It would be naïve to think that the fourth-tier cigarette market has done a “180.” Clearly, renegade companies continue to disregard state escrow laws and sell at artificially low prices—leaving some retailers holding the bag and with a bad taste for the category.
But slowly, there has been a weeding out of many of the so-called “bad guys”—or fly-by-night players. Even the reputable companies are consolidating and improving their “A” game.
For this story, 10 “established” manufacturers were contacted; at least two were out of business (since last year), and only two would go on the record this time around—Carolina Tobacco Company (CTC) and General Tobacco (GT). But much of what they have to say regarding the industry and how it’s evolving is positive. Here are eight of their “fourth-tier truths” as the category stands today:
1. The challenges facing the fourth-tier category are improving compared to a year ago.
“While there remains strong competition with Big Tobacco brands, there are many factors that favor the price-value category,” says David Redmond, president and CEO of CTC. “Some of these factors include: a gloomy economy converts big-tobacco-brand smokers to lower price-value products, states continue to increase their tobacco taxes (often very significantly), smoking consumers are finding that price-value cigarettes have similar and acceptable quality and taste when compared to big tobacco brands, and retailers are increasingly adding good-quality price-value cigarettes as a permanent item in their tobacco category.”
2. Fourth-tier cigarettes are doing well compared to most “Big Tobacco” famous brands, thanks to macroeconomic factors affecting the tobacco industry.
“We expect to see additional incremental increases in market share, as we have in all years since the Master Settlement Agreement (MSA) was signed in November 1998,” says Redmond. “The consumer transition continues toward fourth-tier products. Also, the price gap continues to be significant to consumers as the price-value category increase each year in market share and in units.
“The category gives an opportunity to provide quality cigarettes at value prices,” adds J. Ronald Denman, executive vice president and general counsel of General Tobacco. “The price gap is significant because branded companies sell with high margins. Most of that margin goes to marketing and promotional expenses, and the rest to the shareholders. On the other hand, we operate on much tighter margins due to the stringent governmental payment requirements, yet strive to provide a great product notwithstanding the expense.”
3. The bottom line is: consumers want this cigarette option.
“The fourth-tier market is driven by consumer demand for a price-value cigarette,” states Redmond. “If the fourth tier disappeared, consumers would have no choice but to purchase Big Tobacco’s ‘full-revenue brands’ at manufacturers’ prices not influenced by fourth-tier competition. Carolina Tobacco Company has and will continue to provide an alternative.”
4. Distributors are helping the category advance.
“Distributors continue to favor the promotion of price-value cigarettes because they continue to experience growth, and most importantly, the distributors make more gross-profit-percent per unit, and often, more gross profit in dollars, than with Big Tobacco brands,” Redmond maintains. “Experience has proven that distributors and retailers alike are more interested in promoting price-value brands that meet or exceed their customers’ expectations. In addition, distributors have lower inventory costs per unit. Carolina Tobacco Company’s distributor customers have been and continue to be extremely supportive of our ROGER brand and our company, and the category as a whole.”
“Distributors are a great deal of help, provided they are not jaded by the lure of profits of non-complying companies,” Denman adds. “It appears distributors are tired of being burned with obsolete inventory when it becomes blacklisted, preventing them from selling that product. More and more, I believe distributors recognize the value of sticking with quality products at value prices, rather than unrealistic prices.”
5. Retailers are learning to resist being “bullied” by Big Tobacco so they can carry on with more fourth tier.
“Retailers continue to report strong-arm tactics by Big Tobacco’s representatives, especially everyday low price (EDLP) and point-of-sale (POS) material requirements,” reports Redmond. “However, retailers are listening to their customers and their preferences more than ever before.”
“Outlets are abandoning certain contract programs because they are precluded from selling products that their customers want,” expresses Denman. “It is hard to explain to customers that you can’t carry quality value products simply because higher priced companies won’t let you.”
“As a result, many retailers, including convenience stores, are changing their in-store tobacco category layout to include good-selling price-value cigarettes,” adds Redmond. “They understand the benefits of stocking and merchandising the fourth-tier selections, including the increased gross profits per unit, benefits of lower inventory costs inherent with the price-value category. The quality of Carolina Tobacco Company’s ROGER brand products and our company’s professional services continue to win over more retailers and consumers.”
6. Serious category players are putting forth innovation and progress.
“Our most exciting development to mention is GT’s recent move from Miami, Florida, to Mayodan, North Carolina,” says Denman. “We have officially moved our headquarters and manufacturing facilities to one of the leading locations in tobacco-industry economics. Also, our new, state-of-the-art manufacturing equipment will allow us to produce our entire catalog of tobacco products in the U.S. at a premium level, while still maintaining our value prices. In the coming weeks, the new facility will be fully operational and all of GT’s products will be manufactured and distributed from our new home in Mayodan. When a company like ours moves its headquarters and opens a new state-of-the-art plant with a $25 million investment into our operations, we plan to stick around. We believe in the longevity of our company and its products.”
“This year, Carolina Tobacco Company has enhanced the flavor of its menthol products in response to consumer preferences,” reports Redmond. “We have seen an increase in the demand for menthol products, over non-menthol cigarettes that deliver consistent, enhanced flavor with each smoke.”
7. Greater demand is just a promotion away.
Carolina Tobacco Company estimates about 11.23 percent of cigarette display space in retail stores is devoted to fourth tier, according to Redmond. But he believes there is definitely room for improvement.
“By improving placement of the products and using promotion materials provided by the manufacturer, CTC believes a growing number of retailers will see greater demand for fourth-tier products,” he says. “They will likely enhance sales and improve gross profits at reduced inventory costs while retaining the customers’ demands for fourth-tier products. He says the “promotion musts” for fourth-tier retailers include advertising, where and when legal, as well as in-store sampling, wherever possible and legal. Keeping the category in-stock can be achieved only through reputable companies and is perhaps the most important element of any promotion, according to him.
“In order to improve fourth-tier business, retailers must allow shelf, counter, sign space, and an overall visibility of legitimate fourth-tier products,” summarizes Denman.
8. Globally, fourth tier is already a go.
“Many countries around the world have experienced the strong demand for price-value cigarettes and those markets have changed accordingly,” asserts Redmond. “Carolina Tobacco Company researched these markets in order to anticipate and serve the U.S. consumer’s needs. Carolina Tobacco Company believes the fourth tier is here to stay and grow. The outlook for fourth tier continues to be excellent now that the price-value category is institutionalized in the U.S. market.” •
