Getting adult smokers to try new tobacco products, whether snus, chew sticks, film strips, electronic cigarettes and heat-not-burn cigarettes, has not been an obstacle for Reynolds American Inc.

However, turning trial into regular or occasional usage has proven challenging even for the industry’s innovation leader.

Case in point: Reynolds said Tuesday it is discontinuing its second attempt in 12 years at marketing a heated cigarette, Revo, which was aimed at further diversifying the company’s smokeless product options.

The manufacturer shelved Revo after launching a test market in Wisconsin in February. The product sold at retail for about $6 a pack. At launch, Susan Cameron, Reynolds’ chief executive and president, expressed confidence that heat-not-burn “finally finds its time.”

“Revo has seen consumer interest and trial, but actual adoption rates of the product have not met our expectations,” Cameron said Tuesday. “However, we do remain optimistic in the long-term potential for heat-not-burn, and we continue to work to improve the technology.”

Although Cameron stressed Reynolds is not exiting the heat-not-burn category, the repeat failure did not appear to surprise analysts who have questioned the level of demand for heated cigarette, particularly the inability to match the taste that comes from a traditional cigarette.

“Interest from adult smokers in a product like Revo has been high, although in Wisconsin most adult smokers preferred to remain with their usual cigarette brands instead of switching,” Reynolds spokesman Richard Smith said.

The pulling of Revo comes on the heels of Reynolds halting in July 2013 the marketing of three dissolvable products: a pellet (Camel Orbs), a twisted stick the size of a toothpick (Camel Sticks) and a film strip for the tongue (Camel Strips). Reynolds tested those products for more than 4½ years in five markets, including Charlotte.

Smith said about the dissolvable products that “we’ve found in our conversations with adult tobacco consumers that while there’s strong interest in the category, a different product form may present a better option over the long term.”

In contrast, Camel Snus emerged from test markets to become the country’s top-selling snus. Within six months of exiting Colorado and Utah test markets, Reynolds’ Vuse e-cig jumped to the top of the convenience store distribution chain.

“Reynolds has been more aggressive with product innovations in part because it is Avis to (Philip Morris USA’s) Hertz,” said Roger Beahm, executive director of the Center for Retail Innovation for Wake Forest School of Business.

“Management understands that innovation has to be an important part of future growth.”

The trick, Beahm said, is product innovation “has to be deemed relevant, important and of benefit to the targeted consumer, or you won’t be able to persuade them to go beyond trying.”

Beahm said that on average, only about 5 percent to 10 percent of new product innovations catch on with consumers, with many of those benefiting significantly from being marketed as an extension of a strong consumer brand, such as Camel Snus.

“Most consumer products have to be willing to accept failure as part of the process,” Beahm said.

“Even them, companies have to be careful in that they don’t want new products to have a negative halo effect on their prime brands.”

Pod concept

Beahm cited as an example of the try-try again strategy the evolution of consumer acceptance of the single-use laundry and dishwasher detergent pods.

The pod concept, according to Chemical & Engineering News, first surfaced at retail in 1962 when Colgate-Palmolive launched Action bleach and Procter & Gamble came out with Salvo laundry detergent.

Neither attracted a critical mass of consumers, with Action exiting in its first year and Salvo bowing out in the early 1970s. The main problem was lack of consistency in how the detergent seeped through the protective film covering, and limited shelf life.

The difference between the 1960s and 1970s version and the current pods came when MonoSol, the main U.S. producer of polyvinyl alcohol film, figured out how to get the film to dissolve quickly, particularly in cold water, and not affect the cleaning solutions even after being on retail shelves for weeks or months.

While U.S. consumers remained uninterested in the pods for most of the past 40 years, detergent companies were able to make some progress with European consumers that helped them fine-tine their products.

Besides the product working as advertised, Proctor & Gamble also claimed a socioeconomic benefit with its 2012 launch of Tide Pods.

“Tide Pods have the most concentrated form of laundry detergent you can get, so it’s better for the environment; it’s better for space and consumers’ homes,” Robert McDonald, Proctor & Gamble’s chief executive, told analysts in 2012.

Proctor & Gamble said in promotional brochures for Tide Pods that “consumers are ready for a radical transformation of the laundry process” that was timed with the introduction of high-efficiency washers and dryers.

“You have to persuade consumers that they not only want something different, but that this product performs as well as or better than what they are using now,” Beahm said.

