Smokeless Tobacco Market Includes New Flavor Innovations And Increased Consumer Demand

A perfect storm of societal, legislative, retail and economic factors in 2009 appears poised to push sales of smokeless products—the fastest-growing tobacco category—higher than ever.

Convenience store retailers and marketers of such leading brands as Copenhagen, Skoal, Redman, Timberwolf, Kodiak, Red Seal, Rooster, Grizzly, Husky and Longhorn have already seen a flurry of activity on several fronts whose effects will undoubtedly carry into the new year and beyond.

Over the last 24 months, for example, America’s two largest cigarette makers, R.J. Reynolds and Philip Morris USA, have made major inroads into the smokeless category to support the decreasing number of cigarette smokers. Each has acquired smokeless companies and introduced smokeless pouches, or snus, spit-free products that are placed under the lip.

New products and line extensions are coming rapidly. As CSD reported in January, Pilot Travel Centers in Knoxville, Tenn., has begun testing an e-cigar, a product that looks and feels like a premium cigar but uses a microchip and nicotine-infused liquid to produce an inhalable vapor. Ultimately, it lets users get the smoking experience without secondhand smoke.

Star Scientific Inc.’s Ariva and Stonewall dissolvable smoke-free tobacco is also gaining a national audience and attracting attention from other tobacco companies. At the NACS Show last October, Reynolds showed off a dissolvable tablet called Camel Orb that hit store shelves in Portland, Ore., Columbus, Ohio and Indianapolis in January.

Beyond that, President Barack Obama is said to be eager to sign a bill he co-sponsored with Sen. Ted Kennedy (D-Mass.) that would give the FDA power to regulate tobacco. Congressional Democrats have also pushed legislation that would raise cigarette taxes by 61 cents, to $1 a pack, and use the money to fund an expansion of SCHIP, the State Children’s Health Insurance Program. A version of that bill passed Congress twice in recent years, but was vetoed by former President Bush. At presstime, Congress passed SCHIP and it is expected to be signed into legislation by President Obama.

Focusing In

“The last two years have been great with smokeless tobacco, with double-digit increases,” said John Kelly, chief operating officer and vice president of operations for Mountain Empire Oil Co. in Johnson City, Tenn., which operates nearly 50 convenience stores under the Roadrunner Markets banner. “We really started focusing in on the category more than we ever had two-and-a-half or three years ago, and we’ve really seen great returns on that. Because we’ve had such great growth with it it’s kind of gotten exciting, so we’ve dug more into it than we might have in the past.”

“Digging into it” has meant expanding the number of SKUs it carries from 40 to 58, more promotions and planogram reviews twice a year with all major suppliers. “We try to have a consistent set in all our stores,” Kelly said. “About 80% of stores share the same layout. We’ll never get to 100% exactly the same, but we try and get a consistent layout in our tobacco planogram.”

A majority of Mountain Empire’s units are located in northeast Tennessee, but a few of the stores are in southwest Virginia and western North Carolina. Most stores use a 3-foot-wide-by-84-inch-tall fixture for all smokeless, cigars and scrap tobacco. “It’s a large piece,” said Kelly, “so some of the smaller stores might not be able to handle that.”

Much of what will happen to the category in 2009, Kelly said, has to do with what goes on with tobacco regulation and tobacco taxes. “Whether or not the tax structure changes is going to determine a lot,” he said, adding that much will also hinge on what companies like RJ Reynolds do with snus, which was set to roll out nationwide in the first quarter of 2009.

“I still think that category is going to take several, several years to come into play, so that might not be much of a factor,” Kelly said. “I think it’s a great product, and it’s going to be interesting to watch it. I just don’t think right off the bat people are going to understand just what it is. They‘re going to think it’s just another tobacco product.”

“I think that the category is going to continue moving forward the way it has,” said Lou Maiellano, president of TAZ Marketing & Consulting Group in Levittown, Pa., “This is especially true as folks learn more about the relative reduction in harm that comes from moist smokeless tobacco.”

Smoking restrictions are the other major factor, Maiellano said, though he pointed out that “you are finding in places that people are imposing restrictions even when it comes to moist tobacco.”

