Burning Issues for Cigars

Cigar sales in convenience stores rose 8.58% to $2.8 billion for the 52-week period ending Jan. 22, 2016, according to Chicago-based market research firm Information Resources Inc. (IRI)’s Total U.S. Convenience Store All Scan data.

For a number of years now little cigars, which resemble cigarettes in appearance, have incrementally gained appeal with some smokers, strained by a bevy of state and local tobacco tax hikes. That has also made the cigar segment a consistent performer in the other tobacco products (OTP) category.

In turn, cigars, little cigars and cigarillos have come under increased scrutiny from regulatory bodies. The latest development occurred in 2016. Because of the deeming rule published by the U.S. Food and Drug Admiration (FDA) in 2016, more OTP segments now fall under the same scrutiny as cigarettes, including cigars, pipe tobacco, vapor items and e-cigarettes.

The FDA deeming rule that took effect Aug. 8, 2016 touts key provisions, which:
• ban sales of all deemed products that were not on the market on Aug. 8, 2016;
• ban manufacturers/retailers from making truthful health claims about deemed products;
• ban free sampling of all deemed products to adults;
• ban sales of deemed products to anyone under 18; and
• require photo ID of consumers appearing under 27 who try to purchase products.

QUESTION OF ENFORCEMENT
Different tobacco groups have questioned the feasibility of the deeming regulations, including three major cigar and tobacco industry associations that filed suit soon afterward.

The Cigar Association of America, International Premium Cigar and Pipe Retailers Association and the Cigar Rights of America asked for a declaratory injunction to “vacate, set aside and enjoin the enforcement of the final rule” because it violates numerous federal statutes as well as the federal rulemaking process.

Last month, the cigar trade associations filed a motion for summary judgement and opening brief in the lawsuit challenging the FDA deeming rule on premium cigars and pipes. The motion was filed Feb. 13, 2017 in U.S. District Court for the District of Columbia.

A Summary Judgement is a procedural move that essentially requests the Court to promptly dispose of a case because there are no facts at issue. In this case, the trade associations are asking the court to “throw out” the FDA’s deeming rule, asserting it’s unlawful and in violation of the Administrative Procedures Act. This is based on nine points, stating:
1. FDA’s Final Rule improperly subjected cigars and pipe tobacco to all aspects of the regulations;
2. FDA arbitrarily imposed premarket review provisions without clarifying the substantial equivalence pathway for cigars and pipe tobacco;
3. FDA impermissibly denied to cigars and pipe tobacco the same stay of enforcement pending review of premarket applications as was provided to cigarettes;
4. FDA rejected “Option 2” exempting premium cigars from regulation without any basis;
5. FDA’s decision to impose user fees on some, but not all, of the newly-deemed products is contrary to law and exceeds statutory authority;
6. FDA’s Final Rule is based on a flawed cost-benefit analysis and imposes an unreasonable burden on small businesses;
7. FDA’s Final Rule warning label requirements violate the First Amendment; and
8. FDA unreasonably imposed the new warning label requirements without making statutorily mandated findings.
9. The FDA also improperly treats pipes as “components” of a tobacco product and therefore subject to regulation.

On Dec. 9, 2016, 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 (FSPTCA).

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 was no violation with its product line.

The situation appears to be cleared up for now. Don Burke, senior vice president with Management Science Associates Inc., a diversified information management company, said the FDA’s action shouldn’t be construed in any way other than an isolated incident.

“The recent letters sent concerning flavors in cigars does not, in my opinion, necessarily signify that there will be additional policy enforcement this year,” Burke said. “In fact, my understanding is that of the manufacturers that were notified, there is a level of confidence that their products meet the legal requirement as they are defined and that there is a reasonable chance they will be able to defend their position. This fact, along with an administration that is prone to less regulation, probably means that we will not be seeing an increased level of regulation in the cigar category.”

Darryl Jayson, vice president of the Tobacco Merchants Association, said the possible confusion regarding the FDA’s recent warning letters isn’t about semantics as it is a clear definition.

“The original FSPTCA prohibited the retail sale of flavored cigarettes,” Jayson said. “As long as the flavored products in question do not fit the definition of “cigarette,” the retail sale of flavored cigars will continue under the current set of regulations issued by the FDA CTP (Center for Tobacco Products).”

MARKET MATTERS
Sheila Whitfield, senior buyer for the Army & Air Force Exchange Service (Exchange) purchases tobacco products for 620 store locations nationwide and abroad. She said the military retailer’s cigar business was strong in 2016, and sees no repercussions from the recent FDA action.

“The Exchange carries one of the cigar manufacturers that were issued an FDA warning letter in December 2016,” Whitfield said. “We do not anticipate any additional policy enforcement activities in the future.

Barring some unforeseen occurrence, Whitfield is welcoming a new fiscal year.
“Yes, the Exchange is very much encouraged in overall cigar sales for 2017,” she said.

LOCAL ISSUES
It shouldn’t be surprising to convenience store operators that one of the most significant challenges to the cigar segment isn’t so much federal oversight, but the ever increasing number of state and local tobacco ordinances that seek to ban the retail sale of flavored cigars, mandate minimum prices for cigars, and/or require minimum cigar package sizes, said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO).

“These kinds of ordinances are most prevalent in Massachusetts, California and Minnesota, but are spreading to localities in other states,” said Briant.

Stephanie Lorance, OTP category manager for Cumberland Farms, is familiar with these lines of legislation, especially in the state of Massachusetts, where the company is based.

“With a large number of our stores being in Massachusetts we face legislative challenges on a daily basis. Town boards of health are able to place minimum pricing on cigars, raise the legal age to 21 and ban flavored tobacco products,” Lorance said. “This significantly impacts what we can sell in the affected stores. We are currently up to 145 stores with some form of legislation in the town representing approximately 26% of our total stores.”

Cumberland Farms is one of the largest convenience store chains and gasoline marketers in the Northeast. Its network of 560 retail stores, gas stations, and petroleum and grocery distribution operations spans 11 states across the Northeast and Florida.

The c-store chain is involved with many local issues, and is proactive when a piece of legislation surfaces, promising to impact its business or the interests of vested partners.

“We are very active through organizations like NATO, New England Convenience Store & Energy Marketers Association and others as well as legislators and our vendor partners,” Lorance said.

The full impact of local ordinances isn’t known until they are fully enacted. However, the collective brunt is being felt in many c-stores, where cigars are sold.

“These kinds of ordinances are a real threat to convenience stores because, if adopted, the result is the removal from store shelves of dozens of cigar SKUs, either because flavored cigars are banned outright or the minimum prices are set so high that the cigar products become unsellable,” Briant said. “This results in significantly lower cigar sales for convenience store retailers.”

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