Renewed Optimism for Smokeless tobacco and tobacco chewing products

The simple truth is that no one is certain what the Food and Drug Administration (FDA) will come up with next now that it has been given de facto control of the tobacco industry. But between bureaucratic control freaks, national, state and local taxes, and even the whispered fear of retailer liability concerns ahead, many retailers are proceeding with trepidation.

Last June, President Barack Obama signed into law the Family Smoking Prevention and Tobacco Control Act (FSPTCA), which grants the FDA the authority to regulate tobacco products. Among other things, the FSPTCA provides the FDA with regulatory authority to regulate marketing and promotion of tobacco products and to set performance standards for tobacco products to protect the public health.

The government’s tentacles, however, were beaten back a bit on Jan. 5, when a federal district court judge overturned the FDA’s tobacco regulation banning color advertising of cigarettes and smokeless tobacco products in retail stores and in magazines.

Judge Joseph McKinley, Jr. ruled that the regulation requiring all cigarette and smokeless tobacco advertisements be in black text on a white background violated the constitutional free speech protections afforded to commercial advertisements. Just days later the tobacco industry earned another modest victory when a U.S. district judge ruled the FDA has no authority to regulate electronic cigarettes.

According to the National Association of Tobacco Outlets (NATO), in his decision, Judge McKinley stated that plaintiffs Commonwealth Brands, Conwood Co., Discount Tobacco City and Lottery, Lorillard Tobacco Co., National Tobacco Co., and R.J. Reynolds Tobacco Co. were “clearly right when they say that images of packages of their products, simple brand symbols, and some uses of color communicate important commercial information about their products—what the product is and who makes it. The government’s contrary suggestion—that all use of images in tobacco labels and advertising create non-informative associations of the sort likely to encourage minors to use a tobacco product—is plainly wrong.”

The opinion included rulings on a number of additional issues in the lawsuit, NATO noted, such as:

• Struck down a provision that would have prevented cigarette and smokeless tobacco makers from issuing statements that products are safe or less harmful by virtue of the FDA regulations, or by the product complying with requirements set by the FDA.
• Agreed with the plaintiffs that the FDA regulation banning tobacco advertisements within 1,000 feet of a school or playground is unconstitutional. (Still, he declined to make a final ruling on this issue because the FDA must issue a final regulation on the outdoor advertising ban by March 22, 2010.)
• Upheld the regulation requiring the top 50% of the front and rear panels of a cigarette package and 30% of the two display panels of a smokeless tobacco product to include updated warnings and color graphics depicting the health consequences of smoking and tobacco use.
• Upheld the regulations prohibiting cigarette and smokeless tobacco manufacturers from including a brand name or logo on merchandise, or sponsoring an athletic, social or cultural event in the brand name of a tobacco product.

Playing the Waiting Game
The recent court ruling notwithstanding, the future of the moist smokeless category and tobacco in general has become “a waiting game to see what the federal government is going to do,” said Jeff Arnold, tobacco category manager for Salt Lake City, Utah-based Maverik Inc., which operates the 207-unit Maverick Country Stores chain. “But most of the seven states we operate in have made their changes, as far as what we foresee, already.”

As for retailer liability issues, Arnold added, “I don’t foresee that at this point—not to say that it can’t happen.”

Vendors are “always talking about what’s going on in the different states or with the federal government. They help supply the daily news and things they are foreseeing, and what their companies are doing in correlation with it,” Arnold said. He expects growth in 2010 thanks to new moist products hitting store shelves—Grizzly 1900, Camel Snus and Marlboro Snus—and strong partnerships with its vendors.

“The reality is that cigarette sales are going to continue to come down,” reasoned Kyle McKeen, president and CEO of ALON Brands USA in Dallas. “But moist smokeless is a growing market. You look at the tobacco industry today and the players are looking at a lot of different delivery mechanisms.”

As the smokeless star shines brighter, McKeen conceded, it would likely come increasingly under attack just as cigarettes did. “The thing with tobacco, good or bad, is that it’s a big part of our inside sales. Obviously as taxes go up, the price of the product goes up, but price elasticity in tobacco is pretty stable,” he said.

Alon operates 306 7-Eleven stores in Texas and New Mexico as well as the Fina fuel brand.

“The threat of invasive legislation is not something we lose sleep over. Ultimately we’re working on growing our other sales so that we’re not so reliant on selling tobacco,” said McKeen. “Tobacco companies understand that, and they’re looking at different ways of packaging product. We’re seeing all different kinds of new smokeless options, whether it’s the snus, sticks or orbs. They continue to be innovative.”

Taxing Issues
Despite category innovation, taxes continue to burden sales. For example, Oregon’s switch on Jan. 1 to a weight-based tax on moist tobacco brought the retail prices for the mid-range and premium products a lot closer together, said Butch Fulton, merchandising manager for 100-unit operator Plaid Pantries Inc. in Beaverton, Ore. Consumers are no strangers to sticker shock, though.

“Oregon has been a high taxed state anyway, with a 65% tax that recently went even higher,” Fulton said. “Where it used to be a $2

difference between premium and the mid-tier, it’s now $1. They’re working as hard as they can to tax every sin we have.”

Reason for Optimism
The year ahead for smokeless tobacco is very promising, said Rachel Montgomery, category manager for Wilson Farms Inc. in Williamsville, N.Y. The 200-store chain boosted MST sales after making a few key changes.

“For starters, we focused on the category more. We redid our planograms and updated our mix. We also had a huge push on education of our store associates, not only with these tobacco products, but with tobacco in general,” Montgomery said.

Employees were also trained on how to handle the tobacco category as a whole. They were taught to focus  on the basics like how to read code dates and make sure products are properly faced.

Wilson Farms is looking forward to a robust 2010 in smokeless. “We have room to grow, and market share available to us,” Montgomery said. “I think it’s just up to us to go out there aggressively and get that market share.”

Like everyone else, Montgomery is concerned about what new regulations will be rolled out. “How are we going to be able to promote the product? What are our constraints going to be as far as signage? These are questions we can’t answer right now,” she said.

Wilson Farms is also keeping a watchful eye on the larger picture: the FDA’s newly minted stewardship of the industry and what that is going to bring in the next year. “We’re all a little concerned of the unknown
because you really don’t know what the FDA is going to do,” Montgomery said. “If you talk to 10 different people you get 10 different stories.” CSD

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