Author: Staff Writer

  • Cigarette Sales Up in South Korea

    Cigarette Sales Up in South Korea

    KT&G cigarettes sold in the domestic market
    Photo: KT&G

    Sales of cigarettes in South Korea rose 3.8 percent in the first half of 2020, according to data compiled by the Ministry of Economy and Finance.
     
    South Korean smokers purchased 34.8 billion cigarettes from January until June, compared with 33.4 billion cigarettes in the same period last year.
     
    Meanwhile, sales of heat-not-burn tobacco products fell 6.6 percent to 180 million units in the first half of 2020. Sales of e-cigarettes plunged 80.3 percent to 1.2 million pods during the period as the government strongly advised people against vaping.
     
    The longer-term trend of tobacco sales remains firmly downward. Compared with the first half of 2014, cigarette sales declined 14.7 percent.
     
    In January 2015, South Korea increased the price of cigarettes by 80 percent to KRW4,500 ($3.76). In 2016, it required tobacco companies to place graphic images depicting the harmful effects of smoking on cigarette packs.

  • JT Requests Permission to Raise Prices

    JT Requests Permission to Raise Prices

    Japenese smokers congregating in an outdoor smoking area in Tokyo
    Photo: Colleen Williams

    Japan Tobacco (JT) has applied to the Ministry of Finance for approval to amend the retail prices of its tobacco products in Japan in conjunction with the planned excise tax increase on Oct. 1, 2020, and the increase of excise tax on tobacco vapor products.

    The company has applied for the retail price amendment for a total of 224 products, including 136 cigarette products, 16 cigarillo products, three pipe tobacco products, three cut tobacco products, 18 snuff tobacco products and 48 tobacco vapor products.

    The proposed retail prices will take effect on Oct. 1, 2020, subject to approval from the Ministry of Finance.

  • U.S. Clears Limbe Leaf Imports From Malawi

    U.S. Clears Limbe Leaf Imports From Malawi

    Photo: Taco Tuinstra

    U.S. Customs and Border Protection (CBP) has cleared tobacco imports from Malawi by Limbe Leaf Tobacco Co.

    As of July 31, tobacco imported from Limbe Leaf is again admissible at all U.S. ports of entry. CBP previously denied these tobacco imports entry into the United States based on suspicion that they were produced using forced labor.

    CBP lifted its ban based on a rigorous evaluation of Limbe Leaf’s social compliance program and efforts to identify and minimize the risks of forced labor from its supply chain. According to the agency, these actions produced evidence that sufficiently supports the company’s claims that tobacco from its farms is not produced and harvested using forced labor.

    Earlier this year, CBP cleared Malawi tobacco sold by Alliance One International for entry into the U.S.

  • InterTabac Adapts to Pandemic

    InterTabac Adapts to Pandemic

    Intertabac before the coronavirus pandemic
    Photo: Messe Dortmund

    Due to the coronavirus pandemic, the InterTabac and InterSupply trade fairs will take place in the form of an “ITS Hub” this year. Scheduled for Nov. 3-4, 2020, the event will combine elements of a physical event and virtual platform.

    “Our event brings together the best of both worlds, reflecting the diversity of the tobacco industry and tobacco production, and merging the advantages of a conventional trade fair and an online event,” said Sabine Loos, managing director of Westfalenhallen Unternehmensgruppe.

    According to Loos, the event will feature physical zones where companies can present their products and then move to separate “communication islands” for further discussions or product samples. The physical areas have been designed with partition walls and adequate space to allow for social distancing. In addition, the event will have a stage and a video spot connecting the real world and the digital world.

    The central point of contact on the Internet is a digital platform on which visitors aged 18 and over will be able to register and follow the program on site.

    “When it comes to the live streaming of the on-stage program and individual product presentations—complete with simultaneous interpreting—we’ll be using tools to enable direct interaction, ensuring everyone has as ‘normal’ a trade fair experience as possible,” said Loos.

    “We are also currently preparing offerings such as tobacco product samples that exhibitors and partner organizations will be able to send to verified users’ homes,” said Loos. “This means that one of the signature aspects of InterTabac and InterSupply—smelling, tasting and experiencing the various products—will be preserved even during the current pandemic.”

    Access to the online content will be free of charge.

    The next regular-format InterTabac and InterSupply shows are scheduled for Sept. 16-18, 2021.

  • For the Long Haul

    For the Long Haul

    Photo courtesy of VCF

    Despite declining sales and considerable regulatory pressure, smokers are likely to still enjoy cigars 100 years from now.

    By George Gay

    It is instructive to read what the U.S. Centers for Disease Control and Prevention (CDC) says about the first report of the U.S. Surgeon General’s Advisory Committee on Smoking and Health, which was published in 1964. According to the CDC’s website, the committee concluded that cigarette smoking [my emphasis] was a cause of lung cancer and laryngeal cancer in men, a probable cause of lung cancer in women and the most important cause of chronic bronchitis. And the CDC goes on to say, in the next sentence, “The release of the report was the first in a series of steps, still being taken more than 40 years later, to diminish the impact of tobacco use [my emphasis] on the health of the American people.”

    It is noticeable how the CDC’s piece glides effortlessly from cigarette smoking, said to be the proven cause of these diseases, to the more general tobacco use. Clearly, since no distinction is being made between cigarette smoking and tobacco use, which could include, for instance, the consumption of snus, there was never any hope that regulators and the anti-tobacco community were going to recognize the more nuanced divide that separates cigarette smoking and cigar smoking.

    It cannot be denied, however, that there is a world of difference between cigars and cigarettes and the way in which they are smoked, something that is given tacit recognition in many countries where the two products are separated by definitions and tax levels. Cigars and cigarettes are produced largely from different materials in different ways, so it is not surprising that they don’t look alike, they don’t taste or smell alike and they are consumed differently, including, in respect of cigars, less frequently. Additionally, cigars have a different, more limited consumer profile to that of cigarettes, with the former being enjoyed mainly by older men.

