Cigar Market Remains Competitive

Despite a full-court press from regulators, cigar sales are still on the rebound.

By Howard Riell, Associate Editor

When the original Tobacco Control Act was signed into law on June 22, 2009, the U.S. Food and Drug Administration (FDA) was given “authority to regulate the manufacture, distribution and marketing of tobacco products.” The government was primarily concerned with cigarettes at the time—but since that day cigars have been enveloped into regulation.

On Dec. 9, 2016, the FDA issued warning letters to four tobacco manufacturers—Swisher International Inc., Cheyenne International LLC, Prime Time International Co. and Southern Cross Tobacco Co.—for selling flavored cigarettes that are labeled as little cigars or cigars, a violation of the Family Smoking Prevention and Tobacco Control Act.

The decision touches upon a debate regarding what connotes a cigarette and what connotes a small cigar. One of the manufacturers, Swisher, issued a formal response that there should be no confusion with its product line.

Swisher stated that it doesn’t believe any action is necessary on the part of convenience stores in regard to its little cigar products at this time. The manufacturer also responded that Swisher Sweets Little Cigars are, and have long been, properly classified as cigars and not cigarettes under federal law and are thus not subject to regulation as ‘cigarettes’ under the Tobacco Control Act.

According to the Cigar Association of America, little cigars and cigarettes consist of different tobacco and wrappers. Little cigars consist of air-cured or fermented tobaccos with a stronger taste and lower sugar content. They are primarily alkaline and are either wrapped in natural leaf, or a wrapper consisting of at least two-thirds tobacco by weight, as required by the federal government. Cigarettes on the other hand consist primarily of flue-cured tobaccos, are primarily acidic, have a higher sugar content and are wrapped in paper.

While many little and larger cigars contain filters (a practice begun nearly 40 years ago), if little cigars were actually a substitute for cigarettes as some cigar opponents claim, the market share for little cigars would be much higher than it is, something the FDA overlooks.

RISING DOLLAR SALES
This is more than just semantics. C-stores that bank on cigar sales have a stake. According to Chicago-based market research firm IRI’s Infoscan Review data of convenience store sales for the 52-week period ending Nov. 27, 2016, sales of cigars rose 8.58% to nearly $2.8 billion compared to same 52-week period in 2015.

“While retailers should be aware of the letters, I don’t believe it is something that they should be concerned about,” said Don Burke, senior vice president of Management Science Associates, a information management firm in Pittsburgh. “My understanding is that manufacturers have been planning on how to deal with the FDA’s Deeming Regulations since they were released, and will provide retailers with a product selection that meets these regulations and enables retailers to maintain their tobacco business. A good resource for retailers is their distributor and manufacturer reps.”

For some industry stakeholders, the lines shouldn’t blur when it comes to what constitutes a little cigar.

“Our position is simple,” said Sal Risalvato, executive director of the New Jersey Gasoline, C-Store and Automotive Association. “If the manufacturers sell the product to retailers as little cigars then that is what we should sell them as. If federal or state law specifically determines that they are cigarettes, then we will abide by the law.”

Karl Reagin, partner and general buyer for Kwik Marts-Sinclair in Nederland, Colo., said that his stores’ younger consumer demographic has caused him to cut back at on the amount of space he devotes to the cigar category as part of his store layout.

“We’re currently at one shelf, which is about two feet long,” Reagin said. “I’m carrying 13 or 14 SKUs. Our best seller is probably the Swisher’s, priced at two for 99 cents.” His company, founded in 1970, owns and operates a pair of locations with 6,000 square feet of sales floor space.

For Reagin, getting employees to have age requirements always in mind is a matter of constant word of mouth. “You need to constantly be talking to them about it. We also have a short video that talks about it that we got from (National Association of Convenience Stores) NACS years and years ago. They watch it when they are hired as part of their employee orientation.”
Other top brands like White Owl, Game and Black and Mild are remain strong performers across the convenience channel.

Little cigars remain popular because they are significantly less expensive than cigarettes for a couple of reasons. Many states have a significantly lower sales tax rate for cigars than cigarettes. Cigarettes and small cigars have the same federal tax rate ($50.33 per 1,000, or about a nickel for each cigar or cigarette sold). State sales taxes vary widely but cigars are usually are taxed at a lower rate compared to cigarettes in most states.

STICKING TO THE RULES
Also, as with cigarettes, convenience stores must remain vigilant against underage cigar buyers.

“As far as retailers, we are all concerned because cigars are a good part of our sales,” said Ed Kashouty, the owner of two Exxon-branded c-stores in Brick and Lakewood, N.J., as well as the a retail store called the Cigar Lounge. “We warn our employees, managers, everybody about selling to minors. We are very respectful of that, and I believe many retailers are very respectful of that. Among the retailers that I know, they are very strict when it comes to trying to avoid minors getting cigarettes. They just cannot get them.”

In addition to a NACS video and signage addressing the topic, Kashouty also has new hires sign a letter that they have read the regulation and understood it completely and have watched the video.

“I know that they are really clamping down on regulations, even with hookahs,” said Neissan Koroghli, a 7-Eleven franchisee in Las Vegas. “They have a major campaign that it’s not good for you, and they are trying to prevent it.”

To make certain his in-store staff of nine keeps the issue of underage sales top of mind, Koroghli insists that they view a video on the topic that 7-Eleven has provided. He also talks to employees about the stiff penalties that are due when the law is violated. “They know that if they do it, whether the penalty is $500 or $1,000, they are responsible for paying it. And that also, as an owner, I get penalized, as well. We absolutely consider it a high priority.”

“It’s also a good thing that 7-Eleven has undercover guys that they send out who look like they are underage, to test our employees,” Koroghli added. “They show up here once every month or couple of months. Of course, we never know when they’re coming.”

Koroghli emphasizes cautions when it comes to smart marketing of little cigars, and recommended that operators institute their own mystery shopper programs to ensure that employees are following the rules.

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