Building New Tobacco Sales

Retailers and government officials butt heads over handmade cigarettes.

By Pat Pape, Contributing Editor

Celeste Lucas likes to smoke, but she doesn’t like paying $5 a pack for cigarettes, so she took matters into her own hands and purchased a roll-your-own cigarette machine. Using loose tobacco and paper tubes, she can now create an entire carton of cigarettes at home for about $13.

“I’ve been doing it for about five years,” said Lucas, who manages one of 19 Smokers Host tobacco shops in Edinburgh, Ind. “It seems silly not to do it.”

Although she could easily produce two or three packs in 20 minutes with the do-it-yourself machine, Lucas prefers making about 10 cigarettes at a time, filling each paper cylinder with pipe tobacco. “Pipe tobacco is cut a little coarser (than cigarette tobacco), but it tastes the same,” she said.

Lucas’ cost savings comes from the fact that federal taxes on loose pipe tobacco are approximately 10% of the taxes on the same amount of tobacco in manufactured cigarettes. In addition, roll-your-own packs are generally sold without local tax stamps. Smokers in New York City, the country’s most expensive place to purchase cigarettes, pay an extra $1.50 in city taxes and $4.35 in state taxes for each pack purchased.

Cutting Costs
Owned by Kocolene Development Corp., of Seymour, Ind., Smokers Host tobacco stores are in tune with the burgeoning trend in roll-your-own cigarettes. Each store features between 8-20 feet of roll-your-own products for customers who want to create their own smoking products. The outlets also offer in-store roll-your-own machines that allow customers to combine loose tobacco and paper tubes to quickly make their own cigarettes on the premises. Kocolene also aggressively markets tobacco products at its 12 Fast Max convenience stores in Indiana and Kentucky.

Like other tobacco retailers, Smokers Host outlets don’t want to be perceived as cigarette manufacturers. Store employees may offer advice but are not allowed to make cigarettes for their customers or even touch the customers’ tobacco.

Though prices vary widely by state, the average cost for a pack of cigarettes nationwide is $5.58 (including statewide sales taxes, but not local cigarette or sales taxes), according to the Campaign for Tobacco-Free Kids. As a result, most smokers originally go the roll-your-own route to cut costs.

“You can roll your own cigarettes for as much as 50% less, depending on state taxes,” said Andrea Myers, executive vice president of Kocolene Development. “You walk into one of our stores and you’ve got 8-10 options of tobacco you can buy and several options of tubes. The quality of products has increased over the past several years.”

Most customers discover other benefits of the roll-your-own option. “They find they can blend their own tobacco, pack it tighter, pack looser or however they want,” Myers said. “There is no flavored tobacco any more, but maybe they’ll add some pipe tobacco, such as cherry. They can personalize it.”

Hundreds of tobacco shops with roll-your-own machines have opened around the country to offer smokers a cheaper alternative to manufactured cigarettes, and this trend has generated legal battles in several states.

In Wisconsin, the Department of Revenue notified cigarette machine owners that they must hold manufacturing and distribution permits in order to operate, but enforcement of that ruling is on hold while a judge studies the matter. A West Virginia judge ruled that a tobacco shop violated state and federal law by failing to charge excise taxes on customer-made cigarettes. And in New Hampshire and Massachusetts, officials have declared that roll-your-own retailers are, in reality, cigarette manufacturers.

In September, the U.S. Alcohol and Tobacco Tax and Trade Bureau, which administers federal taxes on tobacco, ruled that roll-your-own cigarette stores must pay the same federal taxes that major cigarette manufacturers pay. Those rulings are being challenged in court.
Meanwhile, storeowners defend themselves, insisting that what they are doing is legal, precisely because they don’t sell or produce the cigarettes. Instead, they sell packages of tobacco, along with paper tubes, and give their customers access to the rolling machines.

On a Roll
Reggie Cure is business advisor to Southern Blend tobacco stores in Melbourne, Fla., which has plans to open several more locations with roll-your-own facilities. Currently, states tax tobacco based on “the rag” or cut of the tobacco leaf, which can range from fine or coarse to dense and long. Southern Blend buys whole tobacco leaves, cuts them and sells the cut product to customers, who can produce a carton of cigarettes for about half the price of a manufactured brand.

“We buy leaves and strip out the center rib where there is a higher concentration of tar and nicotine,” Cure said. “We have equipment that can cut it to any size.”

According to Cure, leaf tobacco does not have the additives, including sweeteners such as fruit juice concentrate, sugar and chocolate, that manufacturers add to cigarettes to make them more appealing. “With leaf tobacco, none of those things are there,” he said.

As required by law, Southern Blend pays excise tax on the tobacco leaves. “But it is considerably less,” said Cure. “If you want to be safe on the tobacco end, you want to buy leaves.”

Offering roll-your-own services may look like a cash cow, but Cure advised store operators to be cautious and do their due diligence before adding it to their business plan. Several manufacturers offer tobacco store rolling machines, some of which run as high as $35,000 each and require a compressor—at an extra cost—to operate. In addition, manufacturers may charge a licensing fee to machine purchasers and then require a royalty payment on every carton of cigarettes sold. When it comes to machine maintenance or repairs, retailers may find themselves with limited resources.

“The little guys have the chance to get hurt here,” Cure said. “Research the industry. You can get burned.”

Cure is big on do-it-yourself machines, like the one Lucas, of Smokers Host, uses. “They’re like a home appliance, like buying a good Kitchen Aide mixer,” he said. “It weighs 11 pounds. It’s not going to do it fast, but it produces a great cigarette. It’s something a c-store could sell with a high margin.”

Lucas paid $50 for her personal rolling machine, but machines vary and can run as high as $500. The machine is made of metal, simple to operate and easy to maintain. “Once a month I take canned air and spray out the loose tobacco,” she said. “There are a lot of people who have never heard of this and don’t realize how simple it is.”

Cigarette prices will continue to climb. Since 2002, 47 states, Washington and several U.S. territories have increased their cigarette tax rates a total of 105 times. In June, Californians will go to the polls to vote on the California Cancer Research Act, which would boost state tobacco taxes by $1 per pack and earmark those funds for cancer research and tobacco education. Supporters say the measure, if passed, would generate an estimated $600 million a year.

As sure as prices will increase, dedicated smokers will continue to look for ways to reduce cigarette costs, whether through roll-your-own shops or other do-it-yourself methods. Every time the price of manufactured cigarettes jump, “We see an increase in roll-your-own customers,” Lucas said.

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