Category Growing
David Sutton, spokesman for Altria Group, which owns Philip Morris USA, recently said smokeless category sales are rising between 6-8% per year, even as cigarette sales fall 2-3% each year.

Upon acquiring UST, Altria told CSD that category success with Marlboro Snus in test markets like Dallas/Ft. Worth, Indianapolis and Atlanta has come as a result of “clear communications, product availability and freshness.” In early January, Altria Group Inc. said it completed its $10.4 billion acquisition of smokeless-tobacco maker UST Inc.

“Conwood Tobacco several years ago became much more of a player, even before RJ Reynolds purchased them, and I think that forced USST to focus more on their game and get sharper,” Kelly suggested.

But future growth in the category could depend on what happens with the SCHIP bill, said Jody Benson, tobacco category manager for Kum & Go, the West Des Moines, Iowa-based operator of 430 units in 12 states.

“Any federal regulation that is put in place is going to be critical for cigarettes as well as smokeless,” Benson said. SCHIP is a federal program that gives funds to states in order to provide health insurance to families with children. It would increase the federal excise tax on both cigarettes and smokeless products.

“Such an increase in the excise tax means a higher cost to the consumer because obviously we would pass that cost along, as all retailers would,” Benson said. “It also would mean loss of volume and less sales, obviously.”

For Kum & Go, as for other operators, the task ahead is “more about making sure we’re competitively priced so that
consumers will continue to shop in our stores for that product,” Benson said. “It’s making sure we have the right products in stock, the right distribution for our consumers. If people are unsure about whether you’re going to have the product today they might shop somewhere else tomorrow. It’s making sure we’re in stock of all the brands people want.”

Due to regional differences in the market, Kum & Go sets all of its store planograms on a state-by-state basis. “Promotions are always great because they help us bring the prices down for the consumers. We always look for promotions,” Benson said.

Like other retailers, Kum & Go has responded to trends by increasing the amount of space it devotes to smokeless over the past year, from two feet to three feet, or about half of its UST fixture. “There has been so much growth thanks to new brands that have been launched, and those that have extended their brand styles,” Benson said.

More Change Ahead
The changes associated with growth will continue to reshape the smokele
ss category through 2009, most agree. Maiellano pointed to societal trends as supporting the category’s growth. “Over time, in the minds of consumers, the social acceptability of smokeless use has been on the rise,” he said. “Smokeless has also been getting more media attention, which has helped drive awareness of the category.”

The national rollout of Camel snus in 2009, like the acquisition of UST by Philip Morris, shows the tobacco companies’ commitment to the category, Maiellano said.

Evolving consumer segments also offer opportunity. Some industry watchers have suggested that smokeless companies need to work harder to reach new adults.

According to the annual “Monitoring the Future” study at the University of Michigan, cigarette smoking rates among new legally-aged adults continued to drop last year while their smokeless tobacco use remained steady.

Kelly concurred with those who say cigarette smokers are switching to smokeless due to restrictions on smoking. “People who choose to use tobacco products are going to use them in one form or another, whether it’s smoke or nonsmoking. We’ve just got to have it available for them,” he said.

Continued success at Mountain Empire will be based on its ability to team up with vendors it trusts and  who can help them develop planograms.

“Relationships and trust go a long way,” Kelly said. “I suggest everyone should talk to several vendors, see who you think is shooting straight with you, and work with those guys.”

One thing that will probably not change is the media’s volley of negative health coverage.

“Some experts say using snus is less risky than smoking a cigarette, but it’s like saying you can reduce your harm if you jump out of a fifth-story window instead of a 20th-story window,” said Stanton Glantz, director of the Center for Tobacco Control Research and Education at the University of California-San Francisco.

The future of smokeless, however, is still very bright, Maiellano insisted, especially with the addition of snus products.
“Retail execution is much better than it’s ever been,” he said. “Folks realize there is an opportunity here. It is also a very crowded field. Not that it’s everywhere, but there is an array of snus-like products that is also going to encourage the growth in moist smokeless tobacco.”

Helping retailers get the message, Maiellano said, are the tobacco companies themselves who are working hard to educate them. 

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