Tobacco: From Wall Street to Main Street

Smoker Friendly Tobacco Conference panel debates whether regs stifling, inspiring innovation

Melissa Vonder Haar, Freelance Writer

BOULDER, Colo. -- Summer is just coming to an end, but it's already been a busy year in terms of tobacco regulations. From local-level taxes and bans on both traditional cigarettes and cigars as well newer products like electronic cigarettes to the FDA's new tobacco chief Mitch Zeller finally taking some action on hot-button issues like substantial equivalence (SE), menthol and potentially deeming regulations, it has been far from quiet on the tobacco front. All of this was very much in the minds of the panelists participating in the Smoker Friendly Tobacco Festival and Conference's "Tobacco Wall Street to Main Street" general session.

"There's an elephant in the room right now that sits between Wall Street and Main Street … and it's called the FDA," said Farrell Delman, president of the Tobacco Merchants Association and moderator of the session. "We're in a critical time in this industry, where the groundwork is going to be laid for decades."

Indeed, Zeller's recent announcements on SE and menthol seem to suggest that long-predicted regulations are on the horizon.

"From my perspective, what [Zeller] has said in terms of his top priorities that he's named have been dealing with the menthol issue, substantial equivalents, and deeming regulations," said Wells Fargo's managing director of beverage, tobacco and convenience store research, Bonnie Herzog. "He's put out some action on a couple of SE's out of the thousands of applications and deeming regulations we're expecting in October." 

Still, with thousands of SE applications awaiting their fate, an April deadline for deeming regulations having come and gone and no true timetable having been set up for menthol, the uncertainty has caused ample strife for tobacco manufacturers big and small. They know regulations are coming--they just don't know when or what those regulations might be.

"The threat of regulations has maybe had a larger impact on innovation [than actual regulations]," said Michael Cellucci, president of the Miami-based premium cigar manufacturer, Drew Estate. "When you don't know the rules, it's hard to innovate," he said.

"This definitely will impact the large manufacturer's businesses," said Herzog, who said her phone rang nonstop for two days following the FDA's advance notice of proposed rulemarking on menthol. "Menthol represents around 31% of total cigarette industry volume in the United States--for Lorillard it's the vast majority of their business. Lorillard's stock trades a lot cheaper than the others because of this uncertainty. Nobody on Wall Street or in the c-store business likes uncertainty."

And while few would argue that the tax increases and strict regulations on where people can and can't smoke have been a good thing for the industry, Bill Sherman, executive vice president of New York City-based Nat Sherman, pointed out that such laws have forced both manufacturers and retailers to think outside the box.

"In a twisted way, regulations have sparked innovations," he said, pointing to how smoking bans paved the way for the popularity of smokeless products and electronic cigarettes.

The increased cost of tobacco products--much in part of steep state and federal excise taxes--has also led retailers to look for higher-end tobacco products, which often boast higher margins and a smaller but loyal consumer base.

"There is innovation going on in the tobacco category that's comparable to what's going on with the craft beer movement," Sherman said. "Every one of these product categories has elevated."

While premium has typically described standard products in both the beer and tobacco categories, Sherman described an increase in truly premium products on the market--which has been a big positive for retailers looking to make up for squeezed margins and decreasing sales in the traditional cigarette segment.

"We're not only replacing the lost revenue, but we're growing revenues--often at higher margins," said vice president of operations for Boulder, Co.-based The Cigarette Store Corp. and Smoker Friendly.

However, the success of electronic cigarettes and premium products under a strictly regulated environment does not underscore how important it is for tobacco retailers to speak out against the potential menthol and deeming regulations and the impact such regulations could have on their business.

"They're going to take as much as they possibly can," Cellucci said. "The stronger our fight is, as an industry, the more we can educate them. Whatever you don't educate them, whatever they feel is threatening, they're going to take. It's up to us as an industry to highlight what's really going on in the marketplace because they truly don't know. They're trying to understand, but it's up to us to have that conversation with them."