Attendees of Winsight’s 2017 Total Nicotine Conference had plenty to unpack from the tumultuous days leading up to the event, not to mention the past year.
Four days before the August conference, the U.S. Food and Drug Administration (FDA) made several surprise announcements on both the existing deeming regulations and future regulations the agency intends to propose. Over the past year, it began implementing deeming regulations on cigars, electronic cigarettes and vapor products. Scott Gottlieb was appointed FDA commissioner. The agency proposed a rule to limit ingredients in smokeless tobacco. And there were significant increases in local regulations, with several cities considering proposals to ban menthol cigarettes.
As Carl Loos, senior vice president of Glenview, Ill.-based Republic Tobacco, put it, “Everything’s either being taxed or attacked in tobacco.”
That said, data presented by Don Burke, senior vice president of Management Science Associates Inc. (MSA), Pittsburgh, showed an industry that’s surviving and, in some segments, even thriving amid the regulatory chaos. Tobacco volumes were down only 0.3% year over year across all retail channels, according to MSA.
“The category isn’t declining,” said Burke. “It’s pretty much flat, but with pretty major changes to the different segments.”
Here’s how those specific segments stacked up:
Cigarettes: Overall, volume for the category was down 3.3%. However, the superpremium segment continues to grow (up 8% year over year).
Cigars: Large cigars again were a bright spot, up 11.5% across all retail channels and 12.8% in convenience, thanks mainly to cigarillos.
Vapor: Far from dissipating in the wake of FDA regulations, vaporizer sales (led by new products from Logic, Vuse and Juul) were up 281% across all channels and 400% in convenience, according to MSA data.
Despite these positive numbers, the tobacco industry’s future is still being written. Check out in the following pages the six topics that were discussed at the 2017 Total Nicotine Conference, held Aug. 1-3 in Chicago, as the industry enters a new era of nicotine.
Table of Contents
Local Regs: Is the Biggest Threat Close to Home?
“Local ordinances are probably the greatest threat to retailers across the country,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), Minneapolis.
It’s hardly a new warning: For several years, NATO has reported steep growth in the number of tobacco regulations proposed by city and local governments. So far in 2017, NATO has tracked more than 700 local proposed tobacco ordinances, most of which are happening in the regulatory hotbeds of California, Massachusetts, Minnesota and New York.
“These trends start on the coasts, then move inward,” Briant said. “Anti-tobacco groups’ end goal is not to restrict, but to prohibit.”
The local regulatory “trends” of 2017 include:
- Tobacco flavor bans
- Menthol bans
- Minimum cigar packaging and pricing (which Briant calls “a prohibition in disguise”)
- Cigarette and OTP taxes
- Limits to the number of retail licenses
- Increases in the legal age to purchase tobacco products
Briant said anti-tobacco groups have set their sights on local because “state legislatures have not been interested in adopting these kinds of ordinances.”
Kevin Roberts, director of regulatory affairs and communications for Logic Technology Development, LLC, Pompano Beach, Fla., was particularly troubled by the trend of local governments lumping vapor products into current tobacco regulations.
“Rather than create a set of laws that treat vapor products as different, it’s easier to just apply existing OTP or cigarette laws,” he said. “It’s the path of least resistance.”
Though the number of local proposals will likely continue to grow in the years to come, NATO and retail organizations have become more experienced at helping retailers tackle this threat. To better combat local proposals, NATO suggests retailers do the following:
- Get to know elected officials.
- Invite officials to visit retail stores.
- Explain your retail business model.
- Discuss the effects regulations have on your store and employees.
- Send emails and make phone calls to local legislatures when regulations are proposed.Engage your employees and customers in the process.
“Local is all about local,” Briant said. “We really encourage retailers to become engaged.”
From the FDA: 4 Updates for Retailers
Ann Simoneau, director of the Office of Compliance and Enforcement in the FDA’s Center for Tobacco Products (CTP), gave retailers and manufacturers an update on compliance and enforcement of the agency’s tobacco regulations. The conversation included four valuable insights:
Vape shops are now being inspected: Prior to the deeming rule, vape shops were not subject to the same kind of FDA scrutiny and inspection as convenience retailers. That is no longer the case. “We have started inspections of vape shops,” Simoneau said. “Depending on the actions of the location, they could be considered a tobacco retailer, a tobacco manufacturer or both.”
The FDA has an age-calculator app: In another response to retail feedback, the FDA developed a smartphone app, the FDA Age Calculator, to help cashiers easily check IDs (available for download on Google Play and iTunes). The app uses a phone’s camera to scan and check IDs from all 50 states to determine if the customer is over or under 18 (the national age to purchase tobacco products). Simoneau stressed that the app does not store or transmit any information once the ID is scanned.
Keep in contact: Simoneau spoke about the value of an open dialogue between the industry and the FDA. “I take comments from [the industry] back to the agency and try to do something about it,” she said. Though the parties may not always see eye to eye, communication helps the agency recognize trouble spots. For example, after a recent NATO event, the FDA realized there was still a lot of confusion regarding warning labels for cigars and launched a webinar series to better explain the new requirement.
Communication factors into FDA warnings: Though Simoneau said most retailers are in compliance with the law, she had some advice for those who fail an initial inspection. “If you do get a warning, responding to the FDA with a plan for training and compliance will help your case,” she said. “It plays a factor in further action.”
What Is NNN? Why Should You Care?
Definition: NNN stands for N-Nitrosonornicotine, a naturally occurring form of nicotine in the tobacco plant.
“It’s in every tobacco product ever made and is produced during the curing and processing of tobacco,” said Briant of NATO.