    And while cigarette smoking is a habit, some say an addiction, cigar smoking can reasonably be seen as one of life’s simple pleasures, verging on a hobby among some people. Fred Vandermarliere, the CEO of VCF (Vandermarliere Cigar Family), which owns owners of J. Cortes and Oliva Cigars, said in an email exchange that taking an hour out of a day to smoke a cigar alone or with friends had the effect of clearing his head—it was a type of destressing that was similar to, though not the same as, the relaxation he enjoyed while cycling. But he said that cigar smoking, like all indulgences, should be enjoyed in moderation. “Don’t smoke, but enjoy,” he added.

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    Lopped in with cigarettes

    The case of mistaken identity that has seen cigars bracketed with cigarettes has been a major obstacle for the cigar business because it has meant that, in large part, cigars have suffered at the hands of regulations developed with cigarettes in mind. In the U.K., where, according to Scott Vines, the managing director of Tor Imports, regulation has banned the display of tobacco products in all shops except the country’s 120 specialist tobacconists, there has been a big reduction in stores stocking handmade cigars (HMCs). This is unsurprising. You don’t have to be an expert to realize that a business that relies partly on regularly offering new products and limited editions, as the cigar business does, needs more retail exposure than is the case with cigarettes.

    But all is not lost. Vines said his company, as part of “the ongoing battle,” lobbied the government via its industry body, the Imported Tobacco Products Advisory Council, and had gained some notable exemptions, such as that concerning what otherwise would have seen standardized packaging applied to larger cigars. This exemption, though seemingly insignificant, is seen as being a very important one for the handmade cigar community. As Vandermarliere pointed out, cigars comprise a niche product with low volumes but high numbers of formats, which means that the introduction of government-mandated pack changes and track-and-trace requirements, for instance, are more detrimental in respect of cigars than in the case of cigarettes, where higher volumes help spread the costs of such changes.

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    For Vines, with sales concentrated in the U.K., a huge hurdle is provided by a system of yearly duty increases that has pushed U.K. cigar taxes to the highest level in Europe. High taxes inevitably mean high retail prices and, in this case, an increase in consumers buying through the websites of companies based in countries with much lower taxes and retail prices. Purchases from Belgium, Germany, the Netherlands, Spain, Switzerland and the U.S. are said to make up most of this trade, which some estimates put at more than 30 percent of the U.K. market.

    Given these issues, it’s not surprising that cigar volumes are declining in the U.K., though much of this decline is occurring in respect of sales of machine-made cigars (MMCs), while sales of HMCs are said to be “holding up.” Along with the retail-display restrictions and increases in taxation, downward pressure on cigar sales has been created too by the country’s system of high product-registration costs and, especially, the 2007 introduction of a ban on smoking in public places.

    Partly because of this fall in volume, but also because of a switch to cigarillos from larger vitolas [Cuban formats], the value of cigar sales in the U.K. is also decreasing, though this fall in value has been partly offset by the yearly increases in duty, which inflate sales prices. Now, about 70 percent of all cigars smoked in the U.K. are cigarillos, which sell at a lower retail price than do HMCs and larger MMCs.

    Declining volume sales were reported also by J. Cortes, which operates around the world but whose main markets are the U.S., France, Spain, Belgium, Italy and the Netherlands, though Vandermarliere also made the point that sales of premium HMCs were fairly stable while those of other cigars were declining. In part, Vandermarliere said, the decline was down to the cigar industry’s tobacco heritage, which meant that it attracted government regulations in the form of smoking restrictions, for instance. But he suggested that the industry was partly to blame for government interference because in producing some products that looked similar to cigarettes it was blurring the cigar/cigarette distinctions.

    VCF’s factory in Belgium

    Evolving preferences

    Whether the emergence of such products could be justified on the grounds of “consumer demand” is debatable, but it is indisputable that cigar-consumer preferences are always evolving, something else that distinguishes cigar smokers from most cigarette smokers but aligns them with consumers of, say, fine food and wines. Vandermarliere said that, in general, though with the exception of those in the U.S., consumers used to know only about Cuban cigars—as they used to know only about French wines. But preferences and tastes had expanded so as to appreciate the special qualities of cigars from other sources. And he gave as an example Nicaragua Fantastic puros [cigars], made by Oliva Cigars, which was acquired by J. Cortes in 2016 and which propelled the U.S. from almost nowhere to the No. 1 spot on the company’s list of markets.

    Vines painted a similar picture when turning his attention to the evolution of the U.K. market. Alongside the switch that had occurred to smaller MMCs, the HMC market had undergone a radical shift in recent years. About 90 percent to 95 percent of the large cigars sold in the U.K. 10–15 years ago had been of Cuban origin, with the remainder being accounted for by all the New World cigar-making countries combined. That had changed considerably with Cuban-origin products now accounting for about 65 percent to 70 percent of the market and New World cigars growing share every year. Indeed, away from London, the share of New World cigars is even higher, with some areas having a 50-50 split. This change is said to have been fueled partly by a consumer desire for new cigar experiences, including the different flavor profiles offered by products from countries such as Nicaragua, the Dominican Republic, Honduras and Mexico, and partly by importers improving the range of New World cigars on offer in the U.K.

    To help prevent the spread of Covid-19, VCF equipped its employees with these stylish masks.

    Coping with Covid

    The question arises, of course, as to what effects the Covid-19 pandemic has had on supplies from such origins and, indeed, on sales in consuming countries. With factories in Sri Lanka, the Dominican Republic, Belgium, Nicaragua and Miami, VCF was bound to be affected by the Covid-19 pandemic, and so it was, but the level of disruption varied hugely—from having to close its Sri Lanka facility for five weeks, during which time workers continued to be paid, to only minor issues in the Dominican Republic. On the retail side, while tobacco was seen as a necessary product in almost all markets and was therefore available through general stores, a lot of markets saw the closure of specialized shops, which put downward pressure on sales. And this downward pressure only added to issues that had been encountered in China and Hong Kong since the beginning of the year. In the U.S., however, many consumers switched to online sales, and Vandermarliere was confident that his company would easily weather the Covid-19 storm. Certainly, he said, by being as flexible and agile as possible, and by keeping in close contact with and protecting its staff, VCF so far had been able to continue delivering cigars.

