March/April 2007

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The smokeless category is still sizzling hot, with new competition and innovation expected to keep the fire growing strong.

By Renee M. Covino

An industry fire is burning brightly—a smoke-free fire, in fact. Is the smokeless category the answer to tobacco outlet retailers’ sales prayers?

Category sales numbers certainly paint a happy face for the channel. There continues to be a great focus on smokeless as the overall category keeps growing in the mid-to-high single digits, according to various industry sources. This kind of growth is phenomenal in these tobacco times, no matter how it’s sliced—and consumer smoking trends, as well as more finely-tuned product segmentation—are expected to keep the segment dynamic for the near future.

Some put the total smokeless category growth at 5 percent. Others put it 2-3 percentage points higher than that. But the biggest segment gain within that is clearly moist snuff—also known as moist smokeless tobacco, or MST, which had very impressive sales gains in 2006.

“With growth of more than 8 percent in 2006, MST is now the fastest growing consumer packaged goods category at retail,” states Ed Chrupcala, director of category development for U.S. Smokeless Tobacco Company (USSTC). “We believe that one of the largest factors contributing to this growth has been adult smokers making the switch to smokeless tobacco. In a study of adult consumers, we found that 62 percent of those who have been MST consumers for less than one year first smoked cigarettes. For those that have been MST consumers for more than 10 years, only 25 percent were smokers first. Those statistics show that the growth of the category can largely be attributed to smokers looking for an alternative.”

Sliced another way, moist snuff was shown to have accelerated by double digits—10.4 percent in 2006 for all channels, according to ACNielsen. Fourth-quarter 2006 can growth was up 13.7 percent, “which is four to seven times the historical category growth seen before the P/V (Price/Value) segment took off,” says Tom Impastato, director, trade and field marketing for Swedish Match North America (SMNA). “This growth seems to be directly related to an increase in P/V offerings giving consumers more options to stay in the segment in light of increasing prices and escalating taxes.” He adds that “other factors such as smoking bans/restrictions are contributing as consumers look for alternate ways to get their tobacco pleasure. We fully expect this trend to continue.”

From a niche side of the business, tobacco-free pouches, Dave Savoca, president of Smokey Mountain Chew, agrees that “there has been increased consumer demand for smoking alternatives,” which he says “has placed more manufacturer and trade focus on the smokeless category—much more so in the past.” Additionally, he sees that “over the past five or so years, smokeless manufacturers have become much savvier in terms of market segmentation.”

That means that tobacco outlet retailers should present the category in savvier form, as well. Here are top tips from the industry:

Make the category obvious. “Within a few steps inside the store, it should be obvious to the consumer that the store is serious about taking care of their OTP needs,” says Impastato.

Segment accordingly. “Consolidate all pouch products together, etc., and then organize the products by brand,” suggests Chrupcala.

Utilize showcase shelving. “This displays the full top disk rather than the side label, while also maximizing capacity,” Chrupcala explains. “Configuring merchandising in this manner adds greater brand presence, and USSTC encourages retailers to use our patented Showcase Shelving.”

Try a self-initiated upsell program. “For instance, offer an adult consumer who is purchasing a pack of cigarettes, an instant price-off incentive to purchase a smokeless pouch product—a bundled purchase price,” suggests Savoca.

Ask manufacturers for/create your own programs and promotions that play to the local and regional consumer preferences.

Realize that no news is not good news. Tobacco outlet retailers must stay on top of product and program innovation for the sake of their customers, smokeless and otherwise. “Within the category, flavors, pouch products and aggressive promotional activity will play a role in developing interests from new consumers as well as those who currently use tobacco products,” maintains Ron Carroll, director of marketing for Swisher International.

The category is, in fact, expected to stay high on its toes with new innovation in the form of packaging and flavors, particularly. Also, there is a general industry belief that more companies will enter the smokeless category through acquisitions and strategic partnerships. •

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Smokeless Product Focus

What’s in the smokeless spotlight? Manufacturers are reporting several well-farers in the category:

• From U.S. Smokeless Tobacco Company:

Copenhagen and Skoal moist smokeless tobacco portion pack (pouches) lines were up more than 26 percent in 2006—and that was on top of 27 percent growth in 2005, according to Ed Chrupcala. He reports that the company has also been “very pleased” with the performance of its new Copenhagen Long Cut Straight in its first year (introduced in February 2006), and new and improved Skoal Bandits (introduced in August 2006).

Additionally, a product that continues to draw a lot of attention is its new Skoal Dry Tobacco Packs, currently in test markets in Louisville, Kentucky, and Austin, Texas. “As Skoal’s first-ever spit-free smokeless tobacco pouch product designed specifically for adult smokers, Skoal Dry eliminates the need to spit and, using patented technology, gives adult smokers the taste and satisfaction they seek,” notes Chrupcala.

