If retailers are feeling the heat from tobacco companies, the reasons are pretty clear. Trying to compensate for huge MSA-dictated payments and a steady decline in cigarette consumption--analysts are projecting another 2% drop in 2001--manufacturers have introduced five price hikes in the last two years. As a result, average wholesale prices are up 74% in the $50 billion U.S. tobacco industry. Each price increase opened the door a little wider for discount cigarette brands, whose market share crept up to 3.7% last year, according to the Maxwell Report.With the renewed pricing pressures, even category leader Marlboro is resorting to repeated discounts. "Marlboro never used to be on a reduced price for two months in a row," said one Midwest wholesaler." Now it''s on two months, off one, on two months and off ... I don''t think that hurts the strength of the brand because they can''t advertise like they could before, and the only way to grab market share is with price." Yet there''s an even more intense battle taking place: on the shelves. In the aftermath of the MSA, Philip Morris and RJR have increased cash rewards to retailers who give top shelf placement and prominent signage to their brands. Contracts often include extra "buydowns," cash manufacturers pay retailers for passing reduced prices on to consumers.

So where is the rest of the money going? A huge portion--more than $3.5 billion--is being pumped into retail outlets through price promotions and merchandising contracts. And that''s where the tobacco giants are turning up the heat with aggressive--and some say bullying--tactics, to squeeze out rivals."The Big Two are more aggressive about dictating what goes on the store shelves," said a Southern operator of a tobacco outlet chain." Honestly we used to joke about the ''Philip Morris police.'' The Philip Morris reps would come around and wreak havoc on anything that was wrong with the store, or if their market share wasn''t what it should be, or if a competing brand had an extra sign or something. They would just have a fit."Now, R.J. Reynolds is trying to flex its muscles in similar fashion. "I took our Reynolds rep outside recently and showed him the sign on our store," the operator said. "I told him when R.J. Reynolds'' name is on that sign, then you can tell me what is and what is not going in here and how much I can sell it for."

"We''re being very careful about not rushing the scientific development," said evp and chief counsel Paul Perito. "We''re looking at the issue of proving that reduced exposure to toxin equals reduced risk. In the meantime, we''re very conservative and are recommending that other companies refrain from making health claims."Brown & Williamson contracted to buy 1.5 million pounds of the Star-cured tobacco, about half the expected harvest from this year''s growing season, ending in October. The No. 3 producer of Kool, Capri, Misty and GPC will have low-nitrosamine cigarettes on the market within a year. Other firms are buying smaller amounts, while R.J. Reynolds is field-testing its own process for reducing tobacco toxins. Separately, Star this month will debut activated charcoal filters on all its brands.The focus on nitrosamines comes amid legislation pending in Canada proposing to add more information on labeling about tobacco''s toxic constituents and specific warnings about nitrosamines being the most active cancer-causing agent in cigarettes. Also, a World Health Organization gathering in May recommended that cigarette brands unable to conform to a standard ceiling of nitrosamine content should be excluded from markets.

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