Little Cigars, Big Questions
Retailers work to clarify the little-cigar category in a post-SCHIP era.
While compiling information for 2010’s Category Management Handbook, an interesting statistic surfaced: Little cigars clocked in yet another double-digit sales year, with a 10.9% increase in units sold from the previous year. Not bad? A closer look at that increase reveals something entirely different. According to the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB), large cigars increased by approximately 27% last year, while little cigars plunged by a resounding 58%.
So, are little cigars growing, as some will profess, or plummeting? The answer depends on how one defines a little cigar. And for retailers, such definition may very well affect how they set their overall cigar displays.
Let’s go back in time, not too long ago, to 2009. The Category Management Handbook put out annually by CSP refers to the traditional definition of little cigars: small filtered cigars that have the same basic look as a cigarette. While this is how most retailers and consumers might view little cigars, drastic tax increases in 2009 caused many cigar manufacturers to refer to the TTB’s definition of little cigars, which qualifies the product by weight—not size or appearance— in accord with the definition of the tax code. That’s where things got cloudy. We’ve enlisted several cigar manufacturers and industry analysts to help clear the smoke by clarifying how and why this category has changed—and why retailers should take notice. Most fundamentally, how you define little cigars will, by definition, determine how well your little-cigar business is performing.
“The Federal Alcohol and Tobacco Tax and Trade Bureau,” says Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), “defines a little cigar as weighing 3 pounds or less per 1,000 units and must have a wrapper that is approximately two-thirds or more tobacco which retains its tobacco characteristics of taste, aroma and identifiable chemical components and which has a color consistent with that of the natural leaf tobacco traditionally used as a wrapper for American cigars.”
That technical understanding certainly departs from the informal, market- based mindset that thought of little cigars as, more or less, cigarette-sized filtered cigars. And perhaps for good reason.
Paul Marquardt, marketing director for Phoenix-based cigar manufacturer Prime Time International, looks at the definition in terms of extremes. “Let’s say that you’ve got a cigar that’s 2 feet long,” he says. “If it’s less than 3 pounds per thousand, it would be a little cigar. It doesn’t really matter what it looks like; it all comes down to the weight.”
Considering that little cigars— regardless of definition—demonstrated healthy growth from the late 1990s well into the first decade of the 21st century, manufacturers quibbled little about little cigars’ precise definition.
What was known was that the entire cigar category was growing, most particularly little cigars, whose “removals” climbed 213% from 1997 to 2008, only to fall 81% over the next two years. Meanwhile, large cigars enjoyed a 121% increase in removals from 2009 to 2010, according to TTB data on removals, a designation that closely mirrors manufacturer sales. But little cigars’ ascent was abruptly snuffed out in the congressional ashtray. In 2009, the government expanded SCHIP (State Children’s Health Insurance Program) by taxing tobacco across the board. Little cigars bore a disproportional blow, its taxes skyrocketing from 4 cents a pack to $1.01, a 2,400% increase that put it on par with cigarettes. Meanwhile, SCHIP’s tax hit on large cigars was significantly less, raising the tax rate from 5 cents to a maximum 40 cents per unit. (While little cigars are taxed per unit, large cigars are taxed based on supplier distribution costs, capped at a percentage rate that amounts to 40 cents.)
“The tax increases tipped the scale,” Marquardt says, “so that actually, from a price value perspective, many large cigars became less expensive for consumers to purchase than little cigars.”
This is where things got murky. The SCHIP quadruple-digit tax increase applied only to little cigars that fit the TTB definition. With many existing little cigars close to the 3-pounds-per-thousand weight classification, downward consumer pressure on pricing pushed many manufacturers to raise the weight on their cigars. The move suddenly shifted many of these products from little to the large-cigar category—accompanied by the lower tax rate. “When SCHIP passed, there was a huge price increase,” says Jane Green, vice president of marketing for Jacksonville, Fla.-based Swisher International, the largest manufacturer of little cigars, as well as a producer of large cigars. “That price increase created a gap in the market that has allowed more people to enter the [large cigar] market. You’ve got an influx of new manufacturers putting product on the market at low prices.”
Looks Little, Feels Little ...
Before SCHIP changed the playing field, little cigars emerged in the early 2000s as fertile grounds for both premium and discount brands. While Prime Time’s premium brand has, for example, always been its flagship Prime Time Little Cigars, the company noticed a need for a discount cigar and launched the Smoker’s Choice little-cigar line in 2003.
But discount brands don’t seem like such great discounts when consumers are forking over a sizable tax. So Prime Time fattened ever so slightly the weight of the Smoker’s Choice line in 2009, just enough to move the product to a discount “large” cigar, reflecting the pressure on price from both consumers and other manufacturers.
“Price matters,” Marquardt says. “It makes sense to have a large cigar because it’s a cheaper product. It doesn’t get any more complicated than that.”