    Meanwhile, Vines reported that, along with other businesses classed as nonessential, Tor Imports had had to adapt rapidly to continue trading in “any way considered close to normal.” “Tor Imports took the decision not to furlough any of its workforce but instead work with our customers [retail] even more closely to help deliver the same levels of customer service as prior to these strangest of times,” he said. This meant the company had had to change the way it managed its workforce, with the office and warehouse being operated on a skeleton-staff rota to ensure staff safety and the rest of its people working from home. This led to the discovery of new ways of working, such as with Zoom calls, and an improvement in internal and external communications.

    Given this, it is possibly not surprising that Tor Imports seems to have weathered the pandemic rather well, but I hardly expected Vines, in answer to a question, to say that the company had done “remarkably well!” It had delivered above-average sales, he said, partly because customers geared up with a solid online offering had positively thrived during a lockdown that had coincided with unusually good weather for the U.K., allowing many consumers working from home to enjoy cigars.

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    It is not surprising that Vines takes a positive view of the future. After all, if you can conjure increased average cigar sales during a pandemic that causes lockdowns around the world, anything is possible. And one of the things that came into its own during the lockdown and that will be retained is the virtual cigar event. Such events, said Vines, had been a huge success, allowing cigar manufacturers to take part in multiple events in the same week without having to travel huge distances.

    But another reason for confidence, perhaps, is that Tor Imports has added a second string to its bow. It has its own brand of cigars, Charatan, which it bought from British American Tobacco in 2018 and which is made by Joya de Nicaragua. Expanding distribution of Charatan cigars outside the U.K., coupled with that of Charatan Pipe tobacco, which is already available in Switzerland and Norway, is said to be a key part of the company’s strategy.

    Vandermarliere, too, is confident about the future, but he has no illusions. Cigar manufacturers, he said, were operating in a market that was declining under a lot of regulatory pressure, so they weren’t giant tech companies that could look forward to doubling their businesses in five years. Nevertheless, J. Cortes believes that in 20, 50 or even 100 years from now, people would still be enjoying good cigars. And because of that belief, this family company with global reach would continue to invest in the cigar industry. Times would be tough, but then they would be tough for companies in other industries too, he added.

    Part of this confidence is down to the way that Oliva Cigars has invested to ensure supplies of tobacco. It has invested in tobacco stocks and even in tobacco farms in Nicaragua, where it is introducing techniques to manage land and water resources responsibly—in a way that will allow tobacco to be grown there for the next 50 years at least.

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    George Gay is Tobacco Reporter’s European editor, but his territory spans the globe. Based in London, George has covered the tobacco industry since 1982, initially for a U.K.-based publication and since 2004 for Tobacco Reporter. George’s understanding of industry issues, combined with his keen sense of observation and dry wit, have earned him a loyal following among Tobacco Reporter’s readers.
  • Measuring Up

    Measuring Up

    Photo: Broughton Nicotine Services

    How instrumentation suppliers and laboratory service providers are supporting customers with their PMTA submissions

    By Stefanie Rossel

    Although there has been a 120-day extension due to the outbreak of the Covid-19 pandemic, Sept. 9 will definitely be the final day: If a company wants its “recent” tobacco products to remain in the U.S. market, it has to submit a premarket tobacco product application (PMTA) to the U.S. Food and Drug Administration (FDA) by then. In 2016, the FDA announced that all tobacco products not on the market prior to Aug. 8, 2016, would require authorization before entering the market and all products on the market prior to that date would have a grace period during which companies could prepare their PMTAs for submission.

    The candidate products will all undergo a several-stage review during which they have to demonstrate with the help of scientific data that they are “appropriate for the protection of public health.” The FDA will consider the risks and benefits of the products not only to the individual but also to the overall population, including whether existence of the product will increase the likelihood of nonusers starting using them. The evaluation also includes reviews of product ingredients, constituents, toxicological profile, health impact, manufacturing and packaging processes as well as labeling.

    Tobacco Reporter asked several instrumentation suppliers and providers of laboratory services how they experienced the run-up to the FDA’s extended deadline, which was originally set for May 12, 2020.

    “The date for the premarket submission was set well in advance, so there was increased demand but no real ‘rush,’” says Tobias Krebs, managing director of German company Vitrocell, which specializes in in-vitro testing technology.

    Ian TIndall

    Ian Tindall, head of innovation and marketing at Cerulean, says there has been a noticeable demand for extra testing capacity in the U.S. but that most of this demand was generated in late 2019, and the extension to the submission date had not really been visible.

    “The larger companies have had this well organized all the way along, and from our experience, the anticipated rush for testing at the contact research organizations has not been mirrored in a late rush for test equipment,” Tindall explains.

    “I should note that the EVALI crisis at the back end of 2019 did generate demand for additional testing of vaping products and a consequent surge in instrument demand, and this did put pressure on the business, but we feel we met all the urgent demands successfully. More recently, some of the focus has moved away from vaping devices towards tobacco-heating products, and we have been increasing supply kits and specialist machines and upgrades for this sector of the industry.”

    In February 2019, Cerulean teamed up with Tews, a leading supplier in the field of industrial microwave moisture and density measurement. Cerulean now exclusively markets Tews laboratory devices for the tobacco industry. Based in Hamburg, Germany, Tews also has a U.S. subsidiary. “We can now jointly address emerging requirements for density and moisture testing in the industry and work effectively with clients in this regard,” says Tindall.  

    Thomas Schmidt

    Thomas Schmidt, director of scientific and technical affairs at Borgwaldt KC, a German manufacturer of high-end quality control instruments and precise measurement devices that is part of the Hauni group of companies, notes that the PMTA process was communicated early and the instruments used to generate the data were available. “Besides new developments like our next generation of analytical vaping machines, the NGX series, we have, however, made some modifications to existing instruments—on our LM5SP and LM5SF, for example, which are both intended to collect aerosol in different collections procedures and increased the flexibility in usage to meet the specific demands of certain customers,” says Schmidt.

