R. J. Reynolds to Cut Back on Shipments of Cigarettes
The R. J. Reynolds Tobacco Co. will slash domestic cigarette shipments for the rest of 1989 and revamp incentive programs for distributors, Reynolds officials said Thursday, in a move to increase the company’s share of the shrinking U.S. cigarette market.
Because tobacco companies usually report their volume based on manufacturers’ shipments rather than sales to smokers, cigarette makers sometimes push their wholesalers at the end of the year or the end of the quarter to buy more cigarettes than they can sell.
Reynolds gave volume discounts and extended credit terms to encourage such wholesaler buying, which is also called “loading.”
Reduce Earnings
“What we have decided is, as far as our company is concerned, that is a counterproductive practice,” said David Fishel, a Reynolds spokesman. “It creates a returned-goods problem. You get so much product in the pipeline that it can’t get to the shelves in a reasonable amount of time.”
Although the curbed shipments will reduce operating earnings by approximately $170 million in the third and fourth quarters of 1989, Fishel said the company hopes its action will steady its manufacturing pace throughout the year.
But Emanuel Goldman, beverage and tobacco analyst at Paine Webber Inc. in San Francisco, took a less sanguine view of Thursday’s announcement, saying Reynold’s action amounts to “inventory surgery.”
“They mismanaged their field inventory,” Goldman said. “They shouldn’t have shipped so much. We estimate that this inventory depletion will amount to around 15 billion cigarettes. Last year, RJR shipped around 177 billion, so 15 billion is like one month’s sales. Rather than try to drop at a gradual rate, they’ve decided to bite the inventory bullet.”
It’s not that the company is losing money. In fact, the R. J. Reynolds Tobacco Co.--a subsidiary of RJR Nabisco--has shown improvement in sales and revenues in the first half of 1989, compared to the same period in 1988.
Savings and Price Hikes
Although the company has sold fewer cigarettes, RJR Nabisco’s domestic and international tobacco sales totaled $3.5 billion in the first six months of 1989, up from $3.3 billion in the same period last year.
“Domestic sales are going down by about 4% in unit volume,” said Karl von der Haydn, executive vice president and chief financial officer for RJR Nabisco. “Profits are not necessarily going down because of cost savings and price increases.”
