OTP Power Shift

Big Tobacco floats all boats, but “contractual bundling” inevitable, analyst predicts

Angel Abcede, Senior Editor/Tobacco, CSP

NEW YORK -- The entry of major cigarette manufacturers into other tobacco products (OTP) will have the benefits of deep-pocket investment into the overall category along with the infusion of Big Tobacco sales tactics heretofore confined to cigarettes, according to one analyst.

Speaking Tuesday in a CSPNetwork CyberConference titled “Tobacco Update: State of Smokeless,” analyst Nik Modi of New York-based UBS Investment Research, said history shows that entry of major players into relatively new categories has lifted overall sales.

Citing the 10% boost in energy drink sales [image-nocss] in 2003-2004 after the makers of Coke and Pepsi entered the fray, Modi said, “When the big guys come in, it increases the category. The same will happen with smokeless.”

Unfortunately, Modi also predicted that as the major cigarette manufacturers begin to enter the OTP segment with their own products, contractual bundling may occur. Similar to what happens in other categories, cigarette makers may tie the sale of popular cigarette brands to the obligation of selling those same manufacturer 's OTP offerings. “It 's inevitable,” Modi said. “When shareholders are pressuring them, the best way to get a return is bundling. I do see it as a reality, but not for some time.”

Also participating in the conference was Ed Roberson, former president of Memphis-based Conwood LLC, a moist smokeless tobacco (MST) player that was purchased by R.J. Reynolds, Winston-Salem, N.C., in 2006. He put a spotlight on the growing “price value” segment of the MST subcategory. Citing industry data for 2007, he said overall MST growth was 11.5% in the United States, where price-value brands grew 18.6%, while premium and mid-tier grew at a combined 8.1%. The program was sponsored by Swedish Match N.A., which chose Roberson and Modi as presenters.

Looking into the future, both Modi and Roberson saw distinct trend lines:

Space-to-sales still underutilized. MST represents the highest profit-per-square-foot item in the store, Modi said, noting how the industry still needs to readjust its sets to take advantage of the opportunity. MST growth comes from cigarette demographic. Modi said 60% of new MST users also smoke cigarettes, and with social pressure and bans on public smoking contributing to weaker demand, MST becomes the beneficiary. Legislative moves to weight-based taxation. Roberson said any move by states to switch from a taxation formula based on price (ad valorum) to one based on weight will have a negative impact on the price-value segment. [Conversely, such legislative moves to weight-based taxation would positively impact the premium segment. USST has endorsed weight-based taxation, which they consider the most equitable and in the best interest of consumers, retailers and wholesalers.] PM has a PV on its hands? Modi said that from what he 's uncovered, Richmond, Va.-based Philip Morris USA, with its Marlboro-branded MST product, essentially has produced a price-value item. He said the taste profile was a “miss” for the premium smoker and in blind taste tests, fell more in line with price-value brands.

In general, Modi of UBS said MST is a growth category and predicted 7% volume increases for all channels in 2008 with c-stores being higher, most likely 9%. He also noted how the development of tiered price points was important for the category. “Price value and premium can co-exist,” he said. “As in other categories, it 's always good to have well-defined [price tiers]; price value has grown but at the same time, premium continues to grow.”

Angel Abcede, CSP/Winsight By Angel Abcede, Senior Editor/Tobacco, CSP
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