A Hazy Truth

Does the CDC's latest tobacco math really add up?

By
Melissa Vonder Haar, Tobacco Editor

Article Preview: 

Pack-of-Stogies-a-Day Habit

With so many different numbers com­ing from the CDC, manufacturers and industry analysts say, it may be impos­sible to decipher whether or not the data presented in “Consumption of Cigarettes and Combustible Tobacco” truly validates the theories offered by the report. But it’s not just the numbers tobacco manufac­turers and retailers are protesting; they’ve also questioned the idea that cigarette smokers could or would replace their habit with cigars or RYO tobacco.

First and foremost, there’s the question of whether or not “switching” to cigars or RYO would actually save cigarette smok­ers money (which is less of an issue with RYO now that RYO operators are taxed as tobacco manufacturers). While most cigars and loose tobacco are undoubtedly taxed at lower rates on the federal level, are they actually a less expensive habit?

“I’m not going to argue that cigars are taxed at the same rate as cigarettes, but the reality is, if you’re looking to buy one cigar, in a lot of states, you’re looking at $1,” says Marquardt. “If you try to equate that one-to-one to the cost of cigarette consumption, it would be $20 for a pack.”

Of course, Marquardt is referring to individually sold large cigars, citing that little cigars (which come in packs com­parable to cigarettes) are in fact taxed at the same rate as cigarettes. The style of cigars the CDC specifically targeted was not large cigars or official little cigars, but similarly sized small cigars that avoided the 2009 SCHIP tax increase.

“Manufacturers were able to increase the per-unit weight of certain small cigars to take advantage of a tax benefit when classified as large cigars,” the report reads. “As a result of relatively minor increases in per-unit weight, the new ‘large cigar’ can appear almost identical to a ‘small cigar,’ which resembles a typical cigarette and can cost as little as 7 cents per cigar.”

While the CDC called out these “small cigars,” the report did not provide any data to show that this style of cigar was gaining more than traditional large cigars. “The data used in this report did not differenti­ate between different types of cigars,” the CDC spokesperson admitted.

Perhaps if the CDC had tracked the consumption patterns of different cigar types, it would have discovered what wholesalers such as McLane Co. have long known: It’s not cigarette-like cigar packs that are accounting for segment growth.

“Smaller cigars have been getting most of the increase, meaning the cigarillo size, not the ‘little’ size,” Mayer says. “Manufac­turers have made changes in terms of the pack size available on cigarillos. Instead of the consumer having to buy five cigars at a time, manufacturers have expanded the number of packs available, which allow the consumer to purchase one, two and three cigars at a time. This in turn makes the cost a little bit more palatable to the consumer.”

Marquardt agrees: “I think the whole point is this really is a baseless comment. [The CDC] is saying little cigars may also be appealing to teens; the reality is, when youth start smoking, the vast prepon­derance of the evidence shows they start smoking cigarettes. The reason is: Ciga­rettes are designed and made in a way to be palatable to have a certain sweetness, to be easy to smoke.”

While the easy smoking experience of a manufactured cigarette might appeal to new smokers, it could also explain why certain tobacco smokers prefer the expe­rience of a cigar or even an RYO cigarette.

“Manufactured cigarettes are sold as a pre-blended product with a pre­determined taste and flavor,” says Steve Sandman, vice president of RYO tobacco manufacturer Republic Tobacco, Glen­view, Ill. “Consumers that choose to make their own cigarettes will often experi­ment with different tobaccos and will ultimately find the blend that suits their tastes, and even alter their blends depend­ing on what type of flavor and taste they are in the mood for at the time.”

As for cigars, manufacturers such as Moorpark, Calif.-based Kretek Inter­national Inc. have made it a priority to understand what draws consumers to its products. The company’s 2012 National Awareness Attitudes and Usage Study (conducted by ECH Solutions) found cost had little to do with the decision.

“The single largest reason for [consum­ers to] switch to cigars is that they ‘find it relaxing,’ ” says John Geoghegan, Kretek’s director of strategic planning and brand development. “ ‘Aroma’ and ‘taste’ were the second and third reasons given. For smok­ers of the top 10 brands of mass-market cigars, price was way down the list.”

The simple truth is cigars and ciga­rettes are very different products. Even smaller cigars take longer to smoke than cigarettes. Because of the way they’re made, the two products smoke differ­ently. While some cigars are filtered, cigars tend to be significantly stronger than cigarettes.

“Cigars aren’t meant to be frequently used, habitual products; they’re designed for occasional, social or supplementary use,” says Marquardt. “I’m not going to claim there aren’t people who break that mold, but the vast majority of people are using cigars in that way. All of that really flies in the face of what the CDC is trying to do in this report.”

All About Taxes?

While cigar and RYO manufacturers offer many valid reasons consumers enjoy their products, these reasons existed long before 2000. So why have cigar and RYO sales skyrocketed in the past decade?

According to the CDC, it’s the tax discrepancy between OTP and cigarettes, which is also the reason cigarette sales have declined over the same time period. But are taxes solely responsible for these changing tobacco trends?

If there’s one theory both the CDC and tobacco manufacturers are on board with, it’s that huge tax incentives are responsible for the recent boom in loose tobacco used for RYO cigarettes. UBS’ research indi­cates that RYO tobacco (including pipe tobacco) volumes at retail have increased 55% since 2006. Pipe tobacco used for RYO purposes has accounted for the surge in loose tobacco; pipe tobacco is taxed at $2.8311 per pound vs. $24.78 per pound for tobacco sold as RYO.

