Imperial Tobacco Group Plcâs (IMT) Alison Cooper was lauded as the surprise winner in the Reynolds/Lorillard tobacco megadeal when she agreed to buy Blu, the world’s best-selling electronic cigarette.
The chief executive officer of the U.K. purveyor of Davidoff cigarettes may have more work than she bargained for, after Blu sales fell 35 percent in the second quarter. Cooper also needs to revitalize traditional smokes -- including the fading Winston label -- picked up in the $7.1 billion purchase designed to help alleviate antitrust issues from the larger Reynolds purchase.
“While it was a positive surprise that Cooper managed to get Blu, the disappointing results mean even this business has questions surrounding it now,” Erik Bloomquist, an analyst at Berenberg Bank, said ahead of tomorrow's third-quarter sales report from the Bristol, England-based company.
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Cooper’s decision to snap up Blu last month is meant to propel Imperial from laggard to leader in e-cigs amid an increase in smoking regulation and as tobacco companies invest in alternatives. Imperial has trailed Marlboro-maker Philip Morris International Inc. (PM:US) and British American Tobacco Plc (BATS) in the trend toward “reduced-harm” products, coming late to the game with just one e-cigarette in the U.K.
“It’s a perfect time for getting Blu,” Cooper, 48, said on July 15 as Reynolds American Inc. (RAI:US) and Lorillard Inc. (LO:US) jettisoned assets to preempt antitrust concerns about their $25 billion combination.
Still, she has to wait until the middle of next year -- when the deal is expected to close -- to get to work on Blu, hoping it can maintain a commanding market lead with Altria Group Inc.’s (MO:US) competitor MarkTen snapping at its heels.
MarkTen’s U.S. dollar market share rose 9.3 percentage points to 12.9 percent in the four weeks to July 13, while Blu lost 4.8 points to 33.5 percent, according to Information Resources Inc. Blu’s decline accelerated in the second quarter as customers shifted to cheaper rechargeable kits. Revenue fell to $37 million from $57 million a year earlier.
Imperial is adamant it can make Blu work.
“Nothing has changed,” said Simon Evans, a spokesman for the company. “Blu is still the number one in the market and it’s a brand that we will seek to internationalize.”
Cooper, who joined in 1999 as finance manager and became CEO in 2010, has some experience building acquired brands after Imperial bought Altadis in 2008, adding Gauloises cigarettes and Cohiba cigars. Under her leadership, the cigarette brand is boosting Middle East earnings and Cohibas are helping in Asia.
Imperial’s share performance including reinvested dividends has trailed Lorillard, Reynolds, Philip Morris and Altria, as well as U.K. competitor BAT, since Cooper became boss. The stock has beaten Reynolds, Philip Morris and BAT in the last year, though its down 7 percent since Imperial agreed to pick up the brands on July 15. Cooper declined to be interviewed for this story.
Imperial’s earnings declined 5 percent in the first half as it made supply-chain changes and invested in brands.
“What gives me comfort is that she managed to persuade the former Lorillard CEO to head up the U.S. business,” said Philip Gorham, an analyst at Morningstar Inc., referring to Martin Orlowsky, who ran the company for a decade.
Current Lorillard chief Murray Kessler says Blu is ready to take off. It started selling a vaporizer in the second quarter, and the second half of 2014 “promises to be a true inflection point,” he said July 30.
More consumers are ditching disposables in favor of vaporizers that use flavored-liquid refills. That comes as e-cigarette sales fell for a third consecutive month in July, with a 0.9 percent decline, according to IRI.
While e-cigarettes represent a small portion of Big Tobacco’s revenue, the market may be worth $51 billion by 2030, Euromonitor estimates.
Blu is preparing to enter France, Germany and the Netherlands, said U.K. brand chief Jacob Fuller. He founded Skycig, bought by Lorillard, and intends to quadruple revenue to about 100 million pounds ($167 million) by the end of 2015.
Reynolds’s six non-core brands lost 0.6 points of share to 7 percent in the second quarter, analysts at Exane BNP Paribas estimate. The biggest three are headed to Imperial.
“We know we are buying unloved and under-invested brands, and we can’t wait to get our hands on them,” Evans said. “With a lot of focus and a lot of investment, we’re confident that we can turn them around.”
Imperial will concentrate on Winston, Evans said.
“I suppose one way to bring them back to life is to play the retro card and try to appeal to the whole retro, hipster crowd,” said Kenneth Shea, a Bloomberg Intelligence analyst. “You’re not exactly cutting edge if you smoke Winston.”
The brand was No. 1 in the U.S. more than 40 years ago, when ads such as their “Winston tastes good like a cigarette should” jingles were allowed on television. It’s now No. 7 with 2.2 percent of the market.
As she waits for the Reynolds-Lorillard combo to close, Cooper must bide her time.
Once she takes ownership, said Berenberg’s Bloomquist, “it will be a visible success or a visible failure -- but it will be visible.”
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