Tough to convert

Revo, Reynolds’ heat-not-burn cigarettes works this way: Smokers light a carbon tip that heats air that, as it is inhaled, passes over tobacco in a cylinder identical to a standard cigarette. The flavors of tobacco and nicotine are inhaled and then exhaled by smokers.

One motivation behind heat-not-burn is that the heating of tobacco leaves may be less harmful since the burning of tobacco tends to create the largest amount of carcinogens.

Eclipse, the company’s first national attempt at the heat-not-burn category from 2003 to 2007, also ended because the product struggled to gain traction with adult smokers. Eclipse remains available in limited supply, including at local Reynolds facilities.

Beahm said the taste Revo offers is likely the major hang-up for smokers.

“If it doesn’t offer a better taste, that’s a show stopper because smokers are going to stick what does taste good,” Beahm said. “Cigarette, like coffee and beer, are acquired tastes.”

Pat Shehan, owner of the Tarheel Tobacco retail chain in the Triad, said “it is very difficult to get smokers to change to other products.”

“Camel Snus has had tons of money invested in marketing and sells well, but has not gained traction with some smokers even though it was developed for occasional usage by smokers” in public settings where they can’t smoke.

“Many smokers have switched to e-liquid because they can still go through the motion of smoking,” Shehan said.

“If Revo will not work with Reynolds’ money behind it, it shows how tough it is to convert smokers.”

Innovation perspective

Revo was considered promising enough that British American Tobacco Ltd. wanted the technology included in a proposed innovation partnership with Reynolds that also includes Vuse. Reynolds said talks are continuing with the partnership.

BAT spent $4.7 billion to maintain a 42 percent ownership stake in Reynolds, with legacy non-BAT Reynolds shareholders holding 43 percent and legacy Lorillard shareholders 15 percent.

The main impetus for the partnership is giving BAT access to product innovations while serving as the global distributor of the products, which keeps Reynolds from having to absorb the great expense of reestablishing a global supply chain.

“I am sure the benefits of the bigger picture and strategic objectives will carry the day over any short-term difficulties,” said Stephen Pope, managing partner of Spotlight Ideas in London. “Strategic alliances and cooperation are likely to be a pillar of strength for future corporate profitability.”

That’s the innovation perspective taken by Altria Group Inc. in partnering its U.S. subsidiary, Philip Morris USA, with spinoff Philip Morris International.

Although Altria is playing catch-up with Reynolds in terms of tobacco innovation, Marty Barrington, its chairman, chief executive and president, told investors on June 23 that the company has “embraced a vision of developing lower-risk tobacco products that appeal to adult tobacco consumers.”

“New technologies in our portfolio, including NuMark e-vapor products and the exclusive U.S. rights to commercialize two of Philip Morris’ heat-not-burn products, hold the promise for harm reduction.”

Barrington said that consumer awareness of e-vapor “is very high, with more than 60 percent of adult smokers having tried an e-vapor product. We’re pleased with the progress being made on both clinical research and testing of marketing concepts” with heat-not-burn.

Howard Willard, Altria’s chief operating officer, acknowledged that “current products have performance gaps, the pace of (e-vapor) category growth has slowed somewhat and manufacturers are awaiting regulatory guidance.

“However, we remain convinced that the desire adult smokers have for innovative tobacco products could one day be met with the right technology, whether it’s e-vapor, heat-not-burn or something yet to be developed.”

Question of risk

The lack of definitive medical evidence that smokeless products pose less risk than traditional cigarettes has hampered the manufacturers’ ability to connect with smokers wanting to quit.

The latest word from analysts is that the FDA may unveil potential new regulations by the end of summer.

Beahm said Reynolds was smart to exit the Revo trial market quickly if results were not to its liking.

“There’s no point pouring good money after bad if you are not achieving your strategic goals,” Beahm said.

“Given how much Reynolds is spending on developing Vuse, and the debt it just took on in buying Lorillard, it is likely to be tighter with research and development spending on speculative products.”

Eric Tomlinson, president of Wake Forest Innovation Quarter, said it takes years for the market to respond to innovative products.

“Thus, all innovative products are more risky than me-too products, whether they are incremental and evolutionary, or revolutionary,” Tomlinson said.

“However, generally a revolutionary technology, albeit one that has great market risk, can disrupt a market and gain great market share.

“Innovation is the way to do so.” (336) 727-7376


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