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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.

All naturalPositioned as an all-natural, premium brand priced at 25 cents to 85 cents higher than standard packs, Natural American Spirit contains a blend of tobacco with no stems or artificial flavorings. For the menthol items, a chamber containing natural menthol is infused into the center of the filter to release a vapor into the smoke as it is inhaled--no menthol is added to the tobacco. Medium and light filter cigarettes have increasingly dense filters and porous papers to dilute the smoke with more air."The real benefit of carrying them is the trade margin," Tully said, with an average profit per pack of $1.02.Regionally popular in New Mexico, California, Oregon, Michigan, New York and Chicago, Tully reported the brand''s compound annual growth rate over the past eight years as 17 percent. This month the company will introduce a tobacco-free herbal cigarette and, by next January, will offer all varieties in hard packs. When the Master Settlement Agreement imposed marketing restrictions, Philip Morris and R.J. Reynolds back with tough tactics to squeeze their competitiors off shelves.

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