Enthusiasm abounds for the March 2007 launch of the latest Skoal product, Skoal Citrus Blend, which is available in both long cut and pouch form. USSTC has also recently launched a new advertising campaign in support of its “legendary” Copenhagen brand of moist smokeless tobacco entitled, “Copenhagen— It’s What’s Inside.” Lastly, the company has redesigned the packaging for its Husky price/value brand of MST “to reflect a bolder attitude,” according to Chrupcala.

• From Swedish Match North America:

Longhorn Moist Snuff is its most recent price/value offering, which grew a whopping 42 percent in 2006, according to ACNielsen. What’s more, “our combined Longhorn/Timberwolf grew can volume by 15.6 percent in 2006, outpacing can growth and gaining share,” states Tom Impastato, director, trade & field marketing. He adds, “Obviously, our primary focus is on moist snuff and ensuring that we continue to offer consumers quality products at fair prices—which will ensure long-term sustained growth of the category.”

• From Smokey Mountain Chew, Inc.:

“Over the past year we have promoted our (tobacco free) pouch line nationally, and sales have been steadily increasing,” reports Dave Savoca, president. “Positioned to provide adult dippers with a breath freshening alternative, we believe our highly flavored pouches are well-positioned to create incremental sales within the category.”

• From Swisher International, Inc.:

“Our Kayak brand of moist smokeless tobacco continues to gain strength at retail,” says Ron Carroll, director of marketing. Simply put, “it’s a product that delivers great tasting quality tobacco flavors, and is the best value on the market,” he adds.

• From emerging new players:

All eyes are on the “big boy” cigarette manufacturers who have yet to make a real big splash in the category. So far, RJR purchased Conwood, with the Kodiak and Grizzly brands, and Philip Morris has been test-marketing its smokeless pouch product, Taboka. Industry experts say they expect much more competition from existing cigarette manufacturers, including Philip Morris, which is expected to get more competitive in the category/be in it in a more meaningful way. (Click here to see Philip Morris Story) •

Will OTP Taxes Kill a Good Thing?

Tax increases have hemorrhaged other tobacco categories, namely, cigarettes; will they soon stab the smokeless genre, too? It is certainly one of the biggest challenges for the category looking ahead, as four states passed higher OTP taxes in 2006, with two other state proposals already underway for this year.

What is especially bothersome to several manufacturers in the smokeless category is the manner by which some of the states are taxing their products.

From USSTC’s (premium) perspective, “the current prevalence of unfair ad valorem—price-based—state excise taxes on smokeless tobacco products is unacceptable, and we are working very hard with state governments to establish an equitable tax structure for the MST category,” explains Ed Chrupcala, director of category development for U.S. Smokeless Tobacco Company.

He further states his case: “While all states collect excise taxes on products such as gasoline, beer, wine, spirits, and cigarettes, these taxes are imposed on a unit or volume basis—a gallon of gas, a liter of wine, or a pack of cigarettes. In 40 states, however, moist smokeless tobacco is one of the few products that is subject to an ad valorem excise tax. This means that premium MST products are taxed more heavily than price-value MST products, exacerbating the price gap between the two and cutting into retailer’s profits by subsidizing down-trading by adult consumers. Throughout 2007, we will encourage our retail partners to join us in educating state legislators about this outdated and unfair mode of taxation on MST.

Tom Impastato, director, trade and field marketing for Swedish Match North America (SMNA), certainly agrees that “tax increases remain a major threat to the entire category.” However, his view is from a price/value perspective: “Weight-based taxes are a major threat to the P/V segment and could totally eliminate both can and dollar growth for our retailers,” he reasons. “Keeping taxes and ultimately retail price increases at a minimum is the key to sustained growth of the category. This is especially true for the P/V segment that has delivered that accelerated growth since the first P/V brand—Timber Wolf—was introduced in the early 1990’s.”

Looking specifically at the states with higher OTP taxes: In 2006, Texas passed higher excise taxes from 35 percent to 40 percent, New Jersey raised its higher taxes to 30 percent of the wholesale price to $0.75 per ounce, South Dakota increased its excise tax by 25 percent from 10 percent to 35 percent, and Arizona increased its excise tax by $0.09 per ounce, from $0.13 to $0.22.

So far, those increasing states on the horizon are: West Virginia has proposed increasing its excise tax on smokeless tobacco from 7 percent to 15 percent; additionally, Wyoming House members gave preliminary approval to a bill that would raise the excise tax on other tobacco products from 20 percent to 33.3 percent of the wholesale price. The only recent good news—California and Missouri’s efforts to increase their state’s OTP excise taxes was voted down during last November’s elections. •