Survival of the Stogie
Cigar manufacturers express confidence in the face of proposed flavor ban.
On Dec. 15, 2011, four Democratic U.S. senators upped the war on flavored tobacco products, sending a letter to the FDA that urged the agency to exercise its right to regulate cigar products.
Not only do the senators—Dick Durbin (D-Ill.), Frank R. Lautenberg (D-N.J.), Sherrod Brown (D-Ohio), Jeff Merkley (D-Ore.) and Richard Blumenthal (D-Conn.)—want the FDA to take oversight of cigars, but they also are calling on the regulatory body to ban popular flavored products, stating “flavored cigars are putting children’s health at risk and increasing nicotine addiction and tobacco use among young people.”
Considering the measure is highly partisan and gaining little traction in the Republican-controlled House, the proposal is likely to go nowhere—at least for this year. But as we saw with SCHIP and empowerment of the FDA over most tobacco products, once the initiative is introduced, it may be a matter of only a few years, if not sooner, for it to become policy.
That said, it’s not surprising that the cigar industry is mounting a strong counter-attack. Cigar Rights of America, which represents cigar smokers, filed registration papers to lobby Congress on legislation that would eliminate the FDA’s ability to ban fl avored cigars—or regulate any cigar products. While the group has never before signed up for such a fight, executive director Glynn Loope said the group felt compelled to do so because “the cigar consumers of America have basically never thought a lot of the things that have happened would happen to them.”
But are cigar manufacturers ready to go to war? While many are hesitant to give an answer, most all manufacturers agree it’s not a matter of if but when the FDA chooses to regulate their products. That doesn’t necessarily mean a battle is looming.
“If you take a look back in history at a lot of the things the government has done in terms of taxing tobacco products, the industry is going to be constantly changing,” says Paul Marquardt, marketing president for Phoenix-based Prime Time International. “However, I don’t think anybody would argue with the fact that the tobacco industry is very resilient. We’ve always said, ‘Tell us what the rules are, and we’ll play by them.’ ”
Higher-ups at some of the biggest cigar manufacturers join Marquardt in this sentiment and are all too happy to explain why, flavor ban or not, the sky is not falling on the cigar industry.
The Post-SCHIP Years
This is not the first time the cigar industry has been threatened by looming legislation. A 2009 expansion of SCHIP (State Children’s Health Insurance Program) hit cigars hard, increasing the tax on little cigars by a whopping 2,400%. This radical change in pricing could have doomed manufacturers of little cigars—most notably Swisher International, the largest maker of little cigars in the United States.
“SCHIP impacted Swisher, just like it did everybody,” says Jane Green, vice president of marketing for the Jacksonville, Fla.-based company. “Everybody had to go up significantly in price overnight.”
But to some surprise, the tax did not yield the devastating blow some had dreaded.
“The dollar tax per pack certainly impacted our little-cigar business. I’m happy to report it didn’t drop nearly as much as we feared it would,” Green says. “The decline was slight. It clearly demonstrated that we have a very loyal base of customers with Swisher Sweets Little Cigars.”
Green wasn’t the only one surprised. Others have even noticed some positive effects from the legislation.
“When SCHIP first passed, we were concerned about the possible impact on the industry due to the significant changes in various product categories,” admits Christine Umstead, senior brand manager for Ft. Lauderdale, Fla.-based Commonwealth-Altadis. “But as a result of the changes, it’s really forced us as an industry to become more consumercentric, focusing on the needs and wants of the adult tobacco consumer.
“Consumers have become far more price-conscious due to that initiative,” she says, “which has led to the establishment of basically a new pricing tier at the lower end that’s being driven by some of the new entrants since SCHIP. In essence, it’s almost been a good thing. It’s made us more responsive and better marketers.”
It’s perhaps this focus on cost that has brought about the era of the cigarillo, a product that has seen fantastic growth in the post-SCHIP era and made up more than half of the top 10 single cigars of 2010. With the popularity of little cigars taking a hit, cigarillos were ready and waiting to fit that market need.
“We’ve continued growth in the smaller shapes—being cigarillos and also mini-cigarillos,” says Green, although she debates the notion that this is a direct response to the SCHIP taxes. “A lot of that may have to do with smoking bans and having less time to enjoy a large cigar.”
Umstead of Commonwealth-Altadis makes a similar case. “It’s not just a response to the taxing in terms of price point, but the other forms of regulation,” she says.
“As a result of regulating where you can smoke, when you can smoke … that impacts how much time people can devote to smoking a cigar. It’s not like other tobacco products.”
Habit vs. Experience
“It’s not like other tobacco products”: Umstead’s point hits not only on the popularity of cigarillos but also why cigars and cigarettes—and the people who smoke them—need to be treated differently.
This is a point that often eludes antitobacco lobbyists. The authors of the Dec. 15 letter allege that “cigars contain the same toxic and cancer-causing chemicals contained in cigarettes, and public health experts have warned that cigars are not safe alternatives to cigarettes.”
However, manufacturers balk at the idea that habitual cigarette smokers could so easily switch to their product.
“You couldn’t smoke 20 cigars (as opposed to a pack of cigarettes),” Umstead says. “Even the form in which they’re available is completely different.”
