Regulators Chew on Cigars

cigarsWhile federal officials weigh new standards for the tobacco industry, retailers hope cigar sales don’t go up in smoke.

By David Bennett, Senior Editor

Recently, the U.S. Food and Drug Administration (FDA) took a big step towards regulating other tobacco products (OTP), including cigars, by proposing to assert deeming regulations under the 2009 Family Smoking Prevention and Tobacco Control Act.

According to the thick agency document, “once a tobacco product is deemed, FDA may put in place restrictions on the sale and distribution of a tobacco product, including age-related access restrictions and advertising and promotion restrictions, if the FDA determines the restrictions are appropriate for the protection of the public health.”

What regulators might do in the future, especially in terms of flavored cigars, is concerning to many convenience store retailers. The FDA’s regulation of cigarettes and smokeless tobacco could mean banning certain flavors, requiring new health warnings, limiting the sizes and shapes of cigars, or imposing restrictions for marketing, advertising and retail sales. Those are a number of gray areas in a category already dulled by previous tax programs.

Keeping Watch
What the future might bring has Stephanie Holt, tobacco category manager for Holt C Stores, watching closely. Holt Oil Co. is a third generation, family-owned and operated business based in Fayetteville, N.C., which currently operates 10 retail convenience stores and leases out 11 other stores under the Holt C Stores name.

Many store locations include sites near Camp Lejeune, a major Marine Corps base in the city of Jacksonville, N.C. and the Army’s Fort Bragg in Fayetteville, N.C. That computes to a lot of cigar-chomping warriors, and a decent volume of sales for the family-owned business.
At the forefront of the skirmish are flavored cigars, which make up 80% of Holt’s cigar sales.

“We’re in a college town and military town, this is a going thing that the young adults are into,” Holt said, explaining that younger adults comprise a majority of cigar sales at Holt locations.

The FDA’s proposed deeming rules don’t present any language that would ban flavored tobacco products outright. But they do open the door to the likelihood that flavored cigars would be subject to FDA authority regardless of price, substantially increasing the retail cost as manufacturers would incur outlays as they go through the FDA approval process.

But for now, the proposed regulations don’t ban flavors for the deemed tobacco products. The ban on flavors, except tobacco and menthol, continues to only apply to cigarettes. However, the FDA is requesting comments on factors it should consider in determining whether a particular tobacco product, such as little cigars—that look nearly identical to cigarettes, except for their brown color—or other non-cigarette tobacco product could be characterized as a cigarette and thus subject to the current flavor ban as well.

It’s that interpretation that could be a game changer for retailers like Holt.

“There’s a lot to this (FDA) rule, like if they started to ban things, such as you can’t do buy one, get one free, or you can’t discount them, that would certainly impact our sales,” Holt said. “But, if they take the flavoring out of the cigars and the cigarillos, that’s going to be massive. I think it would kill the sales. It would be like taking the taste out of Coke. I think a lot of young adults wouldn’t smoke if it didn’t have the flavor.”

The FDA is accepting comments on the deeming regulations for a period of 75 days, ending on July 9, 2014. The proposed rules also cover e-cigarettes, pipe tobacco, hookahs and dissolvable tobacco products. Federal officials and advocates say it will take at least another year for the rules to take effect.

A Portland State University study released recently might support Holt’s observation. The study, published in the New England Journal of Medicine, reveals that most flavor chemicals found in popular candies and Kool-Aid drink mix are used in combinations in similarly flavored cigars and dipping tobacco.

Researchers examined tobacco products, including peach Swisher Sweets cigarillos, made by Swisher International Inc., grape Phillies Blunt cigars from Imperial Tobacco Group Plc, and cherry cigars from Cheyenne International.

Little Is A Lot
Many observers see the focal point of future discussions is reclassifying little cigars so they would be categorized as cigarettes. A little cigar looks almost exactly like a cigarette: It’s the same size and shape, usually wrapped in brown-colored paper that contains some tobacco leaf. Also, many little cigars have filters.

Little cigars have become more popular in recent years, according to U.S. sales figures. Of these, flavored brands enjoy about 80% of the market share—mirroring the percentage of flavored cigar sales that Holt currently rings up.

According to a new study from the Center for Tobacco Surveillance & Evaluation Research at Rutgers University, flavored cigars in 2011 made up almost half of all cigar sales from convenience stores. According to Nielsen market scanner data, between 2008-2011, revenue from cigar sales rose 30%, driven largely by flavored cigar sales, which increased 53%.

More Rules, Taxes
David Bishop, managing partner of Balvor LLC, a sales and marketing firm in Barrington, III., said the far-reaching effects of the FDA deeming rules aren’t known, but do bring assurance to most retailers because they now have a clearer picture of what’s to come.

“In terms of the deeming regulations that were announced, while there’s probably a mixed reaction from various players in the industry, I think, from a retailer’s standpoint, it’s a positive development in that it provides as much clarity as possible by outlining where the FDA is currently looking to increase or change regulations,” Bishop said. “So, having that clarity removes a degree of uncertainty that is a hangover that creates a liability from a retailer standpoint that causes them not to react or not to act.”

The FDA deeming regulations propose two alternatives regarding the scope of the rule: Option 1 would include all cigars as products covered by the proposed regulations, and Option 2 would carve out an exception from coverage for “premium cigars, ” or large cigars. According to the FDA, a premium cigar is wrapped in whole tobacco leaf and contains a 100% leaf tobacco.

If a flavor ban were enacted on little cigars, Bishop said, it would likely drive sales down dramatically, but not as dire as the federal tax hike of 2009 known as SCHIP. Then, excise taxes on little cigars went from four cents to $1.01 a pack. Today, the little cigar market has regained a fraction of sales it enjoyed prior to that tax act of 2009.

However, legislators are champing at the bit to levy more tobacco taxes.

Last year, the Tobacco Tax and Enforcement Reform Act was introduced in the Senate. This bill aims to eliminate tax disparities between different tobacco products, reduce illegal tobacco trade and increase the federal excise tax on tobacco products.

In that vein, the final death knell for little cigars perhaps doesn’t rest with future FDA rules as much as President Obama’s proposed fiscal-year 2015 federal budget, which includes a 94 cents-per-pack hike in the federal cigarette tax rate and a proportionate 93% increase in all other tobacco tax rates.

Such a significant tax increase could prove decimating to the future sales of little cigars.

“Cigars are no different than cigarettes, which is they cannot endure indefinitely the scourge of increased taxation because demand will not be able to support it,” Bishop said.

 

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