What’s in Store in the Humidor

As if the turbulent economy, rising state taxes and local anti-smoking regulations hadn’t rendered the retail cigar landscape dangerous enough, enter the U.S. Food and Drug Administration (FDA), which wants to significantly reshape that landscape, but so far hasn’t told anyone—most notably the retailers that will be selling the products—how.

Some background: The law granting the FDA the authority to regulate the manufacturing, marketing and sale of tobacco products, sponsored by the late Senator Edward Kennedy (D-MA) and U.S. Reps. Henry Waxman (D-CA) and Todd Platts (R-PA), was signed into law in June. Its goal is to crack down on tobacco marketing and sales to kids; ban candy and fruit-flavored cigarettes; require larger, more effective health warnings on tobacco products; require tobacco companies to disclose the contents of tobacco products, as well as changes in products and research about their health effects; ban terms such as “light” and “low-tar”; and empower the FDA authority to require changes in tobacco products, such as the removal or reduction of harmful ingredients.

To prepare for the mammoth task of overseeing tobacco, the FDA in August opened a new Center for Tobacco Products in Silver Spring, Md. The center will set performance standards, review pre-market applications and establish advertising and promotion restrictions for tobacco products. It also established the Tobacco Products Scientific Advisory Committee (TPSAC), which will provide advice, information and recommendations to the Commissioner of Food and Drugs about health and other issues relating to tobacco products.

“The FDA bill does not cover cigars, only cigarettes and smokeless tobacco products,” said Thomas Briant, executive director of The National Association of Tobacco Outlets (NATO). “There are no sales restrictions on cigars in the FDA bill. The FDA can, under the bill, in the future, extend regulations to cigars and pipe tobacco, but it hasn’t done that and probably won’t for some time.”

The FDA bill does ban flavored cigarettes, Briant pointed out, but not flavored cigars (see page 30). “New York City is considering an ordinance that would ban all flavored tobacco products, including flavored cigars, but that has not been passed, either. There has been no nationwide bill that would impact cigars other than SCHIP.”

Consumers are still buying cigars, but perhaps more domestic machine-rolled to some extent as opposed to premium, hand-rolled cigars. “However, both categories are still doing fairly well because there is that cap on the federal excise tax on cigars,” Briant said. “They increased their rate, but they put on a cap.”

‘A Bit Undefined’
There has been a lot of speculation as to what people can and cannot do under FDA’s supervision. “The law has passed, but the FDA has not come out with the regulation yet on what needs to be done,” said Chris Tampio, senior director of government relations for NACS. “People are trying to figure out what to do, but to be honest neither the manufacturers nor the retailers have been told how they can market products as of yet. Everyone is in a holding pattern until the FDA puts out its notice for comment rule and all that kind of stuff.”

So far, only a few specific rules are known. “You can’t advertise near a school, for example. The FDA did put some of that stuff in the legislation,” Tampio said. “But there have been some freedom of speech issues that came out. You can advertise to some extent, but again, I’m speculating too much.”

NACS’ Legal Counsel Doug Kantor believes there aren’t any real differences in respect to cigars versus cigarettes in the FDA regulations. “What it will mean overall is clearly that FDA will have jurisdiction on age-restriction issues, and I think folks can expect stepped-up enforcement, whether it’s cigarettes or cigars,” he said. “The bigger issue with underage sales, I think, is cigarettes and not too much cigars.”

Retailers can fall back on some aspects of the bill, such as various protections they have, training and compliance programs, and so on. But a lot of it remains a bit undefined at this point. “The FDA has just put out a notice saying that they’re organizing what is essentially a new sub-agency here to deal with tobacco products,” Kantor said. “Their notice asks for comment, although it didn’t put anything out there in terms of proposals to comment on.”

The FDA is also convening listening sessions with different segments of interested parties. So, for example, they’ll have  sessions with manufacturers, retailers and importers, giving all sides an opportunity to participate.

“From what I understand they are going to be getting comments and putting out directives on where they’re headed,” said Frank Armstrong, president of Blue Ridge Tobacco, an eight-store tobacco retailer based in Winston-Salem, N.C. “Before they go down a certain road there will be retailer opportunity to have some input. Now, will they listen? We don’t know the answer to that question. You have to think positive.”

Blue Ridge isn’t selling as many boxed products as before April 1, Armstrong revealed. “It used to be that probably 20-30% of our business was in box sales, with as many as 20-25 cigars per box.” 

The reasons for the falloff are both the April 1 passage of an increase to the Federal Excise Tobacco (FET) tax to fund an expansion of SCHIP and the down economy. “However,” Armstrong said, “on the plus side the singles sales have improved and my margins are higher.”

Seven of the eight Blue Ridge stores contain humidors that average 12-feet by 8-feet and hold about 250 SKUs. The eighth has just a small counter humidor. “Since April, cigar sales are up 26%, and that’s not a bad thing. We’ve been very fortunate,” Armstrong said.

Sit and Wait
With the black cloud of the FDA hanging over the industry, retailers, understandably, are frustrated. “They have passed this ruling,” said Jodi Benson, category manager for Kum & Go c-stores in West Des Moines, Iowa, “yet there is nothing out there telling us what we, per se, can or cannot do, or what the manufacturer are going to be able to sell. It’s so up in the air that we have to kind of just sit and wait.”

Kum & Go, which operates 430 stores in 12 states, has seen no drop in its cigar business since April 1. “In fact, we’ve actually seen increases in certain styles that were changed. For example, we’ve seen a spike in premium cigars,” Benson noted.

Most Kum & Go stores have an acrylic counter case for single cigars plus a two-foot by five-foot area in the back. Benson said she has received good support from suppliers—including for little, flavored and premium cigars—such as ongoing promotions.

“Actually, with some of them we’ve received higher promotional rates than we have in the past. They’ve been very willing to share information they receive from their companies, their lobbyists and so forth, as far as what’s going on,” Benson said. “But we haven’t had any cutback by the manufacturers as far as support goes.” CSD

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