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.

RJR claims its merchandising program allows retailers to "sell not only more R.J. Reynolds tobacco products, but also to increase retailer''s sales in the entire tobacco category and total overall store sales," said Jim Boehm, senior manager of trade marketing."Philip Morris competes vigorously, but is in compliance with the law, and Retail Leaders is no exception," said PM rep Mike Pfeil. "The program offers retailers choices and flexibility to achieve a strong category presence in their stores and restrict youth access to smoking."In April, Philip Morris began its 15-cent per carton payouts to Retail Leader participants with non-self-serve tobacco sections, an effort aimed at reducing youth access to cigarettes. Retailers were required to post" We Card" signs, to certify that employees participate in an age-verification program every six months and place in-store cigarette ads no more than two feet away from tobacco products. While the new rules are garnering cautious praise from anti-tobacco activists, some marketers argue that by reducing the retail footprint of all cigarette brands, Philip Morris is grabbing first dibs on the prime shelf and signage spots behind the counter, and continuing to shrink the profile of competing brands.

Driving his and other retailers'' decisions are incentives given for top brands like Marlboro, with its dominant 38% market share in the first quarter, per company figures. Those who don''t receive some of the lucrative buydowns and promotions risk seeing consumers flock to participating stores where the brand is cheaper.A similar phenomenon is occurring with RJR''s Everyday Low Pricing program. EDLP stipulates that retailers stock a Reynolds deep discount brand, like Best Value or Monarch, and ensure that no other cigarette in the store will undercut its price. Doing so earns participants an extra dollar buydown on Doral, the branded savings smoke whose market share fell 0.5% to 6.2% last year thanks to cheaper, deep-discount brands, also dubbed "fourth-tier" cigarettes because they rank below private-label, branded savings and full-priced premium smokes.Fourth-tier cigarette producers, particularly foreign manufacturers not subject to huge MSA outlays, are discounted as low as $16 a carton, versus $21 a carton for branded savings cigarettes. While premium brands were able to boost market share slightly to 74.2% last year, branded savings cigarettes--including B&W''s GPC, RJR''s Doral and Philip Morris'' Basic--slid as consumers traded down to the cheaper alternatives.

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