    Broughton Nicotine Services (BNS) has noted a definite increase in demand for its services in the runup to the PMTA deadline, according to Chris Allen, vice president of scientific and regulatory affairs. For many companies, he contends, the PMTA has been the first opportunity to truly characterize and stress test their products.

    “This has inevitably led to clients learning more about their products and the need to understand further so that risks can be mitigated and improvements made in the future,” Allen says. “The extension has provided additional time for these companies to perform further characterization and bolster their applications. In addition, we’ve seen a wave of companies who had been delaying the PMTA process or having partial information take advantage of the extension in order to commit to the PMTA pathway.”

    Photo: Borgwaldt KC

    Heavy workload

    Matters are complicated by the FDA’s requirement that applicants file a separate application for each brand variant. For suppliers of instrumentation equipment and labs, this has meant a lot of additional work in recent months. “This has had no impact on our business but has required software development to become FDA compliant,” says Eric Favre, managing director of Sodim, a French company specializing in metrology for the tobacco industry and, like Borgwaldt KC, part of the Hauni group of companies. Sodim has developed a specific device called VPA (vaping puff analyzer). “This device has required adaptations for new formats with specific sample holders,” says Favre.

    “The established manufacturers of traditional tobacco products have lots of data available for marked products, which they can provide to the FDA. In [the] case of modified and new products, especially vaping products, the manufacturers were not all aware of what is expected,” Schmidt points out. “These products are newer to the market and do not have sufficient historical data available to refer to. Therefore, we were not surprised that this has led to an increased demand for our next-generation product (NGP) machines and has driven us to develop a new generation of analytical vaping machines, our NGX family and other innovations and modifications within the available Borgwaldt KC portfolio to meet the needs of the market.”

    Allen says that although each product is unique, the FDA is accepting “bundled” submissions for multiple products, which enables clients to save cost and tell the “story” of a group of products. “Despite the ability to include multiple products under one submission, the level of analytical testing has been significant,” he says. “We had been planning our expansion in line with the PMTA since 2015 and moved into our new dedicated nicotine products facility in 2018.”

    The expansion project was completed in January of 2019 following an investment of £10 million ($12.41 million) into people, facilities, analytical equipment, software development and quality standard certification. The company recruited more than 70 new team members, not only within the analytical function but also across clinical, nonclinical and project management.

    Vitrocell observed increased demand for systems with higher output. “We needed to increase our development activities but could tie in new orders in our regular production scheme,” says Krebs.

    “We are fortunate that in the way we have set up our supply chain and manufacturing facility we can redeploy resources quickly and keep customers satisfied with extending lead times,” Tindall says. “Some special requests have taken a little longer to fulfill than our standard lead time, but by switching capacity, say, from our standard smoking machines to vaping and THP testing machines, we have managed to meet our delivery commitments. That is not to say we have not met bumps in the road, but the unsung heroes in the back office who keep the production machine running have really risen to the challenge.”

    A key part of the PMTA is to understand how your product behaves, what the risks are and therefore what quality control checks need to be in place.

    Far-reaching measurements

    Testing required for PMTA applications is manifold; it includes the analysis of tobacco and e-liquid constituents, ingredients and additives, especially the 33 substances listed by the FDA as harmful and potentially harmful constituents (HPHCs), smoke and vapor constituents as well as all physical parameters of the products, toxicological assessments and topographic data, notes Schmidt. “We have seen a remarkable increase in interest in our topography products as well as our NGP vaping devices,” he says.

    In vitro data play a role in the application too. For Vitrocell, this translated into demand for its exposure solutions. Cerulean witnessed greater interest in its vaping machines, particularly with an accessory that determines the density of the vapor. “We have published a lot of work that shows how this device, primarily designed for showing when an e-cigarette stops effectively forming aerosol, can be used to monitor the full life delivery of aerosol of an e-cigarette device,” Tindall explains. “Beyond measurement is the need from our customers’ perspective for installation and servicing in line with good laboratory practice [GLP], with an installation qualification and an operational qualification step that is properly documented.”

    According to Allen, the level of testing required to demonstrate the shelf life of the product, including extractables and leachables, should not be underestimated. “Having the analytical data available is just the start of the process. Conclusions need to be drawn from this data to understand the performance of the product and most importantly to risk assess from a toxicological perspective,” he says. “This is why we saw the creation of the integrated chemistry consultancy and toxicological teams of paramount importance as having these teams on-site enables us to design the analytical studies in line with the end purpose and perform ‘real-time’ risk assessments.” BNS has also developed ToxHQ, a unique internal software tool to complete rapid toxicological screening and risk assessment. The central repository holds chemical data used in e-liquid formulations, including chemical identifiers, properties and classifications, such as HPHC-registered chemicals, Allen says.

    Chris Allen

    Managing the data

    Once the products have been authorized, further measurements will be needed to maintain compliance. “This will be an interesting development over the coming months and as we start to see FDA feedback on the PMTAs,” Allen points out. “It will very much depend upon the product sub-category, e.g., e-liquid, closed system or open device, but the critical point is demonstrating that you have control over the finished product. A key part of the PMTA is to understand how your product behaves, what the risks are and therefore what quality control checks need to be in place as either verification of incoming parts or ingredients, in-process controls or analysis of the manufactured product.”

    As an instrumentation supplier, Tindall says the company must recognize that once equipment has been bought, its use might change subtly over time. “We have a mission to ensure that time does not make our products obsolete. Consequently, as part of our product development strategy, we have upgrade paths plotted for most equipment that allows adaptations as regulatory pressures change or research applications and the new products by research demand. One thing beyond ongoing measurement that should not be minimized is the need to ensure that the equipment used is running properly.”

    In the course of a PMTA as well as during the control period afterward, massive amounts of data are generated, requiring expert management. Borgwaldt KC’s instrumentation features a data collection tool for this purpose. The company offers a variety of methods for collection, storage and submission of data to the customer’s data management system. “Our products are in compliance with the FDA requirements related,” Schmidt says, “but in general, the quantitative analysis of specific substances is requiring other analytical equipment in the labs.”

