By David Bennett, Senior Editor
As much attention has been paid to new regulatory policies targeting tobacco products, the cigar segment has been relatively immune to federal lawmakers’ sharpest knives. That’s good news for many convenience retailers that are often busy fending off local and state legislation.
One example of how cigar sales are at risk is last year’s sweeping tobacco tax package Pennsylvania lawmakers passed that among other mandates, increased the price per-pack of cigarettes by $1. The cigarette tax increase that took effect last August makes Pennsylvania’s $2.60 levy the 10th highest in the nation. New Jersey’s $2.70 per pack is ninth.
In Philadelphia, the tax now is $4.60 per pack, which includes a $2 surcharge added two years ago.
The combined state and local tax makes Philadelphia’s rate the third highest among the nation’s big cities, after Chicago’s $6.16 per pack and New York’s $5.85. In addition, the new law will impose a floor-stocks tax on wholesalers and retailers that have in inventory cigarettes, tobacco products, electronic cigarettes and e-liquids.
The only tobacco segment not affected by last year’s tobacco mandates was cigars.
Alex Baloga, president and CEO of the Pennsylvania Food Merchants Association, said though Pennsylvania’s new tobacco law omits for now cigars, it is indirectly impacting cigar sales as Pennsylvania residents continue to seek cheaper tobacco products across state lines.
“As Pennsylvania residents search elsewhere for less costly tobacco products, it affects the whole basket including cigars,” said Baloga.
Pennsylvania does tax little cigars, part of a state law passed in 2009.
This past July, the U.S. Food & Drug Administration (FDA) announced it will be unveiling a new comprehensive tobacco policy. As part of the policy beginning in 2018, the FDA will require premium cigar manufacturers and distributors to label their products with mandatory health warning statements similar to the wording of the statements already required on cigarette packaging.
In addition, the FDA will delay the deadline for substantial equivalence from May 2018 until to Aug. 8, 2021. By definition, substantial equivalence is a pathway to seek permission to market a new tobacco product that involves comparing the new tobacco product to a legally-marketed predicate product.
While the FDA’s Center for Tobacco Products (CTP) has announced it will issue much more detailed substantial equivalence in the future, it remains unclear when that guidance will come as the agency announced no specific dates other than the 2021 date and an Aug. 8, 2022 date for e-cigarettes and vapor products to submit for premarket tobacco product application (PMTA).
The primary point of debate focuses on how consumers use cigars, the potential health effects of smoking cigars and how cigars should be tested for harmful and potentially harmful constituents (HPHCs).
Darryl Jayson, chief operating officer for the Tobacco Merchants Association in Princeton, N.J., predicts mandated warning labels on cigars “will not have any profound effect on cigar/cigarillo sales at convenience stores.” However, other proposed changes might.
“As cigars are now ‘deemed,’ meaning that, under the authority of the FDA-CTP, the CTP can issue any new regulations concerning the manufacture, sale and marketing of cigars,” Jayson said. “In the deeming regulations, the CTP did note that a prohibition on flavored cigars could occur in the future.”
For now, the CTP announcement for facilitating a detailed substantial equivalence policy, accompanied by the deadline extension that is a few years away, provides suppliers and retailers time to better focus on the application process as a whole.
“As the CTP extended the substantial equivalence deadline to August 2021, cigar makers are no longer faced with an August 2018 mandate to submit their paperwork,” said Jayson. “This should create a level of normalcy for the cigar market.”
Though cigars aren’t under an intense microscope in terms of federal regulation, local lawmakers are chipping away at all tobacco categories, depending where c-stores operate. In New England and other parts of the East Coast, c-stores such as Cumberland Farms are inundated with local tobacco legislation—and cigars aren’t immune.
Stephanie Martone, category manager-OTP for Cumberland Farms, said sales of little cigars and cigarillos have tapered off some this year at the Westborough, Mass.-based convenience chain primarily because of the litany of local ordinances targeting not only cigars, but other tobacco products (OTP).
“Overall, little cigars are not as successful as they have been in years past,” Martone said. “Due to legislation in many of the towns where we operate and states with high taxes there is not enough of a gap between little cigar pricing and discount brand cigarettes.”
Cumberland Farms operates more than 560 stores primarily in New York, New England and Florida.
Like other convenience retailers, the Massachusetts-based chain is diligent when it comes to keeping up with proposed tobacco initiatives and stays in constant communication with local officials. However, the volume of regulations being passed is hard to track at times.
“Because we operate a majority of our stores in Massachusetts we have seen quite a bit of legislation on cigars coming through,” said Martone. “Much of this started a few years ago and continues to grow with minimum pricing and flavor restrictions.
Recently, we have seen more coming out of towns in Rhode Island as well. I would fully expect this will continue to grow as boards consider these regulations.”
Another convenience community that does big cigar business, but is shielded mostly from the local and state tobacco ordinances that increasingly impact most c-store operations is the U.S. military’s retail market.
Sheila Whitfield, senior buyer for the Army & Air Force Exchange Service (Exchange), purchases tobacco products for 495 store locations nationwide and abroad. She explained that so far in 2017, the Exchange has enjoyed a robust OTP category, including filtered cigars, which right now is limited in terms of selection.
“We only have one filtered cigar SKU in the assortment.” Whitfield said. “The filtered cigar brand in the assortment is the Swisher Sweets Little Cigar. Sales on that SKU are up 17% over last year and units are up 8%.”
Moving forward, filtered cigars could become a staple in the Exchange’s OTP sets.
“We are seeing the momentum in the industry for filtered cigars growing in 2018,” said Whitfield. “This will be an opportunity to expand on our assortment.”
For Martone, cigars still remain a robust opportunity for Cumberland Farms, despite the shadow of local and state regulatory policies. To gain more traction, the chain does promotions to capture consumer interest.
“Promotions and limited times offers (LTOs) are very helpful throughout the year,” said Martone. “The LTOs help drive sales as customers come in looking for the newest flavor. Buy- downs and pass-through promotions help along the way with getting customers to come in and see the next deal. We have had quite a bit of success with the different LTO flavors. Customers are definitely looking for the next, new exciting flavor.”