“The reality is they do smoke differently,” Marquardt says, contrasting cigars and cigarettes. He points out 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.”
It doesn’t take a manufacturer such as Marquardt to note the differences between cigars and cigarettes. Stronger and largely unfiltered, cigars tend to be too harsh for inexperienced smokers. While cigarettes are sold exclusively in packs, the majority of cigar sales are singles.
But the point most frequently made is that, while cigarettes are a habit, cigars are an occasion. That’s not to say cigar smokers don’t imbibe on a daily basis—but it’s hard to imagine waking up and enjoying a cigar with your morning coffee the way one might with a cigarette. “
Cigar smoking is an experience, regardless of the size. It’s something that people enjoy, like drinking a fine wine,” says Umstead, citing the wide variety of wine preferences in taste and region can directly relate to the preferences of cigar smokers. “It’s really not like any other tobacco-product experience.” Does that mean some cigarette smokers haven’t switched to certain less taxburdened cigars? Of course not.
“Cigarette smokers oftentimes also use cigars and will also use smokeless tobacco,” says Swisher’s Green. “So it really crosses the lines of consumption.”
But price-conscious cigarette smokers are not the primary audience for most cigar manufacturers. If the bulk of smokers were only looking for a cheaper alternative to cigarettes, how would the little-cigar business manage to stay afloat now that they’re taxed virtually the same as cigarettes? It would appear that, for most cigar smokers, the experience is worth the cost.
The Flavor Debate
Seducing cigarette smokers to switch to the stogie isn’t the only accusation made in the Dec. 15 letter. “Cigars with candy-like flavorings such as strawberry, watermelon, vanilla and chocolate attract kids to smoking and help hook them on this addictive habit,” the senators alleged to the FDA.
While the variety of options certainly has expanded, it’s not the “candy-like” flavors referenced that have seen the most growth in sales—it’s adult flavors such as wine and grape that dominate the market, with wine unit sales up an impressive 46.6% in 2010. And other popular adult flavors were a part of the cigar industry years before a smoking age existed.
“With regard to the flavors, I think it’s important to understand that cigar and pipe tobacco have long been flavored products,” Green says. “Flavors aren’t anything new.”
“In some of the earliest cigars that are known, smokers would dip them in cognac,” Umstead says, elaborating on Green’s point. “They wanted that flavor infused into a cigar. When people say it’s new and they think that those different varieties are a new trend, to me, that is the trend that has been a part of the cigar industry since its inception.”
As for the growing variety of flavors, it’s not a trend that’s exclusive to cigars. Variety is something consumers are demanding across the board.
“Think back 10 or 20 years ago,” Marquardt says. “Looking at the candy aisle, you’d have one, maybe two varieties of M&M’s. Now you’ve got peanut butter, pretzel, almond, dark chocolate—a new flavor every week. Consumers are demanding more now. They’re not c
ontent with a small variety of options.” Tobacco is no different than candy, chips, sodas, beers; c-stores and tobacco shops are also seeing an increase in variety.
“You do have to meet the demands of your adult tobacco [consumers]; they’re looking for more variety,” says Umstead. “But that might not just be in something that’s referred to as a flavor. It might be in the length of the cigar, the width of the cigar—they all provide a different experience.”
Are Flavors the End-All, Be-All?
Though flavors have been around for hundreds of years, and the recent flavor trend might be part of a larger demand for variety, it’s pretty hard to ignore the numbers.
According to data from Nielsen, flavored cigars accounted for 29.5% of 2009’s cigar sales—and the numbers are only growing. In 2010, Nielsen data showed every type of cigar “flavor” seeing growth in both their share of dollars and units except unflavored cigars, which fell 10.9% in c-store dollars and 9.4% in units. With such strong numbers, would the cigar industry survive a ban of these popular products? (Data was not available for tobacco shops.) “We manufacture and market all of our products for an adult tobacco consumer and try to be responsive to that consumer. For this reason we would be opposed to a ban on flavored products, but it wouldn’t be end of our industry,” says Umstead. “We will still go on. We have a large enough portfolio; we’ll be able to sustain and do our best to offer consumers what they’re looking for.”
Marquardt agrees that the industry will survive any limitations thrown their way, although he hopes the FDA will let the data, not political pressure, steer their decision—data Marquardt ultimately believes will continue to show the vast majority of youths are not smoking cigar products, flavored or otherwise.
Part of the problem with determining just exactly what effect a flavor ban would have on the cigar industry is that the terms are so cloudy. Would the FDA simply ban the “candy-flavored” varieties? Or follow Canada’s lead, and outlaw only flavored little cigars? Would traditional flavors such as cognac and sweet be grandfathered in? With the FDA yet to actually exercise control of cigars, the future is more than a little hazy. Umstead is certain of one thing, saying “changes happen and we will work through them.”
With a loyal consumer base that values the cigar experience, manufacturers are positive that their products can fight for themselves, regardless of limitations. Just as cigarillos rose to replace little cigars post-SCHIP, other products will emerge should the flavor options be limited by legislation.
“The category is certainly strong,” says Green of any concerns c-store owners might have. “It’s not going anywhere.”