    Vitrocell offers solutions that enable its systems to be operated with GLP compliance. “Beyond that, data management is performed using the current technology of the customer,” Krebs relates.

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    “There is a lot of data generated, and we have worked with a number of customers to ensure that there is a seamless exchange of data with their laboratory information and management systems (LIMS),” Tindall states. “The vast number of LIMS suppliers has meant that we have had to do this on a case by case basis, and we feel we have been successful in this. We are very conscious of the increasing burden of data generation and storage. Our 21CFRpart11 packages, which are available on many of our products, create complex audit trails. The Internet of Things (IOT) and Industry 4.0 initiatives will increase the amount of data on machine performance that is available to an auditor, user or engineer, and this will be the next challenge to face.”

    Allen says that the retention of records is critical within any regulatory process. As BNS evolved from its pharmaceutical facility Broughton Laboratories, retention of both hard and electronic data has always been an integral part of the company’s quality management system. “Over the past twelve months, we’ve generated in excess of 200,000 lines of HPHC data for our clients, so effective data management is key. The utilization of LabHQ LIMS, developed by our sister company Broughton Software, including integration with the laboratory instrumentation and dynamic reporting, enables us to manage such large datasets.”

    The handful of PMTA approvals to date were granted after long and tedious reviewing processes. Thus far, only three products have received marketing authorization: Swedish Match’s General snus, Philip Morris’ IQOS device and Heatsticks along with two varieties of 22nd Century’s Moonlight cigarettes. What happens when the FDA gets overrun with submissions remains to be seen. Favre expects feedback from the FDA before the end of this year.

    “There will be huge amounts of data for the regulators to review,” Schmidt says. “It will be a monumental task to say the least.”

    “The FDA [is] undoubtedly going to see a significant number of applications,” Allen comments. “The PMTAs we’ve been working on consist of tens of thousands of pages, so this is going to be a large volume of data for [the] FDA to review. The big question will be how many PMTAs make it through to the review stage, which will impact most on [the] FDA’s resource. Once in substantive review, this very much depends on what additional data is requested by [the] FDA as any major amendment of an application, either by the applicant or at the FDA’s request, would result in a new 180-day review period.”

    He concludes: “In the same manner that all regulated industries have had to evolve, the electronic nicotine-delivery systems market will be no different. The PMTA process is simply a starting point, and as the FDA learns more about the products and risks, we’re likely to see further guidance issued—for example, the addition of new analytes and a deeper understanding of other possible chemical reactions and their risks to human health.”

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • When Crime Pays

    When Crime Pays

    Photo: Ridzani Tshivhase

    Cigarette smuggling thrives in southern Africa.

    By Thulani Mpofu

    On May 15, 2020, South African police in northern Limpopo Province near the border with Zimbabwe impounded four vehicles and cigarettes worth ZAR1.4 million ($83,530).

    The drivers, transporting cigarettes smuggled from Zimbabwe, avoided arrest by bolting out of their vehicles and out-sprinting police.

    A fortnight later, four South African men and a Zimbabwean woman were arrested in the same province after a high-speed chase while attempting to spirit 10,000 boxes, or 200,000 sticks, of cigarettes into South Africa. In the last two weeks of June, 30 people were arrested resulting in the confiscation of cigarettes worth ZAR4 million.

    The consignments had been smuggled through the official border post at Beitbridge, or via some 200 illegal crossing points on the Limpopo River, which forms the border between the two southern African countries.

    In Botswana on April 4, police in a northern district close to Zimbabwe arrested a Motswana and a Zimbabwean for smuggling 127 cartons of cigarettes into that country.

    On April 16, three men were arrested near South Africa’s border with Mozambique while transporting 20,095 packs of cigarettes worth ZAR900,000. The contraband was coming from Mozambique.

    “Cigarette smuggling is a big problem for us,” South Africa Police Service Limpopo Province spokesperson Brigadier Motlafela Mojapelo told Tobacco Reporter.

    “We are on alert all the time and make arrests every day, but they are undeterred. I can tell you that since March we have arrested nationals of both countries numbering at least 100. What they tell us during investigations is that the crime pays for those who avoid arrest, but our message to them and would-be smugglers is that ultimately we will catch them.”

    Beitbridge Border Post (Photo: Bulawayo24)

    Trafficking of cigarettes from Zimbabwe into South Africa, the biggest economy in southern Africa and the most lucrative market for both licit and illicit cigarettes in the region, is rampant. Hundreds are arrested yearly for transporting the illegally imported tobacco into South Africa as well as Namibia and Botswana. Individuals and more organized cartels whose kingpins are rarely arrested are involved.

    Apart from being the main destination of trafficked cigarettes from Zimbabwe, South Africa is consistently the biggest African importer of tobacco grown in its northern neighbor. For example, in 2018, South Africa spent $100.8 million importing 32.2 million kg of tobacco from Africa’s top growing nation and the globe’s fourth-biggest producer. In that year and as in other years, South Africa’s spending and volume of imports was second to China, which imported 59.1 million kg of the leaf, worth $449.7 million.

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    According to a report by the Atlantic Council of the United States, “The Illicit Tobacco Trade in Zimbabwe and South Africa: Impacts and Solutions,” released in March 2019, high taxes that South Africa, Namibia and Botswana charge on cigarette imports are the major factor discouraging legal importation of the product, encouraging smugglers to try their luck.

    Members of the Southern Africa Customs Union (SACU)—South Africa, Namibia, Botswana, Eswatini and Lesotho—charge an average of ZAR16.66 in excise tax on a 20-pack of cigarettes. With a 15 percent value added tax, the total cost of the pack rises to about ZAR20. This suggests, according to an Atlantic Council study, any pack of cigarettes selling for less than the minimum collectable tax of around ZAR20 is likely smuggled or broadly illicit.

