On Modi's Mind

Tobacco analyst offers insights on cigarettes, menthol bans and more.

Linda Abu-Shalback Zid, Senior Editor

LAS VEGAS -- From future cigarette growth to bans and innovations and supplier contracts, UBS senior tobacco analyst Nik Modi never shies away from an opinion.

At the NATO Show, before a packed breakout session of more than 100 tobacco outlets and convenience-store representatives, Modi extended his role from prognosticator to historian.
Do you know what percent of tobacco consumption smoking represented in the 1880s? Modi posed the question to the group that represented a cross-section of age, but surely did not include a live witness from the 19th Century.
Answer: 2 %. Not only [image-nocss] that, he queried, do you know who the two largest economic powers were during that period? India and China.
The lesson, according to Modi: The more things change the more they stay the same.
That is, to a point. The lesson Modi was offering is that tobacco is rapidly changing, and while cigarettes may currently dominate the scene, rapid growth in cigars and smokeless is compelling retailers to modify their sets -- and fast.

Modi predicts that cigarette sales, currently representing 80% of all tobacco transactions, will slide to less than 50 percent by 2025. Thus, he cautions: "If you're not best in class in sets in smokeless, get there." The retrospective analyst, who has become a favorite of retailers in recent years, predicts that snus and other oral products will continue to surge, noting, "I really think this is where tobacco is going."
Modi also touched on a number of other subjects during a lengthy and rather engaging Q&A. Lorillard: Considered the third among the Big 3 in cigarette producers, Lorillard has long dominated the menthol market with its Newport brand, and has recently forayed into the non-menthol segment. Modi predicted Lorillard would demonstrate strong growth, especially under the leadership of former UST head Murray Kessler. "I expect to see Newport to be more expansive where they play."
FDA's push for graphic cigarette packaging: Modi does not believe the packaging's depictions will curb cigarette sales, citing the failure of such attempts across other parts of the globe. "Reality is that warning labels will not affect consumption. The number one issue that affects consumption is pricing."
Marlboro's new pricing option that caps retail prices: "Just like your bosses have to hit [certain financial] numbers, these manufacturers have to hit their numbers." Modi said he did not support the Marlboro Leadership Promotion option (MLP) from a retailer vantage, nor did he believe it would boost the overall cigarette category. But from an investment perspective, he thought this would benefit Philip Morris USA and likely increase its market share. "Retailers need to think holistically what the total effect this will have on your business. I understand why they're doing it, but it doesn't make me feel great."
Consolidation: Modi predicts the Big 3-- Altria, R.J. Reynolds and Lorillard -- to continue growing market share, through acquisition across the broader tobacco spectrum over the next several years. As well, look for some of the smaller cigarette and OTP players to pursue consolidation.
Menthol ban: despite the recent position from the FDA's Tobacco Products Scientific Advisory Committee (TPSAC) that banning menthol would improve public health, Modi said he doubted that the FDA would actually adopt such a ban, noting strong evidence that menthol is no more dangerous than other forms of tobacco.