Seeing the Light

NATO Show showcases robust, thriving tobacco category.

Mitch Morrison, Vice President of Retailer Relations

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Who says tobacco’s on the decline?

Such notions are dismissed into the world of the absurd. A trek through the 2012 NATO Show showed an industry in positive transi­tion, pivoting from cigarettes’ dominance to a broader spectrum featuring a robust collection of cigars and moist smokeless, relative newcomers snus and electronic cigarettes, and niche players such as hookah and roll-your-own.

This year marked the 11th annual NATO Show, hosted April 24-26 by the National Association of Tobacco Outlets, and it was the association’s most successful. Inside the Paris Hotel and Convention Center, the number of exhibitors soared 40% to 176; show-floor space skyrocketed 154%; and the number of both retailers and tobacco buyers increased over last year’s totals. Educational sessions were richer than ever.

“We are more than pleased with NATO’s 11th Anniversary & Trade Show,” said NATO president Andy Kerstein. “With more exhibitors, a sold-out show floor, relevant speakers and educa­tional sessions, it’s no wonder the NATO Show has become the premier event for the tobacco industry.”

Inside this special event coverage, you’ll find reports from several of the presenters and highlights from the second annual exclusive NATO-CSP Tobacco Survey. (To read the 2012 CSP Tobacco Supplement, go to

Embracing Alternatives?

Are e-cigarettes and snus on similar or divergent paths?

ombustion-free electronic cigarettes are smoking hot, garnering intense attention from tobacco outlets and con­venience stores alike. But is the attraction superficial or real? Are e-cigarettes the wave of a smoke-free future or the new snus, which burst onto the tobacconist scene a few years ago with great fanfare, only to simmer to an uncertain fate?

An exclusive NATO-CSP Tobacco Sur­vey sponsored by Swedish Match shows that nearly three-quarters of tobacco out­lets surveyed view e-cigarettes as a growing segment, vs. only 35% for snus. What is hard to predict is whether e-cigarettes are merely riding the hype and widespread curiosity, and whether snus’ best days lie ahead or have flamed out before igniting a loyal U.S. customer base.

These questions were among many addressed during a panel discussion. And the excitement generated around elec­tronic cigarettes played out further on the exhibition floor, where no less than 20 e-cigarette vendors demonstrated their wares and sought to differentiate their products.

Major Moves

Indeed, as tobacco retailers and suppliers converged, Lorillard was announcing the $135-million cash acquisition of blu ecigs, fueling speculation that Altria and R.J. Reynolds may not be far behind in exploring the e-cigarette craze. At the same time, statistically, neither e-ciga­rettes nor snus constitute even 1% of total tobacco, a category dominated by cigarettes, followed well behind by cigars and moist smokeless.

Panelists Randy Silverman and Trey Power weighed in on the newer entries to the tobacco set. “Right now, electronic cigarettes are the hottest growth category for us,” said Silverman, fourth-generation operator of the 14-store Klafter’s Inc. tobacco shops, based outside of Pitts­burgh. “Determining how many brands and knowing what brands to carry are the biggest challenges.”

Earlier this year, Circle K, the U.S. retail arm of Laval, Quebec-based Ali­mentation Couche-Tard, embraced e-cigarettes with the chainwide launch of Finiti Branding Group’s FIN e-cigarettes, a disposable unit equivalent to more than two packs of traditional cigarettes.

The chain has been reshaping its tobacco backbar, aiming to give stron­ger representation to the growing OTP sector. “Increasingly, adult tobacco con­sumers are demanding a much wider variety of alternatives to traditional ciga­rettes,” said Powell, director of national procurement/natural accounts, U.S.

That said, Powell acknowledged that both e-cigarettes and snus remain fledg­ling segments with much to prove: “That no one manufacturer or product line has created material separation at this stage of the life cycle is particularly unique. On the one hand, there is no dominant brand or alternative platform, only the promise of future demand.

“Conversely,” he continued, “this trans­lates into tremendous opportunity for the snus, cessation or electronic-cigarette company that can develop some equity and begin to consolidate alternative vol­ume ahead of the higher growth periods yet to come.”

