An Abundance of Uncertainty

With the tobacco category making up a large portion of the convenience channel’s business, a lot of focus has been placed on what the future of tobacco holds.

At the Tobacco Merchants Association’s (TMA) Centennial Celebration & Conference, which was held May 18–20 in Williamsburg, Va., industry players broke down the category’s possibilities by segment. Although cigarette volume has been on a slow and steady decline, there are bright spots in the tobacco category.

CIGARS

“It’s been an interesting few years to be in the cigar industry,” shared Joe Augustus, senior vice president of external affairs at Swisher International.

Swisher is “cautiously optimistic” moving forward, he said. For example, there has been some stability in the marketplace for cigar products, and consumer preference changes have forced cigar manufacturers to adapt to the evolving landscape. In addition, state economies have begun to recover, so legislatures are relying less on tobacco excise tax increases as a revenue booster.

That is not to say the cigar industry is worry-free. The Food and Drug Administration’s (FDA) deeming regulation looms over the industry, according to Augustus. Of particular concern for cigars is the proposed fee structure and 2007 predicate date.

SMOKELESS TOBACCO

As for smokeless tobacco, future potential may lie in modified risk. In August, Swedish Match North America became the first company to submit to the FDA a Modified Risk Tobacco Product application for its General snus line. The agency’s Tobacco Products Scientific Advisory Committee (TPSAC) reviewed the application in April and while the FDA has not issued a final decision, Jim Solyst, director of federal government affairs at Swedish Match, said the application alone has increased awareness for the snus segment.

Time will tell what impact this awareness — which is acting as an education tool about snus to many U.S. consumers — will have on the product. Swedish Match believes the attention “will certainly impact our sales in the U.S.,” Solyst told TMA Conference attendees. “But perhaps the longer-term message will be on harm reduction.”

E-VAPOR PRODUCTS

The FDA’s deeming regulation also takes center stage with e-vapor products. John Wiesehan Jr., CEO of Mistic-Ballantyne Brands, said what the agency decides to do is anyone’s guess. Two things are evident, though: in the past 24 months, vapor technology has changed rapidly and distribution has changed along with it.

“We’ve seen the e-vapor product go from a disposable cigalike to now that being one of the smallest product segments at retail,” Wiesehan explained. “Since August, the industry took a left turn all the way to personal vaporizers.” E-vapor products will continue in that direction, he believes, as consumers look to personalize flavors and nicotine levels.

Technology will continue to evolve, Wiesehan predicts. “We haven’t seen the best of the best yet. We are still working on it,” he said.

HARM REDUCTION

One main focus of tobacco moving forward is the concept of harm reduction. Science, technology, innovation and new players entering the tobacco industry are all taking key roles in the new era of harm reduction, according to Scott Ballin, director of the Alliance for Health, Economic and Agriculture Development.

“Today, it is less important who made the product [and more important] what the product is,” Ballin pointed out.

As an advocate of harm reduction, he explained that the idea of engagement and dialogue around the continuum of risk is “slowly catching fire” at many venues and various levels — including the Food and Drug Administration and organizations like TMA, which has made harm reduction a major component of its annual conference for the past few years.

According to Clive Bates, founder of Counterfactual Consulting, there is “huge public health potential by 2040” around harm reduction if there is:

• 25 years of innovation;
• Regulation and policy that enhances the value proposition;
• True and fair presentation of risk and science;
• Increased pressure on smoking; and
• New accountability in the public health community.

NEXT-GENERATION PRODUCTS

While no one has a crystal ball, leading tobacco analysts tried to shed some light on e-vapor and its continuing role in the space during the TMA Conference.

Vivien Azer, director and senior research analyst at Cowen & Co., pointed out she is not as bullish on the segment as some of her colleagues. “The problem is there is very good trial, but very little repeat,” she said. “If you don’t have adoption, does it point to a disruptive [product]?”

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, said she “adamantly believes the technology is going to have to continue to improve across the board because we’re simply not there yet.”

Still, Herzog believes e-vapor consumption will surpass combustible cigarette consumption in the next decade — with 2017–2018 emerging as the tipping year.

Michael Lavery, director and senior analyst at CLSA, explained that the e-cigarette segment represents a different competitive landscape from traditional cigarettes. Traditional cigarettes have high brand equity, high brand loyalty and high pricing, while on the e-cigarette side, there are unknown players, unknown brands and lower price points.