Firing Up Tobacco Sales—Without the Smoke

As cigarette smoking continues to decline in the U.S., Reynolds American Inc. Chief Executive Daniel Delen wants Americans to consider new ways to consume tobacco.

Reynolds, the maker of Camel cigarette and Pall Mall smokes, is trying to shift its consumers to its smokeless brands, including moist snuff and Swedish-style snus, a type of spitless oral tobacco that comes in pouches. The company is about to have some new competition in that market. Last month, smokeless-tobacco giant Swedish Match AB, the dominant maker of snus in Scandinavia, announced plans to begin a major push into the category in the U.S. in coming months.

Reynolds can’t easily market the smokeless products as less-harmful alternatives to cigarettes. Federal law bars tobacco makers from making such claims unless they can furnish scientific evidence that a product would both reduce risk for individuals and provide a net benefit to the nation’s health.

Reynolds’s efforts to become less dependent on cigarette sales began under Mr. Delen’s predecessor, Susan Ivey, who was responsible for turning around the company after years of sales declines and market-share losses. Mr. Delen, 45 years old, worked with Ms. Ivey for years and had a hand in her success, running Reynolds’s main cigarette unit until he was tapped to replace her in March following her retirement. Winston-Salem, N.C.-based Reynolds ranks a distant No. 2 in the U.S. by sales after Altria Group Inc., maker of Marlboro.

Mr. Delen has smoked since he was 28, but now mostly uses Camel Snus, he says. He recently spoke to The Wall Street Journal about smokeless tobacco, regulatory challenges and what keeps him up at night. Excerpts:

WSJ: What impact is the still-sluggish economy having on cigarette sales?

Mr. Delen: The [unit] volume trends that we would expect have held constant, but people are shopping the category a little bit differently. We have seen down-trading [to cheaper brands]. It kind of makes sense if you think about it from a shopper’s point of view. Where do they mostly buy their tobacco? It’s gas and convenience stores. If there’s sticker shock at the pump, when they walk inside to buy their cigarettes, they are in a price-sensitive moment of the day.

WSJ: What’s driving growth of moist-snuff products like your Grizzly brand?

Mr. Delen: Increasingly more of our effort and focus is in the smokeless category. We see some organic growth in smokeless in general, but we also see consumers opting to switch between [the cigarette and smokeless] categories.

WSJ: Grizzly has gained market share in the face of tough competition from Copenhagen and Skoal.

Mr. Delen: Largely what we did there was we upgraded the packaging. It used to be an all-plastic kind of puck. We did a metal lid on the tin. Then, in the third quarter [of 2010], we asked R.J. Reynolds Tobacco Co. [the company’s main cigarette unit] to take over the [sales] activity. By bringing more feet on the street, we’ve seen significant gains. Historically you had somewhere over 300 people working in the American Snuff field force. Today that’s playing about 2,100.

WSJ: Tobacco companies have grappled with smoking-related suits for more than a decade. How would you characterize the company’s current level of financial risk from litigation?

Mr. Delen: The risk is coming down. Having said that, we still have a lot of work to do to successfully defend ourselves from some of the historic litigation that’s out there. There are fewer new cases, but more importantly, no new legal theories. So, I’m very confident in our ability to successfully defend the existing types of cases out there.

WSJ: You’ve used price promotions to help propel the growth of Pall Mall, your largest cigarette brand. Now that it’s better-established, will you promote it less? [Pall Mall, the third-largest U.S. cigarette brand by sales volume after Marlboro and Newport, boosted its market share to 8.5% in the first quarter from 6.5% a year earlier.]

Mr. Delen: We take different opportunities over time to make sure that we get some good trial and inflows, [cigarette] brand-switching. But over the long run, yes, we look at the bottom line very clearly and we’re continuing to look for opportunities to grow profitability on a per-unit basis as well as overall.

WSJ: [The FDA began regulating tobacco in 2009.] How challenging has FDA regulation been so far?

Mr. Delen: They are still busy organizing themselves, so it isn’t so well embedded yet. From a company point of view, there’s a lot of work and effort going on to bring all the aspects of the business into compliance. I tend to be optimistic about how this will end up, because the FDA certainly has told us—and it’s consistent with other product categories—that they are going to be a science-based decision maker.

WSJ: For snus to garner wider appeal, will you need regulators to let you promote it as a safer alternative?

Mr. Delen: Any help that comes from that side is welcome, but it’s not critical.

WSJ: What are the advantages for Reynolds of moving consumers to smokeless tobacco?

Mr. Delen: We have about a 30% [operating] margin on cigarettes and about 50% on smokeless, so there are benefits that way. But it’s not just about the bottom line. You start looking at long-term sustainability.

WSJ: What sort of challenges keep you up at night?

Mr. Delen: I’m a good sleeper. But it’s actually the things that are actually out of our direct control. We are a newly regulated industry. Litigation, you never quite know where that’s going day-to-day.

Write to David Kesmodel at [email protected]

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