Tobacco Innovation, Smokeless Competition Predicted
Distributors were advised to prepare for new product innovation from cigarette manufacturers and increased offerings and competition in the smokeless tobacco category during the AWMA REAL DEAL EXPO in Las Vegas, NV on Friday.
Tobacco analyst Bonnie Herzog, Citigroup Investment Research, predicted that major manufacturers will begin to take advantage of technology and soon roll out products aimed at reducing smokers’ health risks and respond to governmental pressures. She also said distributors should begin thinking about how to provide space for new smokeless offerings, some from major cigarette manufacturers.
"Innovation will be a much larger focus for ’06 and’07, including the majors," Herzog said. "Companies will begin using technology to create reduced risk products. I think the future is all about this.’
Moreover, Herzog suggested that distributors should watch for "a lot of new products and packaging," as cigarette companies increasingly diversify their product portfolios and offer additional tobacco-based products.
"The industry is not dead," she said. "There is still way to much money to be made and way too many people who enjoy tobacco."
In fact, Herzog contended that current industry fundamentals continue to improve for the major cigarette manufacturers, and that margins are continuing to expand. "Pricing power should lead to higher margins," she said, suggesting that a "modest price increase" of around 5% is probably in the cards as companies seek to maintain the price gap between premium and cheaper brands.
Herzog said she does not expect hefty state tax increases on tobacco this year, although California and Texas, which represent 16% of total cigarette consumers in the U.S., are considering excise tax hikes. Eleven states have proposed increasing taxes, although none have passed as yet.
Herzog predicted that smoking bans will continue, noting that 11 states and the District of Columbia require smoke-free workplaces, including restaurants and bars. But, she said, "smokers adapt, and so do the bars."
"We have no doubt that increased smoking regulations are the future," Herzog said. "And as consumers adjust to the changes, we believe the companies will have to adjust as well. Manufacturers will continue to be providing you with products and ways to make money."
