A Hazy Truth
Does the CDC's latest tobacco math really add up?
Americans Quit Cigarettes But Take Up Cigars.” “Big Cigars Offer Way for Smokers to Save.” “Tobacco Companies Profit From Loophole.”
This is just a small sampling of headlines covering a U.S. Centers for Disease Control and Prevention (CDC) report titled “Consumption of Cigarettes and Combustible Tobacco—United States, 2000-2011.” Released Aug. 3, the report looks at overall combustible-tobacco consumption over the past decade using excise tax data from the U.S. Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB).
However, it wasn’t the data collected by the CDC that had the media abuzz. It was the sound-bite-friendly hypothesis the organization made based on that data. According to the report, cigarette consumption continued to fall while lower-taxed cigars and loose tobacco consumption increased, suggesting that cigarette smokers have been switching to cigars and loose tobacco.
And it’s a big problem.
The report warns, “The evidence that the increase in cigar and pipe tobacco use is the result of offering cigarette smokers a low-priced alternative product is a particular public health concern.”
And it’s not just the media that’s up in arms: The report has been cited by politicians and anti-tobacco advocates calling for stricter regulations and higher taxes on OTP. The CDC’s claim in part prompted Rep. Henry Waxman (D-Calif.) to write a letter urging the FDA to assert jurisdiction under cigars and pipe tobacco, proclaiming that “forceful and timely intervention by FDA can stop the tobacco companies from exploiting loopholes and endangering our youth.”
While the concept that Big Tobacco is using federal loopholes to lure cigarette smokers to lower-priced products may be appealing to the media and anti-tobacco advocates, many individuals who are actually in the business of cigars, RYO and OTP have questioned the legitimacy of such claims—particularly the lack of evidence the CDC presented to link the decrease in cigarettes to the increase in cigars and loose tobacco.
“When you take a look at the report, it’s basically regurgitating unit and dollar growth and trying to link that up with taxes,” says Paul Marquardt, vice president of marketing for Phoenix-based Prime Time International. While the company admits recent category gains might not be completely unrelated to cost, Marquardt says, “Ninety-nine percent of what we’re talking about here is unrelated to the tax and has a lot more to do with consumers in general.”
It’s a complicated issue, one that requires an examination of how the CDC came to such a conclusion, whether or not this conclusion matches up to both sales figures and consumer behavior—or whether other factors are at play. In an effort to clear the air, CSP recruited input from the CDC as well as tobacco analysts, manufacturers and distributors to break down what’s really going on with tobacco.
The Numbers Game
Numbers are at the heart of the “Consumption of Cigarettes and Combustible Tobacco” report’s findings. Specifically, the numbers depicting a drastic reduction in cigarette consumption, including a 2.6% decrease from 2010 to 2011, but a significantly less drastic reduction in overall combustible consumption: just 0.8% during the same time period.
The report says this negligible decline in overall consumption is “in part because of the effect of continued increases in the consumption of non-cigarette combustible tobacco products.” Per the CDC, consumption of non-cigarette products (such as cigars and RYO/pipe tobacco) increased 17.4% from 2010 to 2011.
Given the recent uproar over the tax discrepancies between cigarette and pipe tobacco used for RYO purposes, such findings are not surprising to many in the industry, including UBS senior market analyst Nik Modi.
“I agree with the findings of this report,” says Modi, who covers tobacco for the New York-based financial services company. “We have seen a pretty dramatic increase in consumers using pipe tobacco to make their own cigarettes.”
“We’ve seen that trend,” agrees Dennis Williams, national accounts manager for Harold Levinson Associates, Farmingdale, N.Y. “As a national distributor of cigar and tobacco products, we’ve seen the increase over the last 10 years in the RYO category, as well as cigars, little cigars, snus, snuff—across the whole gamut of OTP products.”
Still, others object to the notion that cigars are benefiting from a breadth of cigarette smokers switching over to a lesser-taxed alternative.
“I don’t know if I would paint it quite that rosy,” says John Mayer, product director of cigarettes and OTP for Temple, Texas-based McLane Co. “Cigars took a hit on the last federal excise tax increase, just as cigarettes did.”
The numbers from the 2012 CSP Category Management Handbook support Mayer’s claims: According to SymphonyIRI Group data, c-store cigar dollar sales dropped 1.7% from 2010 to 2011. And while cigar units did rise 4.1% during that time period, the segment experienced double-digit unit growth the previous year.
But it’s not just outside numbers that are problematic for the “Consumption of Cigarettes and Combustible Tobacco” report’s data: Critics question how exactly the CDC tracked consumption.
The report states the CDC was able to make comparisons between loose tobacco and cigarettes by converting “tax data from pounds of tobacco to a per-cigarette equivalent, based on the conversion formula contained in the Master Settlement Agreement.” The math is clearly outlined: 0.0325 ounces (or 0.9 grams) of loose tobacco equates to one cigarette, making a side-by-side comparison feasible.
But what about cigars, which were lumped in with loose tobacco as “non-cigarette combustible tobacco” in the report’s findings? “We did not convert cigars because they are already manufactured as individual units,” a CDC spokesperson told CSP on condition of anonymity.
Additionally, the CDC’s own data seems to contradict its claim that extreme escalations in non-cigarette combustible consumption were the result of 2009 tax increases, which further widened the price gap between cigarettes and OTP. Yes, the “Consumption of Cigarettes and Combustible Tobacco” numbers show total consumption of non-cigarette tobacco increases 18% from 2009 to 2010 and 17.4% from 2010 to 2011. However, the most drastic increase in non-cigarette consumption happened from 2004 to 2005—when the report shows total consumption rose 19.8%. According to the CDC, it could not explain why such drastic growth would occur in the pre-SCHIP era.
Ultimately, though, it’s not the smaller details of the report that tobacco manufacturers object to, but the wider accusations: specifically, the claim that “recent changes in consumption patterns, particularly increases in large-cigar and pipe-tobacco use, have resulted in a slowing of the decline in consumption of all combustible tobacco, and indicate that certain cigarette smokers have switched to using lower-taxed non-cigarette combustible products.”
As Marquardt previously admitted, the claim may not be entirely untrue— just greatly exaggerated. “It’s all about scale here,” he says. “The way they’ve written this, someone who can’t read between the lines will think everyone will be smoking cigars in a couple of years.”
Because cigarettes make up such a vast majority of tobacco sales, radical increases in cigars, loose tobacco or any kind of OTP cannot combat even a minor drop in cigarette sales. For example, CSP’s exclusive Midyear Category Data Report (CSP—Sept. ’12, p. 68) shows a 1% rise in cigarette dollar sales for the year ending June 10, 2012—a figure that equates to $24.4 billion in c-store sales. While OTP dollar sales increased significantly more—by 8%—that figure equates to a mere $2.2 billion in sales.
Those who sell tobacco products agree that the rising demand for cigars, OTP and loose tobacco still falls far short of covering the loss of revenue from decreasing cigarette sales.
“We’ve had to find other profit centers,” says Williams of Harold Levinson Associates. “The whole OTP category has covered some of it, but for the most part larger distributors and your average c-store have had to find alternate sources of income, like foodservice or coffee.”
While the CDC acknowledges the scale of cigarette to non-cigarette consumption, it was only to showcase how greatly the percentage of non-cigarette consumption has increased over the past decade, going from 3.4% of total consumption to 10.4%. While it’s an impressive shift, the report fails to acknowledge that cigarette consumption still accounts for nearly 90% of total tobacco consumption in the United States.
“You’re comparing one grain of sand vs. the entire beach,” Marquardt says.