    An Ipsos study whose findings were released in November 2018 established that Rudland & George cigarettes, manufactured by one of Zimbabwe’s largest tobacco-growing contractors, Gold Leaf Tobacco, had become the biggest-selling brand in South Africa overall, retailing at ZAR10 a pack.

    The research estimated that illegal cigarettes accounted for 33 percent of all cigarettes sold in South Africa. The tobacco is especially prominent in the informal trade where they make up about 42 percent of that market. Due to their low prices, illegal cigarettes are an attractive bargain for smokers.

    A separate research by the Tobacco Institute of South Africa (TISA) said 38 percent of the illicit sticks were smuggled from Zimbabwe, making that country pivotal for any illicit trade strategy.

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    The financial prejudice of smuggled tobacco to the economies of Zimbabwe and South Africa is not accurately known, said a Harare-based tax consultant, Tendai Mavima.

    “There are no records for smuggled goods, so we cannot be specific in the economic impact,” he said.

    “But it is known cigarettes are being smuggled every day. Both economies suffer because if cigarettes are smuggled, it means losses in income tax, value added tax, excise duty and other taxes applicable to cigarette trade. For Zimbabwe, illegal exports in cigarettes means loss of foreign currency.”

    A Japan Tobacco study released in March 2018 suggests that South Africa lost about $1.5 billion in tax revenue to illicit trade between 2010 and 2016. BAT South Africa estimates that the illegal cigarette market cost South Africa “a conservative” ZAR8 billion every year.

    In its March 2019 report, the Atlantic Council of the United States said although cigarettes are smuggled from Zimbabwe into Botswana, Namibia and Mozambique, the three countries have smaller and poorer populations, leaving South Africa as the most attractive market for cigarette smugglers keen on large profits.

    South Africa police stand guard over Pacific Breeze cigarettes smuggled from Zimbabwe (Photo: OperaNewsHub)

    Actors are not only small-time traders who use undesignated exit points along the Limpopo River but also some “untouchables” who are well connected to the ruling elites in Zimbabwe and South Africa. Small traders typically use small vehicles to carry the contraband, but the “untouchables” carry theirs in large trucks that pass through Beitbridge Border Post where some officials are bribed to wave the vehicles across the border.

    “A former smuggler claims that one of these cigarette-smuggling cartels involves politicians in the highest levels of government from both Zimbabwe and South Africa but would not divulge names,” the report says.

    “This cartel is said to operate a smuggling scheme that runs from Harare to Durban. Huge trucks are used to smuggle the cigarettes from their loading points in Harare through formal border crossing points and onwards to their destination. These trucks are not stopped or searched on the Zimbabwean side of the border. The cigarette brands that are most frequently smuggled are Remington Gold and Pacific Blue, both owned by Savanna Tobacco [now known as Pacific Cigarette Company]. Beitbridge border post is a major point of entry.”

    In late March 2020, South Africa banned tobacco and alcohol sales, saying consumption of both increased the risk of spread of Covid-19. The Fair Trade Independent Tobacco Association, an industry lobby group in that country, argued in a statement that the ban only worsened the black market and the smuggling of cigarettes.

    Gift Mugano, a researcher at South Africa’s Nelson Mandela University, told Tobacco Reporter that individual smugglers and large companies are taking advantage of porous borders in southern Africa and poor government monitoring of their tobacco value chains. Countries, he said, lose much money in the forms of import and export taxes, excise duty and value added tax.

    “Our borders in the region are porous,” he said.

    “For example, there is no fence separating Zimbabwe’s border with Mozambique, the same for the border between Zimbabwe and Botswana. People, some of them smugglers, just walk or drive across. Even the formal border posts are porous because officials can be bribed.”

    Echoing the Atlantic Council report, a World Bank study, “Confronting Illicit Tobacco Trade: A Global Review of Country Experiences,” which focuses on SACU, expresses concern over criminal enterprises’ close ties to leading political figures in South Africa.

    “Recently, a notorious cigarette smuggler’s lavish birthday party is reported to have been attended by high-profile policemen and politicians,” said the report released in January 2019.

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    “Similarly, multiple reports allege that a leading cigarette smuggler met with South Africa’s ex-president to secure a votes-for-protection agreement. All future policy and enforcement measures must reckon with the reality that, in this region, the tobacco industry is disproportionately powerful.”

    The paper says government agencies in the SACU region have had little impact on illicit tobacco trade because of lack of focus, priority and resources allocated to tobacco regulation and to excise goods in general. Furthermore, they are unable to effectively secure tobacco supply chains at key points especially at production, shipment and on the retail segment. Some law enforcement agencies, the document adds, do not have nonintrusive inspection assets, such as scanners, to detect undeclared goods.

     “Tobacco is like gold,” Mugano said.

    “Many find it profitable to smuggle both commodities within the region and millions [of dollars] are involved. Like gold, cigarette smuggling is done by syndicates involving big companies. Those money-mongers are connected to figures in high places politically. Because of that, containing smuggling will be difficult.”

    In her book Dirty Tobacco: Spies, Lies and Mega-Profits, published in June 2020, Telita Snyckers, a South African author and a tax and customs lawyer, argues that some tobacco companies smuggle their own product to evade tax. Illegally trafficked cigarettes, the book adds, are potentially more profitable than cocaine, heroin, marijuana and guns.

    “The industry—even licensed, bigger players—has a long and consistent history of fines, felonies and infringements, spanning decades, across the globe,” the book reads in part.

    “There is ample proof that the tobacco industry incorporated smuggling and other tax and duty evasion measures as an explicit part of its business strategy,” writes Snyckers.

  • The Safety Net

    The Safety Net

    Photo: zikamatej |Pixabay

    Fine-cut tobacco will offer hard-up smokers a legal alternative—if tax officials can keep their ambitions in check.

    By Stefanie Rossel

    The continuous decline in tobacco consumption over the past years has not only impacted sales of factory-made cigarettes (FMC) but also left its mark on the hand-rolling tobacco market. Global fine-cut tobacco retail value stood at $23.73 billion in 2019, down from $24.11 billion in 2018, according to Euromonitor International.

