6 Insights From CSP’s Tobacco Update Webinar
By Melissa Vonder Haar on May 25, 2016So far, 2016 has been quite an interesting year for tobacco. On the one hand, gas prices have remained low, leading to improved consumer confidence and impressive tobacco sales.
“We’ve been in a very anomalous period of flat-ish to even up cigarette volumes,” said RBC Capital Markets tobacco analyst Nik Modi. “We’ve had a good run.”
On the other hand, there’s the U.S. Food and Drug Administration’s (FDA) ominous final “deeming” regulations, which extend the agency’s authority to regulate cigars, pipe tobacco, hookah tobacco and electronic cigarettes—regulations many in the industry have likened to an effective prohibition due to the cost of the premarket tobacco application (PMTA) process.
“To put it bluntly, I can’t see how some of these smaller guys will come up with the funds to comply,” Modi said.
Modi and Swedish Match category management director Joe Teller discussed both of these issues—and more—during CSP’s recent Swedish Match-sponsored Tobacco Update Webinar. Here’s six takeaways from their discussion.
1. Don’t discount ITG
One of the biggest tobacco-related news stories of 2015 was the acquisition of No. 3 tobacco player Lorillard Inc. by No. 2 player Reynolds American Inc., which led to the creation of a new No. 3 in ITG Brands after the company acquired a number of divested brands from Reynolds and Lorillard. Since then, retailers have voiced concerns about a duopoly between Reynolds and Altria Group Inc., worrying that ITG would get lost in the mix.
Though ITG hasn’t made huge noise in the wake of the deal, Modi said he’s been impressed by the company’s performance thus far.
“I think a lot of people discounted ITG,” he said. “What we’re seeing in the marketplace is improvement where they’re wanting to see improvement. Winston has turned the corner, I think. They’ve done a pretty good job of taking a tough deck of cards and starting to make improvements.”
2. E-cig retail interest has hit a low
In December 2014, 100% of tobacco retailers surveyed by RBC Capital Markets and CSPsaid they were carrying electronic cigarettes. By March 2016, that number had dropped to 82%. Even more telling? Zero percent said they were interested in expanding their e-cig offerings.
“The category is under pressure,” Modi said. “Regulations are coming, and that’s probably going to put more pressure.”
3. Two years is not enough time for a PMTA
When it comes to those new regulations, Swedish Match is one of the few companies that already has successfully navigated the PMTA (premarket tobacco application) process. Back in 2015, it became the first company to have a PMTA approved by the FDA for extensions of its General Snus brand.
Based on Swedish Match’s experience, Teller worries the 24 months the FDA is giving manufacturers of newly deemed products to submit PMTA applications will not be enough.
“We’ve filled out a PMTA,” Teller said. “Twenty-four months might be a little tight if someone hasn’t gotten started already. There’s a whole lot for everyone to fill out and a tight timeline to get it done.”
4. Cost estimates are also off
The FDA estimated a PMTA would cost around $330,000. Modi anticipates it will be more than three times that: $2 million for a company’s first PMTA, $1 million for everything after.
Teller didn’t provide an exact estimate, but acknowledged the FDA’s estimate is likely low.
“It’s hard to tell because the first one takes the most time and the most money,” he said. “After that first one, you kind of have a template to follow. It was more than what we thought for both substantial equivalence (SE) and PMTA.”
5. It could be years until deeming hits retailers
Teller also believes the FDA might be off on its estimate of ruling on SE and PMTA applications within one year of submission. Swedish Match estimates there’s anywhere between 7,000 and 9,000 cigar products alone that will require SE or PMTA applications under the new deeming rule. Even if not every company can afford the submission process, that’s a lot of applications for the FDA to review.
“That’s a whole lot of product applications,” Teller said. “There’s a big backlog now—in the thousands—just from the 2009 regulations.”
Because retailers will be allowed to sell products while the FDA is considering those applications, it stands to be a while (a minimum of three years) before the big effects of deeming hit home.
“For retailers, things are going to stay more or less the same for a couple of years—maybe mid- to late 2019 for big changes,” said Teller.
6. FDA action on flavors might be delayed
Because of the potential abundance of product applications the FDA will have to review and rule on, further regulatory action might be delayed. Specifically, the ban on flavored cigars the FDA said it intends to propose.
“I’m sure flavors are going to be addressed and potentially banned,” Teller said. “The question is. with all the SE and PMTA applications, how many things can the FDA really wrap their arms around? It’s going to take more time.”