Tobacco in Time
Analyst looks at past, present and future of tobacco
ROSEMONT, Ill. -- Nik Modi, senior research analyst at UBS Investment Research (New York), is a bit of a time traveler when he talks about tobacco.
In his presentation at the CSP 8th Annual Tobacco Category Review Meeting, he looked at tobacco's past to provide the retailers and suppliers in attendance a better perspective of where things stand right nowand where they are likely to go in the future.
While smokeless only accounts for 20% of the market right now, he said that in the 1940s, it was 30%. And in the 1800s, when things like communal snuff boxes existed, [image-nocss] smokeless was more than 70% of the market; cigarettes only accounted for 2%.
Back then, as tuberculosis grew rampant, anti-spitting bans were put in place. "Kind of like the smoking bans that are causing smokeless to rise now," he said. And as smoking bans increase, he pointed out, there are no bans on nicotine. "Will history repeat itself?"
Looking to the future, Modi predicted that by 2015, cigarettes will be 69% of the market, smokeless 17% and cigars 14%. By 2025, he predicts other tobacco products will surpass cigarettes, with cigarettes only accounting for 45% of the market, cigars 22% and moist smokeless 33%. "That's a long time away, and my sense is that this will happen sooner than 2025."
Modi also examined brands and the implications of FDA oversight:
Brands. While 35% of retailers in a recent UBS-CSP tobacco survey said they thought the Marlboro Leadership Price program has helped Marlboro share trends, Modi said that he believes that is about the same percentage of retailers that have signed on to the program. Modi repeated that one retailer in the survey, who opposes the program, points customers toward other brands. "The worst thing you could have as a brand manufacturer is have your customers telling other consumers to buy someone else's product," he said
When it comes to Newport, the brand has 74% of market share in its core states in the premium full-flavored menthol category; in other states, its share is only 40%. "So just think about the opportunity that this company has with this brand." Modi also touched on how Newport Non-Menthol cigarettes have earned an entire share point since their launch last year, and how 61% of retailers in the survey say their sales of the product are improving. "It's pretty clear to me that this brand is maybe more sticky than people may have thought originally."
FDA Oversight. Modi also uses Newport as an example that menthol doesn't necessarily skew toward African-Americans, one of the factors the FDA Center for Tobacco Products is examining as it looks at the fate of menthol. He said that while 50% of Newport menthol consumption does come from African-Americans, as much as 40% of Newport menthol consumption is by Caucasians.
Another portion of the FDA's research focuses on youth consumption of menthol. Modi said that in areas where menthol has an above average market share of more than 30%, youth smoking rates are actually lower than where menthol use is below average. Another reason that might deter the FDA from moving on menthol cigarettes is that they contribute $5 billion in tax dollars.
In addition to menthol, Modi said some of the FDA's requirements, such as graphic packaging, can be "very burdensome, very costly" for manufacturers, and that not many companies below the Big Three have the scale or resources to keep up. "I think the big will get bigger, and we've already seen some smaller players go out of business," he said.