Reports that Reynolds American may acquire a stop-smoking outfit suggest a new level of tobacco-industry diversification
Jump to full article: Business Week/Bloomberg, 2009-11-10
Author: Esmé E. Deprez
Intro: It would be either one of the most cynical diversifications ever--or a brilliant stroke of synergy.
If a report in The Wall Street Journal is correct, America's second-largest seller of cigarettes may soon be peddling products that help people quit smoking. The Journal reported on Nov. 9 that Reynolds American (RAI), the distributor of Pall Mall, Camel, and Natural American Spirit cigarette brands as well as smokeless tobacco, is in "advanced talks" with Niconovum, a Swedish manufacturer of nicotine replacement products such as gum and mouth spray. University of Ottawa law professor David Sweanor told the Journal he was briefed by people close to the deal.
The move would mark the first time that a big tobacco company also sold smoking-cessation products, according to industry analysts. But it would be in line with the industry's efforts to diversify as cigarette purchases shrink in the U.S. One analyst referred to a purchase of Niconovum as a "cheap hedge" against the smoking decline. . . .
But as Morningstar's Gorham points out, Reynolds can make far more money convincing people to smoke than helping them quit. The cost per unit to produce cigarettes is extremely low—operating margins average 25%-30% industrywide, he says, which is high for consumer goods. (Pepsi (PEP), by comparison, which enjoys enormous scale and volume operating margins, reaches into the high teens, according to Gorham.)
It's unlikely that returns from smoking-cessation products can compete with that anytime soon. "I think we're talking 20 years-plus at this point before tobacco sales are offset by other sources," says Gorham.
Indeed, some view any talks between Reynolds and Niconovum as more of a publicity stunt, designed to place Reynolds in a better light.
Jump to full article » |