Cigarettes may have passed their peak, but OTP numbers show the positive side of the tobacco industry

Forget the negative press—things aren’t so bad in the world of tobacco lately. In fact, it may surprise some tobacco outlet retailers to learn that there is considerable positive news to report—even more so if they read between the lines and numbers.

For starters, take the former barometer of the industry, cigarette consumption. There is no question that industry stats show it to be down in this country, and that it has been declining fairly steadily since the late ’80s/early ’90s. In 2005, 379 billion cigarettes were sold; a substantial drop from 395 billion the year prior, according to the U.S. Department of Agriculture and the Bureau of the Census. But does that paint an accurate picture of a dwindling industry with fewer and fewer adult smokers? Not quite, say the industry experts and analysts.

“The fact that the peak of the cigarette industry was in the early ’80s when we were selling 630 billion sticks—and now that’s under 400 billion sticks a year—is very misleading as a measure of the tobacco industry,” says one observer. He mentions that a lot of imports being sold to distributors are not reported. Also, fourth tier brands are often sold directly to retailers and not reported. “And then we’ve got contraband coming in—so that is easily more than 400 billion,” he adds.

Could the major cigarette manufacturers be purposely reporting numbers they know to be underestimated? “They certainly want the government to think that it’s winning in stopping people from smoking,” says one expert.

But while the total industry is reportedly down over 4 percent, a certain segment of the industry is up considerably; imported and specialty cigarette brands have shown gains around 20 percent over last year, according to industry estimates. What’s more, it’s a category that reigns in tobacco outlets and specialty tobacconists, versus the major cigarette brands, which have their largest share of volume in the convenience channel.

Retail Cigarette Universe

What percentage of the total cigarette business does each type of location represent out of the estimated 282,000 retail outlets?

*Industry Estimates

Imported and Specialty Brand Retail Distribution

*Industry Estimates

Putting cigarettes aside—which many tobacco retailers are considering doing to some extent in their businesses—the tobacco industry has a lot of “other” elements to it—namely, Other Tobacco Products, or OTP, which are attached to industry numbers that are just downright positive, without any in-between line reading and for the entire category.

2005 Cigar Snapshot

For the fourth consecutive year, imports of premium cigars into the U.S. continued rising in 2005, posting a 13.6 percent gain over the year prior, according to U.S. Customs data analyzed and adjusted by the Cigar Association of America (CAA). This was based on the tracking of nine key supplier nations (Bahamas, Dominican Republic, Honduras, Indonesia, Jamaica, Mexico, Nicaragua, Panama, and the Philippine Republic). The CAA reports that the U.S. imported 321.6 million premium cigars in 2005, compared to 283.3 million in 2004 if just those key suppliers are considered.

In all, 322.9 million premium cigars were imported last year from all 21 countries of origins, compared to 285.5 million in 2004, a gain of 13.1 percent. This was the fourth consecutive year of import growth in the premium cigar segment and the largest gain to date during this growth cycle.

The top three suppliers of premium cigars—the Dominican Republic, Honduras, and Nicaragua—continued to show gains in market dominance, collectively capturing 98.5 percent of all premium cigar imports in 2005, up from 98 percent in 2004 and 97 percent in 2003.

Consumption imports of little cigars—those weighing 1.36 kg. or less per 1,000 sticks—rose by 22.9 percent in 2005, reaching 264.8 million units, up from 239.5 million in 2004. Leading countries of origin in this category, which includes the growing filter-tipped little cigar segment, are Brazil (79.5 million), India (68.4 million), Colombia (28.6 million), Honduras (28.6 million), Philippines (20.1 million), and the Netherlands (16.2 million).

In all, a grand total of 848 million cigars were imported into the U.S. for consumption in 2005, up 2.1 percent from 831 million units in 2004.

To top of column 2

Meanwhile, for the first two quarters of 2006, there have been reports that U.S. cigar imports were showing decreases in the double-digits. One leading premium cigar manufacture explains that there were some miscalculations on their part, and that they were to be meeting with the CCA at press time. For now, no one is panicking and figures are expected to be corrected well in time for year-end.

The smokeless category is also a winning ticket in tobacco these days. It grew over 6 percent in 2005, according to Bonnie Herzog, a tobacco analyst with Citigroup, who affirms “the smokeless tobacco category growth has been impressive and with very attractive, very high, double-digit operating margins.” She and other industry observers predict the category will increase at least 4-6 percent again this year, thanks to several industry happenings, including smoking bans, accelerated growth of the price value and sub-value brands, and the entrance of major tobacco companies RJ Reynolds and Philip Morris into the category.