For companies such as Swisher and Prime Time, both of whom had a presence in the larger-cigar segment, SCHIP facilitated a seismic strategic shift, creating a new wave of discount large cigars, formerly designated as little cigars, as well as an influx of overseas brands. And at the same time, it neutered the littlecigar segment.
“We got into the [discount] filteredcigar market because it became apparent that we needed to compete with a number of other manufacturers entering the market at very low prices,” Green says. “We had no choice but to compete with them at the same level.”
To do so, Swisher changed the weight on two of its little-cigar lines, Santa Fe and King Edwards, and has been quite successful in this new large-cigar category. “Right now, the economy is so difficult,” says Green. “People are very in tune to saving money. They are looking at prices on every single thing they buy, including this product.”
Because these discount filtered products are relatively new to the category, it’s not easy to measure how they’ve done as a whole. But with major players such as Swisher, Prime Time and Cheyenne all adding this new product category to their portfolios, it looks as if “large” filtered cigars are here to stay.
What’s the Difference?
There are those within the industry who disagree with the TTB definition of little cigars and the confusion it causes. An official for a cigar manufacturer that does not produce little cigars said he believes the definition should be less about weight and more about the product’s appearance. Such an approach would support this story’s opening paragraph, giving the impression that little cigars actually did grow by nearly 11% in 2010.
Playing off the looks-like-a-duck axiom, the official, who spoke on condition of anonymity, says, “If it looks like a cigarette, but is not marketed as a cigarette, then it is a little cigar.” Although he acknowledges distinctions can be made for tax purposes, he still believes, “It is cigarette smokers who smoke little cigars.”
It is, indeed, easy to blend cigarette and little-cigar smokers based on a quick glance at the two products. From appearance alone, there can be some confusion between cigarettes and little cigars because both are approximately the same size. They part ways, however, in the following: Cigarettes are processed tobacco wrapped in a paper tube, while little cigars—like their larger brethren— consist of filler tobacco and are wrapped with a tobacco wrapper.
To that end, Marquardt and other little-cigar manufacturers balk at such comparisons. “The reality is they do smoke differently,” he says of little cigars as opposed to cigarettes, pointing out little-cigar smokers have different consumption and usage rates.
“A lot of that has to do with the fact that cigar tobacco is a lot harsher, has far less sugar and is a different kind of smoke and a different experience from a cigarette,” Marquardt continues. “The appearance of a tobacco product does not define what that tobacco product is. It is not what it looks like but what it is made of and what is inside that matters.”
As for consumers’ ability to distinguish between little and large cigars, Swisher’s Green acknowledges the shades have noticeably blurred. “The products are very similar,” Green admits. “The main difference between the two is the pricing.”
What Retailers Need to Know
There are two key reasons why this debate is important to retailers. The first is so cigar displays are properly set up and accord to the weight differences, as well as flavors and multipacks, of little cigars and the variety of larger cigars.
Depending on how the categories are set up in a retailer’s pricebook, adhering to consistent definitions is important to accurately assess year-over-year sales for each segment. The blurring of little cigars and large filtered cigars threatens to skew such sales numbers, some industry experts say.
If that isn’t reason enough, there is a more compelling driver behind knowing definitions: compliance.
“Cigar products are classified according to federal regulations and state laws,” says Briant of NATO. “States have laws classifying other tobacco products, including cigars, primarily for excise-tax purposes. Retailers need to follow the federal and state classifications of little cigars and comply with excise tax laws.”
Depending on the state legislation, taxes and rules surrounding little-cigar sales can differ drastically. California taxes little cigars like cigarettes, meaning a cigarette stamp must be put on the little-cigar packs. However, California offers cigarette stamps only for 10- and 20-packs, not single units. This effectively bans the sale of single little cigars in the state of California. Or, as Marquardt puts it, “The states have ways to influence what products you can sell by the way they tax the products.”
Because of these kinds of laws, it’s all the more crucial for retailers to know the difference between federally defined little cigars and large filtered cigars that fall into the large-cigar category. Although the products look similar, taxes can cause the prices to vary drastically—something retailers must communicate to customers. Manufacturers can aid in this task by how they present their discount filtered products. For example, Green says Swisher “tries to put those [discount filtered cigars] in displays which are going to present the price to the consumer.”
Despite all the confusion within the category, both little-cigar and discount filtered-cigar manufacturers encourage retailers to stick with their products.
“What we try to communicate to our retailers is that little cigars are a differentiated product and they’re for a different kind of consumer,” says Marquardt. “To not offer that, you’re losing a potential sale.”
To that point, Marquardt says that while the category has noticeably shrunk due to tax reasons, Prime Time’s premium line of little cigars continues to grow: “It’s really proved to a lot of people in the industry that little cigars are an important product offering and deserve a place in the retailers’ cigar sections.”