The Wild West: OTP’s New Normal

FDA, cannabis place new pressures on cigars, other tobacco products
Photograph: Shutterstock

MIAMI — Retailing tobacco products has never been so challenging. There have always been a few difficulties selling tobacco products, but they were foreseeable and not disruptive. Stores would stock a selection of cigarettes, cigars, roll-your-own (RYO) and other tobacco products (OTP), and operators were able to predict sales and continuity of supply.

However, the U.S. Food and Drug Administration’s (FDA’s) deeming regulations—the set of rules giving the agency authority over cigars and electronic nicotine-delivery systems (ENDS)— that went into effect in 2016 are putting significant pressure on tobacco product suppliers.

For example, while some flavored cigars and flavored OTP are “grandfathered,” there is much uncertainty about their future. Products commercialized after February 2007 face considerable FDA hurdles.

At least one federal court ordered the FDA to move the “substantial equivalence” date—the deadline for manufacturers to show that “new” products are similar to products already on the market as of Feb. 15, 2007— from 2022 to May 2020. This was in the context of ENDS products but may apply to cigars. While it is possible that further appeals or other federal courts may change this date again, affected tobacco-product manufacturers are feeling the pressure of looming compliance. Costs associated with full compliance are projected to be astronomical. For some products, compliance is nearly impossible because they have no pre-February 2007 products for comparison. Thus, it appears that many ENDS products will meet their end in the next few years.

As for cigars, the larger companies will make it through FDA compliance, but the vast selection of SKUs will diminish; only the better-selling products will be selected for compliance because the costs will be justified. Many mom and pop craft-cigar makers are already discussing early retirement because of the impending FDA regulations. This is a shame, because many of those products are 100% natural and have been around for decades.

The Next Generation

Despite the FDA storm, several tobacco products have debuted recently. Variations on single-leaf tobacco wraps (cigar wraps and natural-leaf blunt wraps) are on the rise. Coincidentally, the popularity of these products has grown exponentially with the legalization of cannabis. Many new players are offering these products (natural and flavored). While some may survive FDA regulations, many—especially the flavored products—will not.

Curiously, many growers of premium-cigar leaf are now exploring packaging, importing and distributing their high-end single leaf rather than private labeling for others. Thus, expect many new names and products in this category.

On April 30, the FDA granted approval to new-generation tobacco products such as the IQOS heat-not-burn device. These products are wildly successful and are positioned to be the market leader once the FDA regulations eliminate the fly-by-night vape and e-cigarette players.

 More Competition

Another challenge for tobacco sales is recreational cannabis. Tobacco and liquor companies are making investments in cannabis. Smokable hemp products, the legality of which are still cloudy even though hemp is legal pursuant to the 2018 Farm Bill, are on the rise. Some states have outlawed smokable hemp, and at least one lawsuit is pending in Indiana. The plaintiffs in that case rightfully claim that states cannot outlaw smokable hemp because it is legal at the federal level. If smokable hemp is ultimately found to be 100% legal, expect a boom in that category. Until the FDA regulates cannabis and hemp, these products will cut into traditional products such as cigarettes; however, they will increase the popularity of RYO, single-leaf products and related goods.

The new normal in tobacco retailing is that there is no new normal. Expect volatility in demand and sale of certain categories until FDA regulations are implemented and the Wild West players have left the marketplace.

Frank Herrera is the managing attorney for H New Media Law, Miami. Reach him at fherrera@hnewmedia.com.

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