“Assuming a smoker uses the same tube, paper, etc., when making their own cigarette, a consumer would pay nearly 87 cents less in federal excise taxes per stick equivalent by using pipe tobacco,” says David Bishop, managing partner of sales and marketing consulting firm Balvor LLC, Barrington, Ill. “This in turn would equate to a pack savings of over $17, high­lighting the economic value to an everyday adult smoker.”

It was this vast discrepancy that prompted NACS, NATO and other retail organizations to call for RYO reform. Now that such reform has passed, Modi predicts the future of RYO is hazy at best.

Although common ground was found on RYO, the CDC and tobacco manufac­turers have vastly different opinions on why cigarette consumption is declining as cigar consumption is on the rise. Everyone can admit that taxes play a role, but those in the business of tobacco believe there are many other factors involved in both the decline of cigarettes and rise of cigars.

“The reason cigarettes are declining is pretty obvious: Public awareness is increasing,” Marquardt says. “[Cigarettes] are going to continue to see consumption decline.”

Geoghegan agrees, blaming lower ciga­rette sales on “smokers quitting for health reasons, social pressure and high taxes.”

What, however, is drawing new con­sumers to cigars if it’s not mainly former cigarette smokers picking up stogies?

“Innovation,” says Williams, citing manufacturers and operators. “Retailers have done a really good job in merchan­dising the category better in their stores. Consumers not only have a choice, but they have a section they can actually shop at.”

“Over the last five to 10 years you’ve seen a lot of innovation in terms of packaging variance, flavor and variety of options,” Marquardt says. “Buyers are demanding different types of products overall.”

And while stricter regulations on when, where and how people can smoke may have hurt cigarette sales, some are of the opinion that such measures have helped cigars.

“I believe that restriction and regula­tion have made the smoking occasion a more precious piece of time,” says Geoghe­gan. “People are smoking better because they are smoking less often. Consumers have told us they can get more enjoyment out of the time they take for a cigar.”

Who’s Right?

At the end of the day, tobacco is an incred­ibly complex category. As such, there’s very little black and white—and lots of smoky gray. Is the claim that cigarette smokers have been enticed by lower-taxed options correct? Probably, but not to the extent that the “Consumption of Cigarettes and Combustible Tobacco” report claims. And it’s certainly not the simple bait-and-switch many news stories have focused on.

“It’s not so much a ‘switch’ as it is a part of smoker experimentation with different forms of tobacco,” Geoghegan says. “For example, a significant number of Djarum cigar smokers also smoke other cigars, e-cigarettes and, surprisingly, snus. The variety of delivery forms like smokeless and e-cigarettes allows tobacco users to fit different products into different environ­ments.”

Geoghegan credits such smoker experi­mentation with negative cigarette press activity, local restrictions and the higher cost of cigarettes due in part to taxes.

“Consumers are migrating to other forms of tobacco and smokers are smok­ing less per day,” Modi says of the past decade’s tobacco consumption, also cit­ing the “migration of cigarette smokers to other tobacco products like smokeless.”

And what of the CDC’s claim that non-cigarette consumption has made up for falling cigarette consumption? Again, the answer is not as simple as the report makes it out to be, especially because the report only covers combustible tobacco—ignor­ing increases to alternatives such as smoke­less and electronic cigarettes (even though these nascent segments represent a meager slice of the total market).

“The number of tobacco users prob­ably hasn’t changed that much over the last 10 years,” Williams admits. “However, the shift is definitely moving from traditional cigarettes to utilizing another form of tobacco. We’ll continue to see the category evolve.”

Perhaps the biggest threat the “Con­sumption of Cigarettes and Combustible Tobacco” report poses is the legislative action it seemingly calls for—which may have been the ultimate intent of the CDC to begin with.

“Whether you agree or disagree with the report, the implication is clear,” says Bishop. “[It] provides the evidence that politicians and various groups will use to argue for higher taxes at both the federal and state level.”

With Rep. Waxman already arguing for higher taxes and stricter regulations based on the CDC report, at least one manufac­turer is fighting back: On Sept. 21, Prime Time International sent its own letter to the head of the FDA, urging the organiza­tion to look at more concrete data.

“We’re simply asking [the FDA] to consider the broad-based studies of more validity rather than the smaller CDC study,” says James Deer, secretary and general counsel for Prime Time, citing the Substance Abuse and Mental Health Ser­vices Administration (SAMHSA) report as one of many government studies refuting the CDC’s data. “The industry needs to be a little more forthright about correcting a lot of the things that become matters of so-called public knowledge.”

And while tobacco manufacturers rarely celebrate tax increases or stricter guidelines, it’s the simplification of an incredibly complicated issue that most offends them.

“The fault is not so much with the report as it is with the reporting,” Geoghe­gan says. “Tobacco use is a complex social issue. It is legal, it involves nicotine, it’s a big industry, and it has a very vocal and influential opposition. It’s easy for the press to summarize the in-depth CDC report in a few sound bites.”

Only time will tell if those few sound bites prompt drastic changes in the way cigars and loose tobacco are taxed.

Pages

Click here to download full article