bright future for smokeless sales

Once upon a time, cigarettes were the embodiment of“cool.” Then came the health concerns. Then came thegovernment regulations. Cigarette smoking has reacheda point where it is so severely sneered upon that manycities have outright banned smoking in public establishments. Itshould be a surprise to no one that cigarette sales and gross profitmargins have been steadily dropping.

Fortunately for retailers, this isn’t the case for all tobacco products.Other tobacco products (OTP), such as flavored cigars andmoist smokeless tobacco (MST), have thrived despite this trendand several others, giving storeowners reason to not only embracesmokeless products, but more importantly, ask “What’s next?”For retailers like Dennis Cartwright of the Border Station, atravel center resting on the North Carolina and Virginia border,the answer to that question lies in dissolvable smokeless tobaccoproducts, particularly Star Scientific’s Ariva and Stonewall HardSnuff brands.

“MST sales in our store have been high, but a lot of our customersare more interested in the dissolvable products,” saidCartwright, tobacco manager for the store. While cigarettes arestill the most popular item, followed by MST, demand has forcedCartwright to make more room for this new segment.“A lot of smokers want something that they can use whenthey’re not allowed to smoke,” said Cartwright, whose store serves a lot of soldiers at local military bases who are unable to light up while on duty. “We used to carry only a limited supply,but the demand has been getting higher for smokeless tobacco. Asmore places are putting bans on smoking, smokers are looking fornew ways to get their fix.”

The Rise of OTP
Offering smokers new alternatives hasbeen a stepping stone for huge growth inthe OTP segment. The category as a wholehas been showing big numbers, but MST, inparticular, has been leading a bold chargein the c-store industry. A USB study onsmokeless products showed that in 2006,MST alone enjoyed a sales boost of 8%,reaching a peak of unforeseen sales thathave continued to rise since 2004.Experts, such as Nik Modi, analyst forUSB Investment Research, feel that the risingsales may have peaked in 2006, butforecast that the smokeless tobacco categorywill continue to hold that volumeuntil the end of the decade.

“MST growth is still in its early phase,” said Modi. “It’s expectedto show an increase of 6 to 8% continuing up until 2010. With thevolume growth we’re seeing each year, bigger players and manufacturersare going to be getting involved and we may see thatnumber change even more.”

In 2006, MST products experienced the fastest growth rateamong packaged consumer products, trumping c-store stapleslike bottled water and tea beverages. Modi and other industryexperts attribute this growth to an increase in marketing, especiallyin c-stores, which are using the product as a means to offsetslouching sales in other categories.

“We estimate that 70% of the MST category is sold through thec-store channel,” said Modi. “C-store retailers are recognizing thegrowth potential of OTP, particularly MST, and the attractive marginsit can offer.”

A lot of this growth comes as cigarette sales have been flat, puttingfear into the hearts of retailers worried about losing grossprofit margins on what used to be the number one in-store sourcefor sales. Because of these numbers, retailers—aided by eager supplierslike U.S. Smokeless Tobacco (USST)—have been reducingcigarette space on the counter and back bar to make room for MSTand other smokeless products.

“One of the key growth drivers is that USST has initiated ‘showcaseshelving’ units to help retailers better market the products,”Modi added.

Expanding the Category
An increased marketing effort is onlyone building block that has made OTP aprofitable pillar in the c-store community.There are several other reasons attributedto customers picking up a pack of snuff,and one of them is that smokers aren’t simplyconverting over to MST. In fact, expertsfeel that most of the consumers purchasingOTP products are continuing to smoke aswell.

“It’s estimated that the bulk of MST consumersare duel users,” said Modi, whoseresearch has suggested that more than30% of all MST consumers still enjoy cigarettesas well. “Dipping is becoming a moresocially acceptable means of tobacco usageamong smokers. And with smoking bans increasing across thecountry, smokeless tobacco usage among smokers may expand.”

Bonnie Herzog, tobacco analyst for Citigroup, agreed withModi, suggesting that consumers are turning to smokelesstobacco products for their individual merits and characteristics,as opposed to simply replacing those offered by cigarettes.

“It’s not just about getting nicotine, it’s about getting an experience,”said Herzog. “People that smoke love the experience—theylove the smell and feel of it. With these other tobacco productsavailable, it’s the same thing; it’s an experience for the user. If aconsumer simply wanted nicotine and not the experience alongwith it, they could just slap on a patch.”

What’s Next?
The unique experience offered by OTP as well as growing litigationagainst public smoking has spawned a new need withinthe segment. Hence, big name tobacco companies are enteringthe market on their own terms, introducing Americans to newtypes of OTP.

In particular, Phillip Morris and R.J. Reynolds are both capitalizingon consumers’ desires for a clean, spit-free form of smokelesstobacco. Snus is a popular European concept that comes in theform of tea bag-like pouch of tobacco that’s pinched like snuff.Phillip Morris in particular has coupled this concept with theMarlboro name, offering Marlboro Snus to test markets this summer,and Reynolds is offering Camel Snus later this year. On paper,this new smokeless tobacco has limitless possibilities thanks to theboost it will get from the reputations of tobacco titans like withPhillip Morris and R.J. Reynolds, not to mention the marketingresources. But Herzog feels it may take some time.

“Snus is going to require a lot of education on the supplierspart,” Herzog said. She suggested that the public isn’t yet completelyaware of the differences snus has to offer compared to MST,leaving both retailers and suppliers to find creative ways to showsmokers “exactly what the product is all about.”


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