Tobacco Overview

Samantha Strong Murphey, Freelance writer

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Searching for a Replacement

In 2011, smokers switched rampantly from roll-your-own (RYO) tobacco to pipe tobacco to make their own cigarettes. But the trend isn’t likely to continue full force.

“Legislation could put that tax advantage to an end,” says analyst Nik Modi of New York-based UBS Securities. “It’s going to face a lot of regulatory challenges that will likely lead it to slow down.”

Consumers are also looking for replacements for banned fl avored cigarettes, and little cigars seem to be many shoppers’ rebound product of choice. But Modi says regulatory pressure on little cigars is already mounting. “Several members of the FDA are saying they think it’s a product that’s marketed to children,” he says. “There are emerging headlines on the topic that could be detrimental.”

Other analysts are hesitant to weigh in at all. “Every time another article is written on pipe tobacco and flavored cigars, local jurisdictions tax the living daylights out of them,” says Lou Maiellano, president of TAZ Marketing & Consulting, Sevierville, Tenn.

In late 2011, four senators called for a ban on popular fl avored products. While a measure is not expected to pass a Republican- controlled House, most manufacturers agree it’s not a matter of if but when the FDA chooses to regulate cigars.

Slow-Growth Snus

Snus sales haven’t quite lived up to the hype, but analysts aren’t throwing in the towel just yet. “It’s still promising,” says Bonnie Herzog, managing director of beverage, tobacco and consumer research for Wells Fargo Securities, San Francisco. “It’s just going to take some time.”

Education and awareness about products like this don’t just happen overnight.

“You can’t market these products on television or anything,” Modi says. “Just imagine consumers switching from powder to liquid laundry detergent without anybody educating them. The only way to educate the consumer is at the point of sale.” Maiellano says that if he were a retailer, he’d be taking a look at the Scandinavian snus, which have been successful overseas.

“In areas where it’s being tested and marketed, it’s doing quite well,” he says. “As a category manager looking forward at my business in the coming year, I’d go with something like that to make me different from others.” 

One-Stop OTP Shop

With OTP on the increase, retailers would and putting them all in one place. Tobacco, he says, should be the same. And as for the importance of variety, Maiellano warns retailers to be wary of contracts that threaten it. Customer demand, not contracts, should be the driving force. “Contracts don’t grow business—they protect share,” he says. “That’s unfortunately what’s happened in the OTP industry.”  

Premium Tussels with Lower Tier  

In a market with value-conscious consumers, price matters. Looking forward, we may see premium cigarettes competing more on price with lower-tier brands. Take Marlboro, for example. “On any given day, 21% to 23% of their volume is value-tier price product,” says Maiellano. “It’s down there competing with those products.”

According to Modi, when the Big Three have been major players on the discount end in the past, it has led to dramatic price decreases overall. This can make a big difference in c-stores’ bottom lines. “I think from a c-store perspective, it alters profi tability,” Herzog says. “If the competition is changing the end retail price, it could stem some of the downtrading pressure.” 

Challengers on the Rise

There’s an ongoing debate about whether or not electronic cigarettes and OTP sales will eclipse regular cigarette sales, and 2012’s numbers just might help analysts give their final answer. But for now, the debate continues. 

Modi predicts OTP will overtake cigarettes by 2025. “You go back into the early 1900s, and cigarettes were only 2% of the tobacco category,” he says. “As legislation continues to regulate cigarettes, people will continue to migrate to other things.” But Herzog thinks OTP overtaking the market is unlikely. Her more reserved and “realistic” prediction gives the evolution of cigarette technology more credit.

“By 2025, conventional cigarettes will be altered such that they will still be in demand,” she says. “There’s a real opportunity at some point in the future for cigarettes to be modifi ed so that the harm can be reduced.”  

$300 million to $350 million Estimated sales of e-cigarettes in 2011, according to the Tobacco Vapor Electronic Cigarette Association (TVECA), a trade association representing e-cigarette manufacturers.

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