Generic discount cigarette

Nationwide dsn report - The price wars that major tobacco companies instigated (often internally) in mid-1993 disrupted many discount chains, but now seem to have settled down to a new price structure.

The sudden drop in price of some of the best-known brands in the industry, most notably Marlboro and Newport, hammered same store sales results at Sam's Club, Wal-Mart officials noted in a fall 1994 analysts conference, and cut margins in an already profit-poor category.

The cuts were brought on primarily by the runaway success of generic and budget-brand products introduced by the leading manufacturers and some of their smaller competitors. With many states adding sin taxes to the price of cigarettes, the injection of quality into budget products quickly found favor with the formerly brand-loyal smoking public, leading to steep declines for many top brands. Many of those brands were cannibalized by sister divisions that could undercut the top brands with nearly identical products. They were able to accomplish this because the budget products got little or no advertising and promotional budgets.

The new price points seem to have been assimilated by both manufacturers and retailers, and Sam's noted that its return to positive same store sales results during the fourth quarter was a reflection, in part, of that digestion.

Despite a continuing set of anti-smoking offensives (New York City, for instance, recently banned smoking in almost all restaurants and OSHA is considering regulations that would ban smoking in all public buildings nationwide), the number of smokers, on the decline for three decades, seems to have stabilized at a little over a quarter (26%) of the adult population, according to U.S. government figures. That rate has barely declined over the past three years.

One result of the market stabilization is the entry of Star Tobacco of Petersburg, Va., the first new branded cigarette producer in at least 40 years. A contract manufacturer known mainly for Swisher Sweet mini-cigars for the Swisher company, Star Tobbacco recently introduced Gunsmoke, in both menthol and regular. The rollout of the limited-distribution, deep-discount brand follows a summer test with California Safeway stores.

According to ceo Sam Sears, Star will follow with a mass merchant product, to be introduced at the Candy Wholesalers Show in New Orleans this month.

The price trend in the industry is clear, Sears said. "We came out at a price midway between the top brands and generic, but without the market clout of some of the bigger companies, we had to shift back to the generic price level."

Priced at under $10 for a carton in some markets, Sears noted that consumers are getting "a top quality product. We use only pure tobacco, with no reconstitutes. The packaging is upscale, so we compare well with other deep discount brands."

The pricing strategy has cut into Star's profit margins, but Sears noted that "we don't need the kind of margin that some of our competitors have been making. We're pretty happy with the niche we've found."

While Gunsmoke is meant to be a niche product, meaning it's not available to mass merchants and some other distribution channels, its follow-up will be. "That upcoming product will have `universal appeal,' he said. "The packaging and advertising are aimed at a broader spectrum of the consumer market."

The ongoing morass of often conflicting regulations concerning smoking has given a boost to smokeless tobaccos, as well as a well-publicized return to premium cigars and pipe-smoking. Many discounters, like North Carolina-based Rose's Stores, have moved snuff and chewing tobacco out from behind glass to prime cash register real estate. Rose's has even upped the ante somewhat, merchandising about 20 skus on a four-way fixture in the power aisle near the registers, along with other high-turn impulse items such as cold drinks, jerkies. prepared meats and other snacks.

The total U.S. market for tobacco products is estimated at $48 billion, with discounters accounting for a relatively small percentage of that total However, discounters' market share appears to be rising. One reason: Discounters are adopting convenience store businesses, like cold drinks, prepared food, magazines, comic books and trading cards that shift C-store consumers toward discount outlets. That gives discounters, which often undersell convenience stores by $2 or so per carton of cigarettes, a shot at changing the shopping patterns of many smokers.

The growing wave of legislation aimed at curtailing and limiting public smoking has, of course, increasingly impacted discount stores. Nearly all chains are now smoke-free, with the exception, at times, of snack bars, and many have ceased selling individual packs of cigarettes, or in the case of Clover and WalMart's Canadian stores, have stopped selling tobacco altogether.

The Attorneys General of about 20 states recently urged discounters and other retailers (and intend to introduce statutes to compel them) to adopt more stringent controls to keep minors from illegally purchasing tobacco. These measures include the removal of vending machines, demanding photo identification from shoppers who appear to be under 25, and the use of secret shoppers to test for employee compliance with the identification process. Many discounters and grocery chains have already adopted similar approaches.

Help may be on the way for beleaguered smokers, however. Three major tobacco companies are testing various approaches to smokeless cigarettes, aimed at entirely eliminating second-hand smoke, which is the underlying basis of most anti-smokin legislation.

RJR last year announced a new product, Eclipse, which superheats tobacco rather than burns it, resulting in a smokeless smoke. Other cigarette manufacturers are looking at an electric cigarette, The Wall Street Journal reported, that would superheat tobacco, then inject a puff of tobacco gases, not smoke, into the smoker's mouth. None of these products are likely to see a store shelf for at least a year or two, however, and a previous approach, RJR's Premier, not only tasted awful, but ran afoul of regulators who deemed it a "drug delivery device" and effectively killed it.

This time around, though, the tobacco companies will be facing a far friendlier Congress, one dominated by old-line Republicans from tobacco-raising states and new Republicans opposed to almost all regulation on ideological grounds. California Democrat Henry Waxman, a thorn in the side of the tobacco industry, has lost his chairmanship of the high-profile sub-committee on Health and the Environment, and his successor has already said that Waxman's ongoing investigation of the tobacco industry is dead in the water.