NEW YORK -- Like water carving out a canyon, increased taxation, smoking bans and the probability of regulation are shaping the tobacco market as consumers tweak their habits and manufacturers respond with innovation.
During Tuesday's CSPNetwork CyberConference sponsored by loose leaf manufacturer National Tobacco Co., Citigroup tobacco and beverage analyst Bonnie Herzog provided an update on the state of cigarettes and other tobacco products (OTP). It's not just going to be about cigarettes in the future, Herzog told attendees. It's going to be about [image-nocss] all different forms of tobacco, and it's going to evolve. [Click here to listen to an OnDemand rebroadcast of this CyberConference; free for retailers/wholesalers; $49 for suppliers.]
Change is being driven from the top down. Premium cigarette volumes slipped 2.4% in 2006, according to data provided by Citigroup and Reynolds American Inc. Herzog said consumption will continue to drop closer to the 2% mark rather than the 1% to 2% range often cited by industry experts.
This decrease has been accelerated by smoking bans taking effect across the United States, including Citigroup's New York City headquarters. For the most part, you saw an initial drop-off in consumption but then smokers tend to adapt or use other forms of product, observed Herzog, who said she believes more locales will adopt the bans.
That's certainly contributing to some of the growth we're seeing in the OTP category, she noted. As a retailer, you need to consider how you set up your store and fixtures and make sure you have adequate space for some shifting as the industry mix shifts from cigarettes to OTP.
Despite declining consumption, premium cigarette brands appear strong. This is evidenced by the stabilized price gap between premium and deep-discount, which sits at 44.8%, according to Philip Morris USA data. The deep-discount category, at least in the cigarette arena, really has subsided vs. what we saw so many years ago and that has to do with the gap being at a point where it's manageable, said Herzog.
She also told attendees to continue to expect price increases from PM USA. In the future, maybe you'll see more of a mix from this companyif they continue to be the leader, which I think they will, they will continue to reduce off invoice but I wouldn't be surprised if they take a list-price increase at some point in future, although it may not be mostly in the form of off-invoice discounts.
Herzog said that increased state excise taxes on tobacco will continue to be a popular source of government income, projecting an annual increase of around 10%. According to Citigroup, seven states passed increases in excise taxes last year, while seven failed. Herzog cited the defeat of a tax increase in California as an example of how manufacturers, wholesalers, retailers and consumers banding together can really put some pressure on government to make sure tax increases aren't too onerous.
The possibility of the government regulation of tobaccothrough the Food & Drug Administration (FDA) or another bodyis inevitable, Herzog believes, although she does not anticipate any developments in 2007 and is hopeful that any regulation will be reasonable. The largest stakeholder, PM USA, has gone against industry sentiment in support of regulation, in the hopes it will provide a stronger footing for the company's reduced-risks products currently in development.
Keep in mind that the way they think about it, it's not just a product, said Herzog of PM USA's focus on reduced-risk. If you think about it as a technology, someday, if it works and is accepted by consumerswhich I think it will be, based on testing we've performed in the last couple yearsthey can apply the technology to all brands and that could be a really nice competitive advantage for that particular company.
Meanwhile, although its consumer base is small in comparison to cigarettes, smokeless tobaccowith an estimated five to seven million consumers vs. the 45 million who smokeshould continue to grow in the low to mid-single-digit range, Herzog said. The entry of a new deep-discount brand, South Boston, Va.-based American Smokeless Tobacco Co. LLC's Bobcat, is likely to spur down-trading among consumers and price competition among suppliers.
Herzog also touched on the market tests currently taking place among several companiesincluding PM USA, Reynolds and USSTCwith snus, a pouched form of smokeless tobacco that sits under the user's upper lip instead of their lower lip like traditional varieties, preventing the need to spit. The biggest roadblock to sales success here, she believes, is consumer education.
Longer term, these major manufacturers will continue to push in these other tobacco categories, said Herzog. Make sure you have enough space allocated for this growing areaI think you're going to see money spent on promotional dollars or signage [and] fixtures, so you need to be ready.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.