With many states passing smoking bans, more customers are turning to smokeless tobacco, and the sales figures from 2009 bear that out. According to Information Resources Inc., for the 52 weeks ended Dec. 27, 2009 total dollar sales for other tobacco products was $6.07 billion, up 14.6% from last year. Unit sales totaled 2.40 billion, up 13.8% from last year.
Looking ahead, “smokeless tobacco appears well positioned for another year of mid-single digit volume growth in 2010. This continued growth trend is motivating retailers to increase shelf space in order to make room for additional SKUs,” said David Bishop, managing partner at Balvor.
Smokeless Versus FDA
In a big win for the smokeless tobacco category, a U.S. District Court in January overturned the FDA tobacco regulation banning color advertising of smokeless products in retail stores and magazines. Also denied was a provision that would prevent smokeless tobacco manufacturers from making statements that their products are less harmful.
The court declined to offer a ruling on the regulation banning tobacco advertising near schools and playgrounds becasue the FDA must issue a final regulation on the proposal by March 22, meaning the way smokeless is marketed in convenience stores could still change at some point in 2010. For now, the court upheld its rule requiring 30% of the two display panels on a smokeless tobacco product to include updated warnings and color graphics depicting the health consequences of tobacco use, as well as the regulations that prohibit manufacturers from including a brand name or logo on merchandise, or from sponsoring certain events under a tobacco brand name.
The National Association of Tobacco Outlets (NATO) and others sent letters to the FDA in late February objecting to a possible plan to ban self-service displays for smokeless even in retail stores that only admit adults. The current rule bans self-service displays in most retail stores, but allows self-service displays in stores where “no person younger than 18 years of age is present, or permitted to enter at any time.”
States Versus Smokeless
In 2009, OTP tax increases were defeated or failed in 15 states while 17 others passed higher OTP taxes or changed the method of moist snuff taxation, according to NATO. Since the start of 2010, six states have already introduced bills to change OTP tax rates.
“We’ve seen that the rhetoric around how smokeless is taxed has increased since Altria acquired UST, and we should expect more of it in 2010 as states continue to look for additional monies to plug budget shortfalls,” Bishop said. “Retailers should understand that if they operate in a state that uses an ad valorem tax method and it were to convert to a weight-based method, this change would in effect help to close the price gaps between premium and sub-price value products. This in turn would also lead to possibly higher penny profits on sub-price value as the retail prices adjust upwards, which is key given the stronger growth in the lower price tiers.”
Snus or Lose
One ongoing trend expected to carry momentum into 2010 is snus. R.J. Reynolds, through its Camel brand, has been pushing sales as a smokeless subsegment to augment tobacco sales.
Swedish Match reported U.S. sales of snuff and snus stayed steady in the fourth quarter of 2009, with volumes almost unchanged from the year before and revenue down less than 1%. It noted operating margin for the fourth quarter improved to 24%, compared to 23.2% in the fourth quarter of 2008, mainly as a result of continued growth and improved profitability in snus and snuff.
Manufacturers are responding to the segment’s success. Altria Group Inc. plans to expand its Marlboro Snus smokeless tobacco nationwide by the end of March.
While snus continues to build distribution in the U.S., many manufacturers are still focused on building consumer awareness and trial, Bishop noted. “There are market niches where the product is doing quite well according to some retailers,” he added.