    With a consumption of 24,298 tons in 2019, Germany remained by far the largest market, with stable sales over the past decade. “In Germany, fine-cut tobacco has an important buffer function between FMC and illicit cigarettes,” says Michael von Foerster, managing director of Germany’s smoking tobacco association Verband der Deutschen Rauchtabakindustrie. “It’s a real alternative for all those who want to enjoy tobacco but can’t afford or don’t want to buy expensive cigarettes.”

    In terms of rolling tobacco sales, Germany was followed by France, with 7,620 tons, and Poland, with 6,590 tons. Fine-cut tobacco was also popular in the U.K. (6,346 tons) and Belgium (6,098 tons). Across the European Union (EU), fine-cut consumption stood at 80,663 tons in 2019, down from 82,044 tons the previous year.

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    “In general, one can say that the fine-cut market is now stable whilst still being characterized as very diverse across the EU,” explains Peter van der Mark, secretary general of the European Smoking Tobacco Association (ESTA). “It is difficult to talk of a ‘European’ market for fine-cut tobacco as this product is not spread homogeneously across the union. In most countries, fine-cut tobacco is still a niche product whilst it can also be a long-established traditional product with a sizeable market share in other countries.”

    After the financial crisis of 2008, the fine-cut market in Europe grew substantially until the crisis subsided. “Since 2014, with the general economic recovery, the fine-cut market stabilized and then declined over several years and is stable again,” says Van der Mark. “In 2014, requirements of the EU’s revised Tobacco products Directive (TPD2) entered into force and became mandatory in 2016. The impact on tobacco companies in the EU, and especially on smaller and mid-sized companies, has been significant. The costs of the legislative requirements, including those for track-and-trace, lead to several companies closing down, the shifting of manufacturing plants and other companies being sold. In the end, the TPD2 is driving further market consolidation. Fine-cut taxation has been increased with the minimum requirements of the excise directive, with the last minimum increase in January 2020. In some member states, fine-cut taxation was increased significantly, and tax levels sometimes reached the ones for cigarettes. This led to an increase in illicit trade.”

    Michael von Foerster

    Impact on exports

    According to Van der Mark, the track-and-trace system for fine-cut tobacco products, which manufacturers, importers and distributors had to implement in record time, presented a challenge to the sector. By May 20, 2019, the transition period for both cigarettes and fine-cut tobacco ended. Intended to combat illicit cigarette trade, the EU track-and-trace system requires that each tobacco package carries a unique identifier (UI) code that must be scanned and recorded at every step of the distribution chain and transmitted to both the manufacturer’s database and the EU database, allowing authorities to trace and authenticate tobacco products. This required an entirely new level of data transfer technology as well as a highly developed IT infrastructure and updated packaging machinery. The system involves around 720 million scans a day across the EU, ESTA reports on its website.

    Van der Mark fears the track-and-trace system will impede European manufacturers’ ability to export their rolling-tobacco products. “The system, as provided for in the European Tobacco Products Directive, was meant for products placed on the European market—as common sense dictates—but this obligation was later extended through the implementing regulation to export products when manufactured in Europe,” he says.

    “As a result, the European tracking and tracing system can introduce a de facto export ban if products are destined to a jurisdiction where regulations are incompatible with the track-and-trace code either due to packaging or labeling regulation or due to incompatibility of the EU code with the code used in the destination country. Fine-cut tobacco, being predominantly manufactured in Europe, often by smaller and mid-sized companies, has as a result already been significantly and disproportionally impacted and disadvantaged,” says Van der Mark.

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    Getting taxation right

    Peter van der Mark

    Taxation has always played an important role in the fine-cut tobacco sector. The EU requires member states to levy a minimum rate of excise duties on cigarettes, which means that a pack of twenty FMC with a retail selling price, excluding taxes, of €0.70 ($0.79) would end up having a retail price, including all taxes, of €3. For fine-cut tobacco, the minimum excise rate stands at 48 percent of the weighted average retail selling price, or €60 per kg, which is significantly lower.

    “The directive underlines the objective of ‘convergence’ and ‘approximation,’” says Van der Mark. “This also means that tax levels must cater to the differences that exist between the product categories. Fine-cut tobacco, for example, is a nonfinished product that requires consumers to make additional purchases, its consumers have different characteristics than cigarette consumers and production of fine-cut tobacco involves a higher share of smaller and mid-sized companies.

    “For these reasons, fine-cut tobacco has a lower tax-bearing capacity than cigarettes, which is well reflected in the tobacco excise directive, which set the minimum rate for fine-cut tobacco at two-thirds of the minimum level for cigarettes. This tax differential is also key in curbing illicit trade as it allows fine-cut tobacco to fulfill its ‘buffer function’ by capturing price-out cigarette consumers that would have otherwise sought cheaper alternatives, including nonduty paid products. This, also, was well understood by many member states. In general, member states have implemented these new minimum rates in 2020, but this required for some of them significant step increases that put unnecessary pressure on the fine-cut tobacco market,” says Van der Mark.

    “Price differences between individual EU member states increase the incentive for cross-border shopping or even contraband,” confirms Von Foerster. “That’s why a sensible tax harmonization within the EU makes sense. The continuously high revenues from tobacco tax in Germany in parallel with the steady decline in cigarette consumption show that a balanced tax policy with moderate tax hikes and balanced product categories works.”

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    Potential opportunity

    With the Covid-19 pandemic that has paralyzed the global economy for almost six months now, consumers will likely have less income at their disposal in the coming months or even years—a situation that typically results in downtrading within the tobacco category. Past experiences, such as the financial crisis of 2008, suggest that consumption of fine-cut tobacco and associated government revenues will grow this time too.

    “When consumers’ disposable income is under pressure, consumers are looking for more affordable alternatives, and downtrading to fine-cut tobacco is the legal option,” says Van der Mark. “This, however, requires one condition to be met: that a country’s tax policy allows fine-cut tobacco to be that cheaper alternative. In several countries, taxation on fine-cut tobacco was aligned with that of cigarettes in the last few years as governments were looking at increasing revenues. In those cases, consumers’ available alternatives were found on the black market, which produces no revenues at all. Authorities, therefore, need to understand that market mechanism to develop the right tax policy.”