Generally speaking, smokeless tobacco is segmented into three different price tiers: premium smokeless brands (such as Copenhagen, Skoal, and Kodiak), price value brands (such as Red Seal and Timberwolf), and deep discount brands (such as Grizzly, Husky and Longhorn). At the end of 2005, premium brands had an average retail price of $4.79 per can, according to Herzog, price value brands had an average price of $2.70 per can, and deep discount brands (or sub-price value brands) had an average retail price of $1.96 per can.

“We expect the overall smokeless tobacco category to grow 4 percent in 2006 with cheaper brands growing 20 percent and premium brands declining by 2 percent mainly due to the large price gap between the segments,” says Herzog.

And actually, price/value brands grew 31 percent in a recent 52-week period, according to ACNielsen. The moist snuff category as a whole (of which price/value brands are part) grew by 8.4 percent, according to ACNielsen’s figures for the 52-week period ending March 25.

More OTP growth has been witnessed in MYO/RYO (see article, page 46); according to industry estimates, this total category has doubled in the last five years.

There has also reportedly been an “explosion” in flavors in several OTP categories, including MYO/RYO and little cigars.

Perhaps the biggest negatives to the industry remain with the state legislatures and their ever-popular tax increases and smoking bans. This year, tobacco outlet retailers need to keep a watchful eye on the OTP proposed increases. But there are courses of action that can be taken. The more involved retailers get with their state legislators and the National Association of Tobacco Outlets (NATO), the more positive picture we can paint for next year.

The success that NATO has experienced since it was just an idea five years ago has been “phenomenal,” according to board members. Just last year, NATO and its members compiled an 83 percent success rate in defeating proposed legislation that would have either further overtaxed tobacco products, further restricted tobacco freedoms, prevented 18, 19, or 20 year-old adults from purchasing tobacco, or banned the sale of flavored tobacco products. This is day-by-day progress that will amount to year-to-year favorable outlooks for the tobacco industry as a whole, and for tobacco outlet retailers. •

Proposed State Tax Increases

In 2006, five states have passed higher excise taxes: Alaska, Texas, Vermont, New Jersey, and North Carolina.

The following states have proposed excise increases for 2006: Arizona, California, Indiana, Iowa, Maryland, New York, South Carolina, South Dakota, Vermont, and West Virginia.

In 2005, nine states passed higher cigarette excise taxes: Kentucky, Maine, Minnesota, New Hampshire, North Carolina, Ohio, Tennessee, Virginia, and Washington.

The current weighted average state excise tax is now approximately $0.87 per pack, versus $0.79 per pack at the end of 2004. “We are expecting a much more muted round of excise taxes going into 2006,” says Bonnie Herzog, a tobacco analyst with Citigroup.

Two states have passed higher Other Tobacco Products (OTP) taxes this year (2006): Texas passed higher excise taxes from 35 to 40 percent, and New Jersey raised its excise taxes to 30 percent, of the wholesale price of $0.75 per ounce.

West Virginia has proposed increasing its excise tax on smokeless tobacco from 7 to 15 percent of the wholesale price.

Additionally,Wyoming House members gave preliminary approval to a bill that would raise the excise tax on other tobacco products from 20 to 33.3 percent of the wholesale price.

In 2005, six states passed a higher state excise tax on OTP; 17 states issued proposals for higher OTP excise taxes in 2005. •

No Smoking Allowed—A Smoking Ban Review

Currently in the United States, 14 states require smoke-free workplaces for all workers, including restaurant and bar workers:

Additional states are likely to pass similar legislation in 2006, according to tobacco analyst Bonnie Herzog with Citigroup.

Citigroup research also indicates Arizona and Ohio will likely have voter referendums on whether the state should go smoke-free. Maryland is also currently considering similar legislation.

In March, Utah passed a bill to make restaurants smoke-free and will include all bars by 2009. In April, smoking was banned in most indoor public places in Washington, DC, including restaurant dining areas, and offices, while bar areas of restaurants, taverns, clubs, and nightclubs have until January 1, 2007 to introduce the ban. Additionally, states like Louisiana and some cities have passed laws restricting smoking in all work places with the exception of stand-alone bars and casinos.

On April 6, the New Hampshire Senate rejected a bill that would have prohibited smoking in all restaurants and bars in the state. On February 24, a committee in the Maryland House defeated a bill aimed at banning smoking in indoor public places, including bars and restaurants. Supporters of the ban said they will try to push the bill again next year.

On February 23, a Virginia House subcommittee unanimously voted down a bill that would have prohibited smoking in most indoor public places in the state. The committee found that the measure would regulate private businesses excessively. •