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.

"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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