Looking Ahead

Forecasting growth in any infant busi­ness is challenging. Trying to do so in an environment of likely FDA oversight is no likelier than winning at the roulette wheel.

“How the government handles electronic cigarettes will be the biggest long-term concern for the viability of this category,” said Silverman. “With all of the public smoking bans, it could be a huge category in the future.”

As for snus, Silverman offered: “Snus has been a category that has been rapidly growing. I’m not sure whether it is taking sales from traditional snuff consumers or cigarette consumers, but it has become a subcategory that we are seeing continued growth with. One of the challenges for carrying snus will be that some brands require refrigeration of the product, and this type of space may be limited.”

Battle for the In-Between

Analyzt Herzog examines how lines between first- and second-tier brands is blurring

Economic growth has been mod­est coming out of the recession. … The U.S. economy will probably mud­dle along over the next couple of years.”

It was not an optimistic opening to Wells Fargo Securities senior analyst Bon­nie Herzog’s “U.S. Tobacco Trends and Insights” discussion.

Negative as it may be, it was a relevant opening. With the unemployment rate and gas prices high (unemployment at 8.2%, gas prices reaching an average of $3.86 as of April 22) and consumer confi­dence low (70.2% in March 2012), there’s bound to be an effect on retail sales.

“As you think about your tobacco category and what could be impacting it, this is worth noting,” Herzog said. “I don’t want to depress everyone early on—just keep this in mind.”

It’s certainly on the minds of those selling or manufacturing premium ciga­rette brands, whose percent of the total industry volume has fallen from 91% in 1984 to about 70% today.

“My assumption is this will continue to depress,” Herzog said of premium’s share of the marketplace.

But it’s not all bad news: Herzog described a growing “sweet spot” between the traditional first- and second-tier brands. In fact, she believes the line between the first and second tiers has blurred significantly. “The interesting thing about this industry is it’s much more complex,” said Herzog. “There are so many different price tiers now.”

With premium numbers in a freefall, the big three tobacco companies have engaged in what Herzog refers to as a “battle of the brands” for control of that second-tier rank.

“This is something we know started late last year,” said Herzog. “The com­petitive pressures have intensified and promotional spending has increased.”

This could be bad news for the current “king” of the second tier, R.J. Reynolds’ Pall Mall, whose volume was down for the first quarter of 2012.

“They’ve got the most to lose,” Herzog said of Reynolds American. “They’re try­ing to defend their turf with Pall Mall. You’ve seen a lot of increased hyped activity from Marlboro Special Blends, L&M, Maverick, Newport Red—a lot more money being spent fighting to take the share from Pall Mall.”

Philip Morris USA and Lorillard have employed a variety of methods in the fight for Pall Mall’s hold on the blurry territory between first and second tier. Lorillard has taken the slow and steady approach with Maverick. With a minus­cule share of the market, Maverick may not seem like a threat—but Herzog warns against overlooking Lorillard’s offering.

“Although Maverick has less than 2% of the market share, it has been growing at a double-digit pace for the past several years,” Herzog said. “It’s a growth that appears to be continuing.”

For its part, Philip Morris has chal­lenged Pall Mall’s stronghold with not one but two brands: Marlboro Special Blends and L&M.

“They might be trying to find a sweet spot, trying to raise that price between the first and second tier,” Herzog said of Special Blends, a brand whose price-point Marlboro previously has lowered to keep consumers buying the Marlboro name. “Their challenge now is to get that price point up.

“In terms of L&M, they’ve been much more aggressive,” continued Herzog, who applauded the strategy of positioning L&M to go head to head with Reynold’s Pall Mall.

Not that Philip Morris is limiting itself to L&M or Special Blends to take down Pall Mall. It’s also looking at third-tier brands.

“They’re trying to match Pall Mall wherever possible—or be lower,” Herzog explained.

Regardless of the brands at war or the methods employed, Herzog believes this battle of the brands will continue through 2012 and perhaps beyond. It’s just one example of how the category is changing in the face of the current economic and regulatory environment.

“At the end of the day, tobacco will stay,” said Herzog. “But it will have to evolve.”


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