Reynolds Plans Cuts in Tobacco Inventory : Firm to Redirect Incentive Program for Sales Balance

In a sign of sluggish cigarette sales, R. J. Reynolds Tobacco Co. today announced a plan to cut excess customer-held inventories by the end of 1989 by reducing domestic cigarette shipments for the rest of the year.

The company also will refocus its distribution incentive programs.

“In the future, Reynolds Tobacco will better balance its sales to direct customers with consumer purchases of its products,” said James W. Johnston, the company’s chairman and chief executive officer.

“We will replace our existing trade incentive programs with a comprehensive new program that will provide performance-based financial incentives to our direct customers and assist us in improving our retail share of the market,” he said in a news release.

Details of the program, which will become effective Jan. 1, 1990, will be announced to customers in December. The program is intended to prevent imbalances in what are known as trade inventories.

Company spokeswoman Betsy Annese said Reynolds Tobacco’s trade inventories are unsold cigarettes held by customers.

Common Practice

During certain periods of the year, the company offers incentives to customers to encourage them to buy more cigarettes than they expect to sell. The practice is a commonly used method in the consumer goods industry to move products into retail channels.

Because tobacco industry unit volume is generally reported based on manufacturer’s shipments rather than on actual consumer sales, the plan will result in a reduction from comparable periods in 1988 of Reynolds Tobacco’s reported shipment volume of about 29% for the third quarter and 17% for the fourth quarter.

However, the plan will not have an impact on the company’s share of actual consumer shares, which is expected to decline only slightly in 1989.

The plan is expected to reduce operating earnings for Reynolds Tobacco by about $170 million in the third quarter and the same amount in the fourth quarter.

Impact on Cash Flow

However, it is also expected to have a moderate positive impact on the company’s cash flow for 1989. Reynolds Tobacco expects the plan to have a positive impact on its financial performance after 1989 because of reduced costs for returned products and increased manufacturing and sales efficiency.

“It will ensure fresher, more consistent products for our customers, provide more efficiency in our planning, production and distribution and help us build a stronger partnership with our direct customers. We are also pleased that we can accomplish our plan without any reduction in staffing,” he added.

R. J. Reynolds Tobacco Co.’s major brands are Winston, Salem, Camel, Vantage, Doral, More, NOW, Century and Ritz.