Rolling with the Punches

While piquing retailer interest, RYO machines take a hit from regulatory bodies

Published in CSP Daily News

By
Linda Abu-Shalback Zid, Senior Editor

OAK BROOK, Ill. -- When RYO Machine Rental LLC debuted its roll-your-own (RYO) cigarette machine in 2008, it never planned on such machines garnering so much national attention so soon.

The Cincinnati-based company’s inaugural year was slow; it produced only 10 machines. But when the feds came in, so did the orders from retailers.

The State Children’s Health Insurance Program (SCHIP) took effect in 2009, and RYO tobacco taxes skyrocketed 2,400% from $1.01 per pound to $24.78 per pound. Meanwhile, pipe tobacco merely doubled, going from $1.09 per pound to $2.83 per pound.

To circumvent the crippling tax on RYO, some manufacturers allegedly began labeling RYO as tobacco, used in the machines as pipe tobacco.

And RYO Machine Rental was an unexpected beneficiary. “We had nothing to do with that,” company president Phil Accordino said. “The federal government created the market with SCHIP, and that’s when our machines took off.”

In its four years of operation, the number of machines has soared to 1,700, despite the $32,000-per-unit price tag on the jukebox-size contraptions, which are about 55 inches high by 40 inches wide.

But the company’s offering is actually at the heart of two debates: one centered on the alleged mislabeling, and the other that classifies owners of large RYO machines as “manufacturers” who should therefore be subjected to manufacturing regulations.

Ron Bernstein, CEO of Durham, N.C.-based Liggett Vector Brands, asserted that the mislabeling increased pipe tobacco sales by 350%, following SCHIP’s passage: “It now represents almost 19 billion cigarette equivalents per year, as compared to 2.5 billion cigarette equivalents in the year prior to the tax increase.”

But during CSP’s recent Tobacco Update CyberConference, UBS tobacco analyst Nik Modi said of the PYO phenomenon, “The bottom line is, I don’t think this trend is going to go unchallenged next year; I would expect a lot of activity behind this.”

And major tobacco companies are supporting the challenge, he says: “The reality is, I don’t think you should be planning for significant space allocation of pipe tobacco in the risk that the government really clamps down in a meaningful way.”

Read the full story in the January issue of CSP magazine, or click here.