The Cigarette Crystal Ball
Big Tobacco can be tight-lipped on new-product development, but recent launches hint at trends to come
Lately, when the words “innovation” and “tobacco” are paired, one’s thoughts inherently turn toward electronic cigarettes--or even newer advancements in the world of vaping, dissolvables and other products not stifled by the strict regulations that combustible cigarettes endure.
But that doesn’t mean new-product innovation is any less important in the realm of combustibles.
“In all of the [tobacco] categories, really, you need to continue to innovate to create excitement and awareness for the consumers,” says Bonnie Herzog, senior tobacco analyst for Wells Fargo Securities LLC, New York. “It’s a little more challenging with combustible cigarettes given the limitations on marketing and advertising, but it keeps consumers interested. And that’s key.”
Although marketing limitations--not to mention the backlog of substantial-equivalence applications at the FDA (see sidebar, p. 78)--have made innovation a challenge, creating consumer excitement via new products and line extensions is a central strategy for manufacturers such as Lorillard Tobacco Co.
“Innovation has become a meaningful component of the overall cigarette market as manufacturers compete for market share and satisfy the evolving desires of consumers,” says Robert Bannon, director of investor relations for Greensboro, N.C.- based Lorillard.
To ensure a competitive edge, major cigarette manufacturers tend to keep quiet about new-product launches. Though new products are something Herzog repeatedly inquires about when speaking to Lorillard, Altria, Reynolds American Inc. and other manufacturers, she typically gets the runaround.
“They’ve all suggested that yes, they have [new products] in the pipelines,” she says, “but we have to wait.”
Like Herzog, CSP was told we’d have to wait and see what new products 2014 will bring. But a look at two late 2013 entrants from Lorillard and Altria provides a glimpse of the cigarette innovations retailers can expect in the year to come.
Lorillard Goes for Gold
Last June, Lorillard was awarded the first-ever substantial-equivalence approvals from the FDA’s Center for Tobacco Products for Newport Non-Menthol Gold. The “smooth flavor” option for the Newport brand was released in October, quickly reaching broad retail distribution and garnering enthusiasm from retailers and analysts alike.
“We’ve been really bullish and excited about [Newport Gold],” says Herzog. “The feedback that I’ve been getting from a lot of the retailers seems to be pretty positive.”
Some of that feedback came in the form of a September “Tobacco Talks” survey conducted by Wells Fargo. Out of the retailers questioned, 55% were optimistic about Gold’s rollout, with comments such as:
▶“I expect this new brand extension to further erode the Pall Mall value line and possibly some of the local low-price leaders.”
▶“I think it is 100% necessary for Lorillard to continue in light of potential future FDA menthol rulings. I do believe that the FDA may begin to phase out menthol over the next couple years, if not ban [it] outright, and launching Newport Gold is the smart thing to do.”
▶“Yes, [Gold is a game changer for Lorillard]. It’s going after their competitors’ customers.”
The last two comments seem on point with Lorillard’s intentions for Gold, with Bannon pointing out the company is “hopeful that the Newport brand will be able to further expand its presence in the nonmenthol segment of the cigarette market, which represents approximately 70% of the total market.”
It’s this expansion into the nonmenthol arena that has Wells Fargo “bullish” about the launch. Unlike many cigarette line extensions, products such as Newport Gold and Newport Red have the potential to tap into a market outside of Newport’s menthol consumer base.
“Who does Newport Gold take from?” says Herzog. “Does it cannibalize other Newport brands or does it represent true growth for Lorillard? What we’re hearing is it’s mostly from Marlboro Gold.”
Assuming Newport Gold continues to garner consumers from Lorillard’s competition, it seems likely that the company’s new products will center on other nonmenthol products.
“A key component of Lorillard’s long-term strategic plan is to pursue close-in product adjacencies to our core cigarette business,” says Bannon. “Expanding the Newport brand into the nonmenthol segment of the cigarette market has been an important element of that strategy.”
Altria on the Edge
Like Lorillard, many of the recent product launches from Richmond, Va.-based Altria subsidy Philip Morris USA have been line extensions of its industry-leading Marlboro brand.
“Marlboro has expanded its reach over time to meet evolving preferences of adult smokers while consistently maintaining its core positioning,” says Brian May, spokesperson for Altria.
Herzog says the company has “created a brand architecture” through the color-coded Marlboro profiles of Red, Green, Gold and Black. The company’s latest product—Marlboro Edge—falls into the Marlboro Black family, which May says “builds upon the Marlboro franchise with a bold, modern take on the brand’s values of independence, hard work and freedom.” Launched at the end of October 2013, Edge is a “nonmenthol cigarette containing a bold smooth flavor” with a cork tip, available only in the king-size box.
