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Reynolds American’s Drive Brands Comprise 93% of Its Portfolio

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May. 20 2016, Updated 12:32 p.m. ET

Benefits of acquisition

Reynolds American’s (RAI) acquisition transaction with Lorillard and its related divestitures to Imperial Tobacco (ITYBY) occurred in order to shift cigarette volumes into RAI’s drive brands. In 2004, drive brands comprised only 25% of the portfolio.

By the end of 2014, drive brands included Camel, Natural American Spirit, and Pall Mall accounting for 70% of the portfolio. However, after the acquisition and addition of Newport and removal of divested brands comprise 93% of RAI’s cigarette portfolio.

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Retail market share

Newport’s addition to combustibles has increased the retail contract coverage, offsetting declines in the company’s value portfolio and non-support brands. Newport Cigarettes’ year-over-year share has increased from the historical rate of ~30 basis points to ~60 basis points.

Newport’s menthol and non-menthol styles contributed about two-thirds of market share gains in 1Q16. Marlboro Menthol also contributed to share gains for Philip Morris International (PM). Vector Group (VGR), Altria Group (MO), and British American Tobacco (BTI) do not produce menthol-based cigarettes.

Payday Everyday campaign

To further energize its Newport brand, Reynolds American initiated an equity-building program called Payday Everyday. The campaign encourages adult tobacco consumers to use NewportPleasure.com to engage with the brand and each other.

The program offers cash prizes, quizzes, a community message board, and a chance to post pictures of their Payday splurges. This has significantly increased website visits year-over-year, as noted by the company’s chief operating officer, Debra Ann Crew.

Premium marketing

Reynolds American (RAI) plans to provide marketing support for the launch of Newport Smooth Select. Along with premium positioning, distinctive packaging, and multicultural appeal, new point-of-sale materials could benefit Newport Smooth Select. The new point-of-sale materials will include brand-specific direct mail, e-mail, and print advertising, highlighting brand relevance and smooth flavor profile into selected markets.

On May 16, 2016, RAI constituted 1.9% of the iShares US Consumer Goods ETF (IYK).

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