Don’t mistake speculation for hesitation. Un encumbe r e d b y months of beltway buzz surrounding a potential FDA ban, the nation’s largest cigarette manufacturers are hurtling forward with new menthol initiatives that suggest political and corporate confidence in this core tobacco staple.
Just months ago, Richmond, Va.-based Philip Morris USA launched its new Marlboro Skyline menthol and began test marketing Marlboro Special Brand in menthol in Michigan. “At the core, we believe menthol should remain a viable choice for the millions of adult smokers who currently prefer [it,]” says PM USA spokesman Steve Callahan.
Last March, Winston-Salem, N.C.-based R.J. Reynolds Tobacco Co. (RJR) added a menthol capsule to its Camel menthol cigarettes to deliver an extra burst of the flavor—based on the success of its Camel Crush cigarettes, which feature a capsule that turns the cigarette from nonmenthol to menthol. “It was driven by the opportunity,” company spokesman David Howard says of the additional menthol burst. “The menthol segment is a growing segment in cigarettes.”
One effort that could point to something amiss with menthol came from Greensboro, N.C.-based Lorillard Tobacco Co., the biggest menthol-cigarette shareholder. Late last year, the company launched a nonmenthol Newport cigarette. But Lorillard also had tried a Newport nonmenthol 10 years ago, before the menthol speculation. Bob Bannon, Lorillard director of investor relations, tells CSP that with 70% of the cigarette industry coming from nonmenthol, it was “an opportunistic move, designed to leverage Newport’s strong brand equity among adult smokers into this large market segment.”
Other recent efforts by Lorillard more closely align with the “business as usual” theme surrounding menthol, including the launch of a website, www.understandingmenthol. com, which “informs readers as to the FDA’s power to restrict or ban menthol cigarettes, and explains the compelling scientific evidence showing that menthol cigarettes should be treated no differently than nonmenthol cigarettes,” according to Bannon. The company also raised the price of its Newport menthol cigarettes (but not nonmenthols) by 1.5% late last year.
Ban Expectations?
The FDA’s Tobacco Product Scientific Advisory Committee (TPSAC) is required to produce a report to the FDA on its menthol findings by mid- to late March. “After that, FDA will review the committee recommendations along with any other relevant data and make a decision on the totality of the science,” says agency spokesperson Kathleen Quinn. “I do not have a time frame that is more specific other than the time the report is due to FDA.”
The “big three” cigarette producers shared their thoughts on that science, all reaching the same conclusion. As Lorillard’s Bannon puts it: “The most reliable scientific tools overwhelmingly show that menthol cigarettes have the same health effects as nonmenthol cigarettes.”
He thus plays down the likelihood of a ban. “We believe that if TPSAC adheres to these principles, it will also conclude that menthol and nonmenthol cigarettes do not differ in terms of public health impacts,” he says. A CSP Daily News poll found 77.3% of participating retailers, suppliers and manufacturers agreed that a ban is unlikely, with most (35.8%) saying the reason is that menthol isn’t more harmful than nonmenthol. (See sidebar, above.)
What if?
But that’s not to say a ban, or onerous restrictions, won’t happen. And the biggest concern facing all stakeholders, should a ban occur, is a potential black market.
At a November TPSAC meeting, the majority of speakers—including representatives for NACS, Lorillard, and even the Center for Regulatory Effectiveness and the American Council on Science and Health—testified to that effect in an open forum. Testimony included discussion on harmful effects of a black market, including the inability to enforce the “We Card” program; lack of safe standards in manufacturing; potential ties to organized crime and even terrorism; and the loss of tax dollars.
Research from New York-based Fitch Ratings estimates that in the most extreme case, if menthol cigarette users all sought illegal cigarette replacements, it could mean a loss of $4.3 billion in annual revenue, and the federal government would see a $4-billion drop in excise tax revenues. A legitimized black market also could mean that other smokers will use it to bypass taxed cigarette sources.
Ban Victims
Lyle Beckwith, senior vice president of government relations for NACS, said in his comments at the TPSAC meeting that so far tobacco prod-ucts have gone to the black market because of price. “I firmly believe that if there were to be a ban on menthol, that would be the spark that the black market in tobacco needs to push it into a more burgeoning problem for our country,” he said. “My membership loses sales when people go to the black market.”
According to data from Nielsen Scantrack, presented at the meeting by Brett Loomis of Research Triangle Park, N.C.-based RTI International, c-stores account for 209 million packs of cigarettes per week, with 27% of that coming from menthol. (By contrast, food/drug/mass sold 33 million packs per week, with 25.7% menthol.)