“Edge, I think, is really filling out their Black profile and offering different flavor profiles, different versions for that consumer,” Herzog says. “It’s their way of segmenting, not only by color but within that [Black] umbrella. The goal is to keep that consumer in the Marlboro brand family and also attract new consumers.”
Retailers, however, were divided on Edge. While some respondents to the September “Tobacco Talks” survey were optimistic about its potential, others were concerned that it lacked “message or purpose.” Other feedback included:
▶“Too many line extensions to suit my taste, but I understand their strategy. Edge is likely to hurt Camel.”
▶“I believe they have diluted the brand. Everybody used to equate Marlboro with an image much like Harley-Davidson. Now, who knows what Marlboro is? You can’t be everything to everybody; doesn’t matter what business you are in.”
▶“I believe it has helped and supported their brand equity. They are gaining trial and support of the Marlboro family of brands and not having to deep discount as much to do so.”
Despite a less-enthusiastic retailer response, Herzog predicts Edge will do well with both Marlboro and non-Marlboro consumers--and that we’ll continue to see more of these “umbrella” extensions from Philip Morris in the future.
“I believe Philip Morris USA’s innovation strategy is working as evidenced by steady share gains in Marlboro,” she says. “It’s their way of making sure they have the right brand for the right consumer by looking at what appeals to different types of adult smokers.”
All in on ‘E’
So what can we expect from Winston- Salem, N.C.-based Reynolds American Inc., a company Herzog has often touted as a leader of innovation? It appears the Camel manufacturer is concentrating on innovation outside combustible tobacco.
“Focus seems to be on Vuse for the time being,” Herzog says, citing that Reynolds did have some smaller 2013 product launches in the form of Pall Mall recessed filters and a “reintroduction” of Camel Reds in select markets.
An emphasis on expanding into the less-restricted realm of electronic cigarettes is a trend Herzog anticipates all of the big manufacturers--not just Reynolds--will follow in 2014.
“I’m assuming it’s mostly line extensions in combustible, and the real action will be in e-cigs and reduced-risk products,” she says. “But they could always surprise us.”
Substantial Movement in 2014?
Arguably last year’s biggest cigarette product launch, Newport Non-Menthol Gold was made possible through the FDA’s substantial-equivalence pathway, a first for the agency. It was good news for Lorillard Tobacco Co., Greensboro, N.C., but what about the thousands of applications still awaiting their fate?
“It’s still a little slow,” admits Bonnie Herzog, senior tobacco analyst for Wells Fargo Securities LLC, New York. “I’d like to think the pace of their reviews will continue to accelerate. It’s like they needed to get this set up and figured out how they handle things.”
The fact that the approvals came just months after the appointment of Mitch Zeller as the new director for the FDA’s Center for Tobacco Products seems to further indicate that substantial equivalence could be a realistic option for new products in the future (CSP—Oct. ’13, p. 179).
“Having the two market authorizations for our products demonstrates to the tobacco industry that there is a pathway for substantially equivalent products when pursued in a diligent and comprehensive manner,” says Robert Bannon, Lorillard’s director of investor relations.
Zeller addressed the issue in a December FDA webinar, saying he knows “there are concerns about how long that this has taken,” and promising that the agency would catch up on the very long queue that has built up.
But how long will it take? “I’m optimistic that by calendar-year 2014—definitely by 2015—things will move more quickly along those lines,” Herzog says.
New E-Cig Products in 2014
Like cigarette manufacturers, e-cig companies are not eager to give their competitors a sneak peek at new product innovations. But here are some hints at what we might see from some e-cig manufacturers who participated in Wells Fargo’s Inaugural E-Cig Forum in November:
Craig Weiss, the Scottsdale, Ariz.-based company’s president and CEO, promised NJOY has “a significant technology advancement” coming in 2014, though he declined to elaborate with so many of his competitors in attendance.
Miguel Martin, president of the Livingston, N.J.-based maker of Logic premium electronic cigarettes, revealed his company would debut a puff counter in 2014, which will allow consumers to track how many puffs are left on an e-cig.
Andries Verleur, CEO and co-founder of Miami’s V2 Cigs, said 26% of the vaping market prefers mod or open-sourced devices—products that tend to be significantly larger than electronic cigarettes and give consumers the option of mixing their own e-liquid combinations. In 2014, V2 will introduce a brand outside of its current V2 and Vapor Couture lines that will address this market.
Jason Healy, founder of Charlotte, N.C.-based blu, said that while there haven’t been any true advances in the technology of electronic cigarettes over the past couple of years, blu will change that in 2014. Like Weiss of NJOY, he did not elaborate on what that advancement might be.