Analyst: City-Level Menthol Bans Not a Death Knell
NEW YORK — Come April 2018, San Francisco will become the first major city to prohibit the sale of menthol cigarettes after the Board of Supervisors voted in favor of measure to ban all flavored tobacco products earlier this month. However, it may not mean the beginning of the end of the menthol segment.
According to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC, San Francisco's vote is "a significant event but not a 'deal breaker' for the menthol category, in our opinion."
The Food and Drug Administration (FDA) prohibited the sale of flavored cigarettes as one of its first regulatory moves under the Family Smoking Prevention and Tobacco Act of 2009; however, the regulation did not include menthol. The agency has been reviewing menthol for several years, though no decision has been made at the federal level.
As Herzog pointed out, San Francisco's regulation goes further by banning all flavors — including menthol — in all tobacco products like cigarettes, cigars, smokeless tobacco, and electronic cigarettes and vapor products.
"To date, just a small handful of local jurisdictions have enacted, or are drafting legislation, to restrict menthol cigarette sales," Herzog said, adding Chicago, Berkeley, Calif., and New York currently enforce restrictions, although at a "much narrower in scope than San Francisco."
In addition, Minneapolis, the California towns of Oakland, Contra Costa, and Santa Clara are considering menthol bans.
"We believe the net negative impact for manufacturers will be limited since we expect many consumers will likely move their purchases online or cross border ultimately having the greatest negative impact on retailers," she said. "Importantly, we don't expect menthol bans to be widespread especially given possible legal options by the industry."
In response to the San Francisco legislation, the tobacco industry formed the "Let's be Real San Francisco" coalition in an effort to gather 20,000 signatures from voters by Aug. 7, to place a referendum question on the June 5, election ballot which would put the ban on hold, she explained.
"Ultimately, we think this goes the way of some of the minimum age restrictions that have been placed on the sale of tobacco products — consumers who want the product will still find a way to get it either by purchasing online, cross border, or on the black market. That said, the industry is most certainly watching this closely given the importance of menthol to the category," Herzog said, adding it is about 35 percent of total cigarette volume.
Herzog added that Wells Fargo Securities' retailer contacts are saying that menthol bans in more cities would be a negative for the category given the segment's relative size. However, they also recognize that consumers will likely seek other means to purchase the products.
"Our view is that absent a comprehensive ban at the federal level, we would expect very limited smoker attrition and volume pressure resulting in a very manageable risk for tobacco manufacturers," she added.