Government stings, graphic images could become national policy.
Since the Food and Drug Administration (FDA) gained oversight of tobacco in June 2009, packages and signage have changed, most product has been moved out of consumer reach to the backbar, and major cigarette makers have shifted to a total tobacco strategy.
At the same time, tobacco sales continue to generate around 40% of industry sales. And while cigarettes continue their incremental decline, there is no indication that FDA oversight has hastened any demise.
So where are we? Has the great bugaboo of FDA jurisdiction been exaggerated, or is the worst yet to come? Or is there some middle of the road?
While retailers have been relatively quiet bystanders in the debate over the FDA’s involvement in the tobacco industry, they could be severely affected by FDA regulatory changes. Industry professionals warn against complacency toward the FDA. Chief issues most likely to affect retailers are how tobacco is merchandised and promoted, and a likely increase in inspections to curb sales to minors.
Jim Smith, longtime head of the Florida Petroleum Marketers & Convenience Store Association, is prepared for inspections and fees associated with sales to minors to increase. He predicts retailers will “try to stay one step ahead of the regulations” in an effort to ensure that they are compliant.
“Business understands that the only way for the government to make money is to take it from somebody,” Smith says. “So we are going to do everything we can to make sure they don’t take any money from us.” (Smith recently stepped down as CEO after a nine-year stint.)
Mike Thornbrugh, spokesman for Tulsa, Okla.-based QuikTrip Corp., said the company “knew changes were coming” and made appropriate changes to prepare for new regulations.
As the FDA adds to the current regulations, Thornbrugh expects many retailers will voluntarily enact policies that go beyond government regulations. “You have to be prepared for that,” he says. “I don’t think that is going to change.”
While it is no simple task to predict the FDA’s next move in regulating retailers, it is believed the agency will adopt more restrictive steps already in place for some states. Jim Calvin, president of the New York Association of Convenience Stores (NYACS), says his state imposes one of the most restrictive sets of tobacco regulations and among the highest taxes on tobacco products in the nation. “Extensive taxation and regulation on the state level has driven most of our customers away,” he says.
The FDA’s June 22, 2010, regulatory changes were the first significant ones concerning the sale and marketing of tobacco products. Though relatively mild, the guidelines affect the size of warning labels on packaging and displays of smokeless tobacco products. One of the most significant changes involves point-of-sale displays, which had to switch to a larger warning that occupies 20% of the display. Warnings on packaging will now have to cover at least 30% of the front and side of the package.
Still in question is whether warning labels will eventually be required to include graphic images. “What will happen with packaging?” asks Lou Maiellano, president of TAZ Marketing and Consulting Group, Sevierville, Tenn. “Will it be very graphic warnings with a cancerous lung?”
In December, retailers sued the New York City Board of Health for a requirement mandating just that; convenience stores were required to post warning posters demonstrating decayed teeth, cancerous lungs and stroke-damaged brains wherever tobacco products are sold. Calvin of NYACS describes the requirement as “confiscating the prime real estate in your store for the purposes of nauseating and offending customers.”
The debate over graphic warning labels rages on for good reason. Stanton A. Glantz, director of the Center for Tobacco Control Research and Education at the University of California, San Francisco, says current research demonstrates that such visual warnings significantly cut into consumption. “In the end, graphic warning labels will have a bigger effect than targeted disruptions,” he says.
While the New York matter remains unsettled, tobacco advocates wonder whether the c-store industry should be taking a more proactive stance to prevent visual warnings from becoming law. Maiellano believes many retailers simply are complacent about FDA oversight, failing to “understand that there is going to be heavy enforcement.”
David Gaudet, president of The BARS Program, a compliance-check training service that prepares retailers for inspections, warns that while state agencies have typically enforced prevention of underage tobacco sales, retailers in many states are now likely to have two separate entities involved in tobacco checks. State authorities and the FDA could conduct inspections independent of each other. “At some point they are going to see an increase in inspections,” Gaudet says. What could this mean? Well, if you fail to ask for the ID of any customer under 27, Gaudet says, “you may now have two infractions.”
For now, such draconian steps are more speculation than reality. And retail data clearly shows that the tobacco category as a whole remains vibrant, albeit changing, and that previous predictions of peril stemming from the federal excise tax increase to FDA oversight have not yet been borne. Indeed, the competitive balance on the manufacturing side remains stable, aided by a flurry of innovation in flavored cigars and smokeless products as well as yetto- market nicotine alternatives.
But the relative harmony may be relatively short-lived, says Bill Godshall, executive director of SmokeFree Pennsylvania. Godshall fears that despite the three-year moratorium that small manufacturers were granted on several areas of the new legislation, it won’t be long before Altria, the most prominent tobacco manufacturer to actually endorse FDA governance, leverages its sheer muscle.
Godshall estimates that while it may cost a company the size of Philip Morris only 0.05 cents per pack to comply, it may cost small manufacturers as much as $1 per pack to abide by the new regulations. As a result, he expects industry consolidation over the next few years. “These small manufacturers are going to need to find ways to stay alive,” he says.
Indeed, since tobacco came under the authority of the FDA, there have already been several examples of global consolidation within the industry. Earlier this year, Swedish Match and the Scandinavian Tobacco Group entered into an agreement to form a new global company focused on cigars. Swedish Match agreed to contribute all of its cigar business, with the exception of U.S. mass-market cigars, as well as its remaining pipe-tobacco and accessories businesses; and Scandinavian Tobacco will contribute its tobacco business.
Also, Philip Morris Philippines Manufacturing Inc. merged with Fortune Tobacco Corp., the Philippines-based maker of cigarette brand Winston and the Philippines cigarette brand Hope.
While these moves fell outside the United States, some tobacco forecasters expect domestic moves over the next two to three years that will squeeze out smaller manufacturers who today wield negligible market share. When asked to discuss how FDA regulation of the tobacco industry could benefit Philip Morris, Altria spokesman Steve Callahan reiterated that the company supported the legislation and says the FDA’s regulation would “create a level playing field.” FDA regulation “will create the same high standard for every manufacturer or importer in the USA,” he says.
One of the first regulatory moves the FDA made was to ban flavored cigarettes. Beginning in September 2009, tobacco companies were prohibited from manufacturing, shipping or selling flavored cigarettes, because they have been shown to be more popular among teen smokers.
The FDA has also taken a strong approach in regulating e-cigarette devices. It categorized e-cigarettes as drug-delivery devices, a move that effectively bans their sale; many of the devices are imports from foreign nations. In January, a U.S. district judge ruled that e-cigarette devices should be regulated and marketed like cigarettes. In the decision, the judge ruled that the FDA does not have the authority to treat the device as a drug device.
David Dean, vice president of sales and marketing for Star Scientific, says recent trends are “driving to where we are”—toward an involvement with modified-risk products. The company filed an application with the FDA to market smokeless products Ariva and Stonewall.
So far, the FDA has taken actions that affect very specific regulatory targets. In coming years, however, retailers may face a more comprehensive regulatory regime. In discussing the contradictory studies that examine the extent of convenience stores as a source of tobacco products among minors, Glantz says, “Even if the numbers are relatively low, I think you are still going to see efforts to disrupt the pointof- purchase sales.”
As the FDA adapts to its new role as regulator of the tobacco industry, retailers and industry experts predict additional federal steps to control the sale of tobacco products. Among the possible changes:
- Federally contracted underage stings
- Graphic designs of cancerous lungs on cigarette packages
- Potential ban on flavored cigars
- Ban on e-cigarettes
- Increased control of nicotine levels