Why it matters now: On Jan. 23, 2017, the FDA issued a proposed rule to limit NNN in all smokeless products (moist smokeless tobacco, chewing tobacco, snus and dry snuff) to only 1 microgram per gram in a finished tobacco product.
“A quarter-teaspoon of sugar is 1 gram,” Briant said. “Take a millionth of that: That’s how much NNN nicotine they want in a finished smokeless tobacco product. It’s as close to absolute zero as the FDA can possibly get.” (When Congress gave the FDA authority to regulate tobacco products, it also wrote into law that the FDA cannot ban nicotine in its entirety from any tobacco product.)
If the rule is passed as written, manufacturers will be given three years to bring the NNN levels down to 1 microgram per gram.
Can it be done?: One major problem with the proposed rule is that it may not be possible for the majority of smokeless products to achieve this level of NNN. The main factor that affects NNN level, according to Briant, is the weather: the amount of sun or rain the tobacco plant receives, or how long it grows in the fields.
“NNN is naturally occurring, based on weather, curing and other factors,” he said, pointing out that the levels change all the time. “If you can’t control the weather, how can you control the 1-microgram-per-gram limit in a finished product?”
According to manufacturers, snus is the only product that can get there. For all other products, the lowest NNN level possible is closer to 4 micrograms per gram.
Meanwhile, the FDA indicated in the proposed rule that it may eventually drop the requirement even lower.
What this means for retailers: If manufacturers cannot meet the standard, the FDA would mandate that those products be removed from the shelves. That’s not just bad news for smokeless manufacturers—for retailers, it could potentially wipe out an entire tobacco segment.
“This is ‘prohibition by regulation,’ ” Briant said. “The FDA cannot outright ban any category of tobacco products, but this standard may be so difficult to reach that they effectively ban smokeless.”
Broader implications: While there has been a lot of discussion about the FDA’s July announcement to potentially lower the level of nicotine in cigarettes, Briant said the proposed NNN rule marked the agency’s first attempt to limit nicotine levels. It serves as a strong indication of the agency’s priorities moving forward.
“Mitch Zeller, director of the CTP, is very focused on nicotine levels because that’s the addictive property in tobacco,” said Briant. “He wants to really focus on lowering nicotine levels.”
Next steps: The FDA is reviewing more than 8,000 comments submitted on the proposed rule. The agency has three options: Adopt the rule, amend the rule or withdraw the proposed rule, Briant said. There is no timetable for when the FDA will make its decision.
The FDA’s Other Announcement: Good, Bad or Who Knows?
Of course, there were a lot of conversations about the other major FDA announcement made July 28, 2017, which outlined the agency’s intentions to limit nicotine in cigarettes, propose product standards on e-cigarettes, extend deeming deadlines and collect comments on flavors. Here’s what conference attendees had to say:
On extending the SE and PMTA deadlines
“The vape category now has a five-year grace period. You’ll continue to see it innovate and
—Don Burke, senior vice president of Management Science Associates Inc., Pittsburgh
On requesting comments on menthol and flavors
“It’s interesting that flavors and menthol were only mentioned once in this announcement. I don’t think an outright ban is likely.”
—Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities LLC, New York
On product standards for e-liquids and batteries
“The important thing to remember is we have a long road to go with this: It was an advance notice of proposed rulemaking. This is going to be a years-long process.”
—Kevin Roberts, director of regulatory affairs and communications for Logic Technology Development LLC, Pompano Beach, Fla.
On reducing nicotine in cigarettes
“I give (FDA director) Gottlieb credit for laying it out in a cohesive and comprehensive way. But it gets very complicated. If they do reduce nicotine in cigarettes, they’re going to have to do so gradually over a long time because of the unintended consequences.”
—Herzog of Wells Fargo Securities
Menthol Regulations: Who Has the Most to Lose?
This year has seen a slew of local proposals to ban flavored tobacco products, including menthol cigarettes. In June, San Francisco became the first city in the country to adopt an outright menthol ban. The ordinance was later stayed to allow for a special election in June 2018, when voters will determine if the ban remains.
Minneapolis passed similar legislation in August. At the time of the conference, five additional cities in California had pending regulations to fully ban menthol.
The potential effect on the industry is clear: Menthol represents 35% of cigarettes sold in the United States, according to MSA. NATO estimates the segment counts for at least $226,000 in annual sales per retailer in Minneapolis.
Depending on a retailer’s location, those numbers can increase significantly. Here’s a look at how important menthol cigarettes are to all 50 states.
iQOS: Can It Live Up to the Hype?
Philip Morris International’s (PMI’s) long-awaited iQOS product is expected to launch within the next year. Bonnie Herzog, managing director of consumer equity research for New York-based Wells Fargo Securities LLC, made the case for the heat--not-burn technology, while also outlining some potential areas of concern.
While Herzog said iQOS does “seem to have superior technology,” she pointed out that British American Tobacco and Japan Tobacco International also have heat-not-burn products. iQOS’ real promise comes down to a first-mover advantage: PMI has filed its FDA application to market the product in the United States, and Herzog anticipates it will be approved in late 2017 or early 2018.
PMI also has ample test-market data on iQOS, which is available in 27 countries. It plans to up that number to 31-35 countries by the end of the year.
Herzog saw three possible flags for iQOS’ launch in the United States:
- Capacity: “There are not capacity constraints holding back expansion in Japan, because of manufacturing capabilities,” Herzog said.
- Cost: The high starter-kit cost—about $120—could be a barrier for U.S. consumers.
- Flagship model: Perhaps most concerning for retailers, PMI has used “flagship stores” to launch iQOS in other countries. These company-run stores (similar to vape shops) are initially given exclusivity before a wider rollout. “I expect at least a few (flagships) in the U.S., though PMI won’t confirm,” Herzog said.