Star to Use, but Not Tout, Carcinogen-Lowering ProcessStar Scientific next month will be among the first tobacco companies to offer cigarettes with reduced carcinogens at retail when it begins phasing into its four discount brands--Gunsmoke, Vegas, Main Street and Sport--tobacco processed through a patented two-step curing process that reduces nitrosamines, the most abundant and powerful carcinogen in tobacco and tobacco smoke. Within three years, every cigarette from the Petersburg, Va., manufacturer will contain the specially cured tobacco, and major player Brown & Williamson has contracted to use Star-cured tobacco in some of its cigarettes.Trade sources said Star''s move anticipates what is regarded by some as the inevitable move in Washington to put regulation of the industry under the Food and Drug Administration. The expectation is that, just as labels tell consumers how many grams of polyunsaturated fat are in a bowl of cereal, smokers someday will see cigarette packaging disclosing the quantity of toxins in their favorite brands. However, Star will not flag these changes in packaging or ads until more science is available to convince the FDA and Federal Trade Commission about the benefits.

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.

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.

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