Will Menthol Cigarettes Be Banned?

Modi's viewpoint, and how to grow OTP (Part 2)

Published in Tobacco E-News

By  Mitch Morrison, Vice President & Group Editor
Melissa Vonder Haar, Tobacco Editor

Nik Modi (left), Joe Teller

NEW YORK -- Remember the doom and gloom of the Great Taxation?

With state budget shortfalls still a widespread problem across much of the country, many saw tobacco as the easy target for fresh revenue.

Guess what? Not this time; not this year.

Of more than 85 proposals to raise state excise taxes, only seven passed were signed into law, said Nik Modi, tobacco analyst at RBC Capital Markets, in last week's exclusive CSP Tobacco Update sponsored by Swedish Match and featuring its category management director Joe Teller.

[ Click here to view Part 1 of the coverage of this webinar.To view an OnDemand replay of the webinar, please click here. The program is free for retailers and wholesalers; others, $49.]

Three states--Massachusetts, Minnesota and Texas--passed cigarette excise tax hikes. And according to Modi, 2014 should continue the relatively calm taxation climate.

On the federal front, while excise tax generates little significant dialogue, both manufacturers and retailers are keeping a close eye on how the FDA rules on menthol. Although a scientific arm earlier cited the harm of menthol, its report was not nearly as harsh as industry advocates feared.

Still, how will the FDA respond, especially in a backdrop of health advocates pushing for bans or at least onerous restrictions aimed at curbing menthol consumption?

"We believe that menthol is not a point of focus at the current moment," Modi said emphatically. "We think it's going to take some time to get clarity from the FDA on menthol. Over 200,000 pages of research they need to review and I think [FDA tobacco head Mitch] Zeller is very, very focused on e-cigs right now. Menthol, I think, will take some time."

How much time?  According to Modi, at least a couple of years when factoring the requirements for public comments and other considerations. "It could be anywhere between Aug. 2015 and Dec. 2017 before we get actual regulations from the Department of Health and Human Services … and longer if they do attempt to ban, as there will be litigation dragging things out."

Growing OTP

In a deep dive of the other tobacco products (OTP) segment, most notably cigars and moist smokeless, Teller shared several growth opportunities.

"OTP distribution is worse than you think," he said, "even for top-selling products like single sticks. There are some really well-selling Swisher and White Owl [single-stick] products that aren't even close to full distribution."

And that remains the fundamental challenge--delivering full distribution of your top products and managing the multiple segments within a wide-ranging OTP business.

Take single sticks, for instance.

"All manufacturers, I think, are probably guilty of rushing so much into foil pouches that they haven't done a good job of maintaining single stick distribution," Teller said. "I don't know why it's so low in single sticks--it's still a third of the category. There are a lot of consumers that just have change in their pockets and just want to buy one stick. If we're playing down the importance of single sticks, we're all missing a growth opportunity."

Conversely, Teller showed promising results around moist smokeless tobacco (MST), noting, "The distribution numbers look really good."  Still, he cited low-price portion pouches as a viable opportunity, showing their growth as four times faster (18.2%) than the rest of MST at 4.5%.

And yet despite that growth potential, pouches are often buried within a total tobacco set.

"Too often, you've got to be a private detective just to find pouches--and the clerk as well. [The clerk] knows where the big hitters are, but probably not most of these pouches. If you make this stuff visible and easy to find, you're going to sell a lot more than you are now. This is extra product just waiting to be sold."