Pricing strategy

How consolidation in Big Tobacco could actually be good for public health

July 11, 2014
July 11, 2014

We may be at the beginning of a fresh wave of consolidation in the cigarette market, which could make the biggest players in Big Tobacco even bigger.

Reynolds American, the maker of Camel and other cigarette brands, confirmed today that it is in talks with Lorillard, best known for its Newport brand of menthol cigarettes, about a tie-up. A combination of the two would create a stronger challenger to the market leader, Altria, which controls about 50% of the US tobacco market, and sells the Marlboro line of smokes, among others.

The prospect of consolidation in most industries tends to freak people out—think of the widespread concerns about Comcast and Time Warner Cable’s looming tie-up—because they can lead to outcomes that are not friendly to consumers, such as higher prices. The Reynolds-Lorillard deal has been rumored for a while now, and Credit Suisse opined on it back in May.

We find it extraordinary that such a concentration of market share can be considered. Lorillard have a 15% share, Reynolds 27%, still a way behind Altria’s 50%, but it would surely create an effective duopoly. We believe that the US anti-trust authorities would want a very close look indeed.

But hang on a second. If the aim of regulators is to protect consumers, maybe higher prices aren’t such a bad thing. The tobacco industry is unlike most other industries, in that it is selling products that are acknowledged to be extremely harmful to consumers. Governments have intentionally driven cigarette prices up with taxes because (as well as creating tax revenue) expensive cigarettes seem to discourage smoking. So, if the byproduct of further consolidation in Big Tobacco is gouging smokers, wouldn’t that be a good thing for society as a whole?

Anti-trust concerns aside, the rationale behind the potential tie-up is, at least partly, not even about cigarettes. At the moment, Reynolds has only just started rolling out its vapor product, Vuse, nationwide, after trying it out in Colorado. Lorillard, meanwhile, is the market leader, with its blu brand capturing  a 50% share of e-cig sales from convenience stores and gas stations in the US, according to the Wall Street Journal (paywall).

Reynolds has a rich history of being involved in eye-catching deals. One of its subsidiaries, RJ Reynolds Tobacco, merged with Nabisco in 1985 and  the combined company, RJR Nabisco, was then acquired by the buyout firm Kohlberg Kravis Roberts in 1988, after one the biggest and most bitter corporate takeover struggles of all time, immortalized in the legendary book Barbarians at the Gates.

If regulators have consumers’ real best interests at heart, this latest deal should be a lot more straightforward.

Top News

Powered by WordPress.com VIP
Follow

Get every new post delivered to your Inbox.

Join 23,971 other followers