Silver Lining

Smoker Friendly sees reasons for optimism as FDA tobacco regulation nears
BOULDER, Colo. -- The Senate vote and likely approval by President Obama of Food & Drug Administration (FDA) oversight of the tobacco industry hardly came as a surprise to retailers and manufacturers. But the trick with this bill is that the overall result of the action won't be known for months and possibly years down the road as the FDA sets up the new departments and rules that will govern the industry.

"That is one of the down sides; it's estimated to cost about $7 billion over the next several years to implement [the oversight]," Terry Gallagher Jr., president of [image-nocss] Boulder, Colo.-based Smoker Friendly, which operates 85 smoke shops, told CSP Daily News. "We'll be sitting on the sidelines waiting to see what exactly the rules will look like and provide input whenever we can to help the process along."

Gallagher, who has long been an opponent of the effort approved by the Senate on Thursday, said he doesn't expect removing terms such as "light" and "low tar" from tobacco packaging will have a major effect on sales. "The major manufacturers have already started moving away [from using those terms]," he said. "I don't think it's going to be that big of a deal to us."

He is concerned, however,about the wording in the bill that leaves the possibility for individual communities to ban the sale of tobacco products.

"That's the song I've been preaching all along with FDA, that we don't have cities or federal entities take advantage of the non-preemption and work to outlaw tobacco in communities or within certain areas around schools, for example," he said. "I hope that we don't have communities or agencies take away our ability to sell a legal product."

Beyond that, Gallagher said tobacco stores and convenience stores may benefit from some increased regulation, if it means retailers in other channels of trade increasingly choose to get out of tobacco sales.

"If there's anybody that's fully invested in the category, it's those two trade classes," he said. "There may be some continued drop off in other retail venues, whether it's grocery or drug stores, and our stores will be the recipients of those consumers."

The results of a recent Kraft/CSP Daily News Poll suggest the loss of tobacco sales from the FDA bill could be significant. When asked this past week, "If the Food & Drug Administration is given the authority to regulate tobacco, what do you think will realistically occur to sales volumes as a result?", nearly 50% or respondents answered more than 10%. But Gallagher is inclined to agree with the 19% who answered "no impact" or the 33% who said 1%-10%.

"I don't agree with that just based on the little bit of data we have so far coming out of SCHIP," he said, referring to the federal-excise-tax hike to pay for the State Children's Health Insurance Program. "SCHIP was definitely a much more onerous tax increase, and I think that a tax increase affecting price points probably means more in terms of the consumer elasticity in purchasing than some of the regulations the FDA might put in."

Following the spring FET hike that increase federal cigarette taxes to $1 per pack and also raised prices on most other tobacco products, Gallagher said, "Some stores are up in some categories and some [geographic] areas."

"In our corporate stores, we're fairly flat, which I think is a good story right now, in the first couple months after SCHIP," he said. "In some parts of the country, they've seen an uptick in premium cigarette sales, in addition to some of the fourth tier.

"So we're encouraged with that and we're also encouraged with the idea that it seems like retailers are reacting to the higher cost of goods, the higher risk of carrying the category and believe they ought to make more money in the category . That was some time coming; so margins look pretty decent out there."

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