Reynolds American’s Competitive Positioning: Porter’s Five Forces

Reynolds American (RAI) is a leading tobacco giant in the US that faces stiff competition from other national and international players. The tobacco industry in the US is highly concentrated, with only a few dominant players such as Altria Group (MO), British American Tobacco (BTI), and Vector Group (VGR). Reynolds’ subsidiaries purchase raw materials (flue-cured, burley leaf, fire-cured, and air-cured leaf tobaccos of various grades and styles) directly on a contract basis from tobacco growers and farmers.

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During economic uncertainty, changes in demand for agricultural products and supply shortages could increase the bargaining power of suppliers (contract farmers and tobacco growers) and may also increase production costs and raw material prices, which lower Reynolds’ bargaining power.

Given the addictive nature of cigarettes, cigarette smokers tend to be loyal. Cigarette buyers are not greatly affected by changes in pricing, unless there’s a huge difference in prices compared with competitor brands. Often during changes in pricing, it’s most likely that consumers will switch to another Reynolds’ brands, as the company offers a range of products with differential pricing.

It is very difficult for a new company to enter the tobacco industry due to many governmental regulations and restrictions. Also, the tobacco industry is horizontally integrated with few dominant players with strong economies of scale in manufacturing, distribution costs, and marketing. This makes it difficult for a start-up to enter and compete.

Potential substitutes—inhalators, gums, sprays, and e-cigarettes—pose the biggest replacement threats to cigarettes. However, Reynolds plans to capitalize on the e-cigarette market with its Vuse brand.

The US tobacco industry consists of a few tobacco giants. The industry concentration has increased with Reynolds’ acquisition of Lorillard. After this transaction, Altria’s Marlboro Menthol appears to face stiff competition from Newport Menthol, which has a market share of 37% in the US.

Reynolds (RAI) has exposure in the iShares Core S&P 500 ETF (IVV), with 0.1% of the total weight of the portfolio as of September 8, 2015.