April 9, 2009 Larry Waters

Lorillard Tobacco: living in the past; ignoring the FUTURE

In October of 2008, I spoke to Ron Milstein; Senior Vice President and General Counsel for Lorillard Tobacco Company. A SnusCENTRAL INTELLIGENCE AGENT in Sweden had provided bomb-shell information. According to the sources, after the Free Triumph Snus giveaway was over in the two Triumph test markets, Lorillard Tobacco instructed Triumph Snus manufacturer Swedish Match to significantly lower the nicotine levels in Triumph Snus. My report was published on October 29th, 2008.

With Lorillard’s Annual Shareholder Meeting taking place soon, I decided in mid-March to follow up and see where Lorillard and Triumph Snus were today. To my dismay, I found a company not looking forward, but still living in the past when Big Arrogant American Tobacco could do no wrong and cigarettes were king.

Lorillard’s entire business plan seems focused on two things: pushing their new Executive Bonus and Compensation plans through at the annual meeting and an almost singular fixation on Newport cigarettes as being the only product they produced that matters. Lorillard boasts long and loud that they are America’s oldest tobacco company and the #3 tobacco company in the United States. I can believe they are the oldest just looking at their circa 1990’s website, their continued lack of a Triumph Snus website, and their antiquated outlook on the entire tobacco industry and market. This is from the creaky Lorillard.com website:

Description: Lorillard Inc. is the nation’s third largest tobacco company. Lorillard Tobacco Company, the company’s operating subsidiary, does business in all 50 states, the District of Columbia and Puerto Rico and other outlying U.S. possessions.

History: In 1760, entrepreneur Pierre Lorillard founded America’s first tobacco company in New York City. Now known as Lorillard Inc., it is the oldest continuously operating tobacco company in the United States. Today, Lorillard manufactures Newport — the number one selling menthol cigarette in the U.S. — as well as brands Kent, True, Old Gold, Maverick, Satin and Max.

The reality of the above is this: Lorillard is the #3 tobacco company in the United States with about a 9% market share. R.J. Reynolds, the #2 tobacco company in America has around a 24% market share. Philip Morris USA is #1 with a less than 30% market share. Lorillard may be #3 but they are a very distant #3.

Lorillard’s cash cow is Newport cigarettes. During the 30+ years I smoked cigarettes, Kent was considered terrible even by cigarette taste standards, I never heard of True, Satin, Max, or Maverick; another tribute to Lorillard’s marketing genius, and Old Gold tasted…..old. It never ranked as a cigarette of choice, only a cigarette of desperation if you ran out of your regular brand and only had the change for tolls in your center console to buy an emergency pack.

In all the convenience stores I’ve visited, Newport had the worst placement on the shelf; usually buried at the bottom. Even Basic Cigarettes had better positioning than Newport at the store I visited today. I guess Lorillard feels Newport is such an amazing product that promotion and paid placement is an unnecessary expense. Also helps explain only having a 9% market share.

Congress tried to ban menthol once in the last year but failed due to a fear of losing menthol-smoking voters. In the federal legislation now pending giving FDA regulatory authority over tobacco products, Congress specifically withholds the ability from FDA to ban cigarettes or nicotine. It does give FDA the authority to ban “dangerous substances” within cigarettes, regulate nicotine levels, and most importantly in the case of Lorillard, FDA will have the authority to BAN MENTHOL.

This bill, which deserves and will get an article of it’s own, allows Congress to effectively ban cigarettes while passing the blame off to FDA. Menthol will be banned, the taste of cigarettes will be so washed out after FDA bans all the “dangerous substances” that even cigarette smokers won’t be able to tolerate smoking them, and nicotine…who knows? If nicotine is regulated lower, cigarette smokers won’t be able to smoke more since there are so many restrictions on where and when you can smoke today. They will either quit if they can or switch to Swedish snus if they can’t or don’t want to stop using tobacco.

I say Swedish Snus because snus will also be under the perview of FDA. Another power they will be granted is to demand that all tobacco products disclose their ingredients and content levels of “dangerous” substances. American Snus will either have to be reinvented or will be even more tasteless than it is now after FDA demands public health changes and especially “protecting the children” changes to flavorings.

Swedish Snus, already regulated by the Swedish version of FDA since the early 1970’s, has a much better chance of passing scrutiny. Their ingredients are already public knowledge as are levels of nicotine and TSNA’s (tobacco specific carcinogens). Swedish/Scandinavian Snus is so reduced harm that Sweden recently lifted the need for the warning label “this product may cause mouth cancer”.

Where does this leave Lorillard Tobacco? Once menthol is banned, say goodbye to Newport. It will join Joe Camel (who I miss…Joe was cool!) in the Tobacco Museum.

Can Triumph Snus save Lorillard? It is manufactured under contract in Sweden by Swedish Match AB, the worlds largest producer of snus. Taste and nicotine levels are not regulated by Sweden’s FDA but everything else Washington will be looking at pretty much is. This would normally position Lorillard as the leading American Snus….except for one thing.

The original Lorillard was founded in 1760 and their marketing game plan as well as tobacco industry perception hasn’t changed much in the last 150 years. They squandered any advantage Triumph may have brought them by ignoring the entire smokeless tobacco vertical.

Triumph Snus is still in only two test markets (we think; could be less now..they won’t tell us), is marketed incredibly poorly in those test markets, has no website of it’s own: Triumph Snus doesn’t even get it’s own page on Lorillard’s website! In fact, the website proper doesn’t even mention Triumph. If you really, really dig through the document repository, you will find a mention of it. An antiquated/detached from current tobacco reality mention as you will see.

The only indication Lorillard even knows it’s 2009 is their Opinion campaign in which open letters on different facets of tobacco and tobacco legislation are placed in major US newspapers. Aside from being filed in the News Room section of Lorillard.com, they have received no exposure I could find on the Internet through social media, advocacy websites or even Twitter.

SnusCENTRAL.org is evaluating the different Opinion open letters and will publish the ones we consider of value….which is much more exposure than Lorillard currently gets on the Internet.

As to Lorillard’s antiquated and unrealistic view of the tobacco industry; the latest emails between myself and Mr. Milstead will illustrate this all too well. They will also provide helpful questions which shareholder might like answers to. These you will find in the second part of this discussion – Lorillard Tobacco: living in the past; ignoring the EMAILS.

Yours in Snus,