increases, it's going to start dipping into profitability," said Gregg Warren, food and tobacco analyst at Morningstar Inc. 

LESS OF A CLOUD 

Meanwhile, smokeless tobacco consumption is growing. Volume for the sector rose 4.5 percent in 2005, though much of that growth was driven by lower-priced products, Warren said. 

The smokeless tobacco sector "doesn't have the same dangerous legal and health cloud hanging over it" as cigarettes, said one investment banker who specializes in the consumer products sector. "It may not be viewed as a 'healthy' product, but it's not viewed as a deadly product like cigarettes." 

The chief executives of Altria and Reynolds American were both asked about entering the smokeless tobacco market during calls to field questions about their fourth-quarter earnings. Both declined to answer specifically, but their answers left open a move into that market. 

"It is clear that smokeless is a growing category," Susan Ivey, chairman and chief executive of Reynolds American, which makes brands including Camel and Kool, said Wednesday. "I would not want to comment on how we would or would not get engaged in that until we have something concrete." 

Meanwhile Altria Chairman and CEO Louis Camilleri said last week that the company's Philip Morris USA unit, which makes the top-selling Marlboro brands, is interested in "adjacent" tobacco businesses. 

"You can clearly expect a lot of activity in the coming months," he said, but did not provide more detail. 

Analysts and bankers said it makes more sense for the companies to buy smokeless tobacco companies rather than start their own businesses since the tobacco used is a different strain and processed differently from cigarette tobacco. 

"It's a different tobacco, a different manufacturing process, a different audience. Just buy it -- and get a built-in, loyal customer base -- rather than trying to reinvent the wheel," said a second investment banker who declined to be named. 

A spokesman for UST declined comment on the possibility of the company being acquired. H Group Holding Inc., the holding company for Conwood, could not be reached for comment. 

Bankers have said that any Pritzker holding could be available after the family settled a lawsuit brought by two young heirs to the family fortune who had charged the family had emptied their billion-dollar trust funds. 

(Additional reporting by Jessica Hall in Philadelphia and James Kelleher in Chicago) 

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