Of course, big tobacco would also be hit hard if the legal menthol business disappeared or went to a black market. Christopher Collins, an associate at Fitch Ratings, says Lorillard would be in the “worst position,” with 87.5% of its 2009 cigarette volume coming from Newport menthol cigarettes. He points out, however, that “smokers tend to be brand loyal,” which bodes well for Newport’s introduction of a nonmenthol version.
Reynolds American Inc., RJR’s holding company, would also take a hit, with one-sixth of the company’s cigarette volume coming from menthol versions of Camel, Salem and Kool, according to Collins. However, the company’s more diversified nature, including its share in nonmenthol cigarettes and smokeless tobacco, means it would be less affected than Lorillard, he says.
While Altria’s PM USA gets 10% of its volume from Marlboro Menthol cigarettes, “it’s not a premiumpositioned product,” Collins says. The company generates the lion’s share of its revenues from its nonmenthol portfolio, buoyed by Marlboro, and strong OTP holdings headlined by UST Inc.’s smokeless and John Middleton’s cigar business. In addition to a potential black market, a menthol ban could mean other changed consumer behaviors that would affect retailers and tobacco companies, according to research from Fitch:
Nonmenthol cigarette trial. Ex-menthol smokers might switch to nonmenthol cigarettes, which would simply mean a shift in volumes.
Production of large machinerolled menthol cigars. Paralleling what happened with the flavoredcigarette ban, production might shift from menthol cigarettes to small menthol-flavored, filtered cigars made with a tobacco wrap.
Stockpiling. If a ban is imposed, it could take a year or more to enforce. Meanwhile, consumers who smoke menthol would likely build up their personal inventories, raising volume growth in the interim. “The question is, how much inventory would be available in the short time you could stock up?” says Wesley E. Moultrie II, managing director for Fitch.
Larry Hauck, director of marketing for Saginaw, Mich.-based Garb-Ko Inc., says potential stockpiling could mean a short-term boost for menthol cigarettes. However, he says, “With the high cost of cigarettes, someone going out and buying a year’s supply of cigarettes is, I think, prohibitive.” Stockpiling for a year or more also wouldn’t be likely because the cigarettes wouldn’t be as fresh, he says.
Consistent with Nielsen numbers on c-stores and menthol, Hauck says menthol accounts for 25% to 30% of the cigarette business at his company’s 86 7-Eleven stores. While he doesn’t predict a ban in the near future, he suspects “someday it will happen.”
But if it does, he says, a number of new menthol-based products could already be circulating in the market or at least be in the offing, including flavored tips, lozenges or menthol extracts on the filter. “I think it would come to market really fast,” he says.
What’s next?
With the TPSAC report due by the end of the first quarter, the ball will quickly move to the FDA. But a final decision is not likely to be the final word. If the FDA issues an outright ban or even severe sale restrictions, tobacco companies likely would pursue a legal challenge.
If ultimately an FDA ban is upheld, it would probably take at least a year to put into effect, as outlined in H.R. 1256, the Family Smoking Prevention and Tobacco Control Act (although an earlier date could be imposed if considered necessary for the protection of public health): “Such date or dates shall be established so as to minimize, consistent with the public health, economic loss to, and disruption or dislocation of, domestic and international trade.”
Meanwhile, Callahan of PM USA and Howard of RJR suggest retailers and wholesalers also get involved in public comments on the FDA’s website (www.fda.gov). “Make sure … voices on this matter are heard,” Howard says.
Other Potential FDA Actions
Most industry stakeholders say a menthol ban is unlikely, asserting the science doesn’t justify it. However, New York-based Fitch Ratings suggests that the FDA could take other steps when the Tobacco Products Scientific Advisory Committee (TPSAC) reports in March:
- Further study. The FDA might require further data be collected and analyzed to answer the menthol questions posed by TPSAC. “If a new study comes out and finds menthol is one of the largest reasons for youth acceptance of smoking,” Collins says, “the FDA could always come back and say, ‘You know what? We’re going to ban menthol.’ So that risk is always out there.”
- Marketing restrictions. Marketing restrictions could be placed on menthol cigarettes in the form of additional warnings, more restrictive placement and in-store display regulations.
- Partial or phased ban. Chris Collins of Fitch explains that younger menthol-cigarette smokers tend to prefer cigarettes with lower levels of menthol. It is believed that those cigarettes have a “smoother flavor,” because the menthol masks the harshness of tobacco without overwhelming the smoker with menthol taste. Because of that, another response might be to put a minimum menthol requirement in place to deter them from smoking. While that might seem counterintuitive and hasn’t been brought up in TPSAC discussions, Collins says it has been discussed in the financial community.
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