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    Von Foerster expects the German government to stick to its strategy of moderate tobacco tax hikes, even as it needs to fund multi-billion-euro economic aid programs. “The amendment of the European tobacco excise directive was only just started,” he says. “The amended version is expected to be released in one-and-a-half years. It is unlikely that Germany will change its tobacco taxation legislation during that period. Furthermore, negative examples, such as Greece or France, show that a thoughtless significant tobacco tax hike will not lead to the desired additional revenue—on the contrary, it will lead to a massive plummeting of revenues. Interestingly, this is true for all taxes. It is high time politicians learned from this experience.”

    Van der Mark notes that the EU tax directive sets only minimum rates, and many member states, including France, Ireland and the U.K., have implemented far higher taxes, resulting in high levels of illicit trade and nondomestic-duty-paid consumption.

    “It would not be surprising if several member states indeed seek to increase their revenues from tobacco sales, thinking demand for tobacco in general is relatively inelastic,” he says. “They, however, should pay due attention to the fact that the demand for legal products is much more elastic. If member states increase taxes without ensuring that consumers can still find cheaper and legal alternatives, consumption may then shift to illicit products, and state coffers will not see the rise in tax receipts that were expected.”

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    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • Counting Down

    Counting Down

    Photo: Tobacco Reporter archive

    The nicotine industry prepares for a shakeout in the wake of the premarket tobacco product application deadline.

    By Kenneth Robeson

    Chris Allen

    The phrase “time is money” has seldom been more apt for the tobacco industry.

    The United States District Court recently granted the Food and Drug Administration’s (FDA) request for an extension of the premarket tobacco product application (PMTA) submission deadline for certain tobacco products, which the FDA requested due to the Covid-19 pandemic. Applications are now required to be filed by Sept. 9, 2020, for many e-cigarettes, cigars and other deemed tobacco products.

    What does this mean for the tobacco industry? Several things—from a significant reduction in the products that retailers can place on store shelves to changes in management, manufacturing, R&D and marketing.

    “Those working towards a PMTA have benefited most as this has either provided the time to complete existing studies or generate more data,” said Chris Allen, vice president of scientific and regulatory affairs for Broughton Nicotine Services, a privately owned laboratory delivering analytical, scientific and regulatory services for the electronic nicotine-delivery systems (ENDS) industry based in Lancashire, England. “Also, those that are intending to exit the market have a slight reprieve in that they can continue selling their products for an extra 120 days.”

    In addition to a significant reduction in the product portfolio, said Allen, manufacturers are coming to the realization that they are going to need to invest “far more” in their quality-management systems as manufacturing guidance evolves. “Although it is not expected the manufacturing regulations will be as stringent as pharmaceutical GMP, it may be significantly higher than the standards that many companies currently work to.”

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    ‘The reality’

    Barnaby Page

    “The deadline change was triggered by the Covid situation and requested by the FDA, which stated, among other things, that it had refocused some of FDA CTP staff on other emergency matters related to Covid,” noted Patricia I. Kovacevic, a global legal and regulatory strategist and attorney and the founder of consulting firm Regulation Strategy, which has offices in Tampa, Florida, USA, and London. “While the extra time appears beneficial to the entire industry, the reality is that most clinical studies, testing labs and so on would not have carried on, at least during the three critical lockdown months, April to June.”

    Thus, Kovacevic added, there is “a slight benefit” for the industry to have additional time to refine PMTA submissions. “But those who were not ready with the substantive work needed for PMTAs—including various clinical and nonclinical controlled trials—would not see their situation improve much due to the extension.”

    “For vapor, it doesn’t substantively change the picture,” suggested Barnaby Page, editorial director of ECigIntelligence, a provider of detailed global market and regulatory analysis, legal tracking and quantitative data for the e-cig, heated-tobacco and combustible-alternatives sector worldwide, and TobaccoIntelligence. “Any company which was not already reasonably well prepared to submit by 20th May is unlikely to be able to make it by 9th September.”

    However, Page added, “for those who were close, it will be welcome given that the run-up to the 20th May deadline came at possibly the most disruptive point of the Covid pandemic.”

    According to George Parman, director of communications for Altria Client Services in Richmond, Virginia, USA, his company submitted PMTAs for 35 On! Nicotine Pouch products on May 15, and the FDA accepted them for scientific review in the second week of June. They are manufactured by Helix Innovations, an Altria joint venture responsible for the global On! nicotine pouch product portfolio. To support the applications, Altria submitted more than 66,000 pages of documentation, including six primary studies.

    The On! nicotine pouches are tobacco leaf-free and available in seven flavors and five nicotine levels. The product line was distributed in over 28,000 stores at the end of the first quarter, including the top five convenience store chains by volume. According to IRI, total oral tobacco-derived nicotine category sales in 2019 grew approximately 275 percent compared to 2018.

    “We believe the scientific evidence in these applications demonstrates that the marketing of On! is appropriate for the protection of public health,” said Paige Magness, senior vice president of regulatory affairs for Altria Client Services, in a release. “On! nicotine pouches are a key part of our vision to responsibly lead the transition of adult smokers to a noncombustible future.” The FDA will now undertake a substantive scientific review of the applications.

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    ‘Subjective term’

    Maggie Gowen

    And for those companies that will not be ready in time?

    “Ready,” Kovacevic believes, “is a subjective term in this context.” Small manufacturers would not have had the resources needed to comply no matter what the deadline might have been “but would have enjoyed the additional time to participate in the market. The top five bestselling products manufacturers were preparing for this moment, some as early as 2013.”

    If a company has not amassed the necessary science and assembled the right scientific and regulatory team beginning at least two years ago “or at least early last year, at this point it is too late to consider anything else but a last-moment attempt at litigation if even that were possible,” Kovacevic added.

    Maggie Gowen, marketing director for Avail Vapor in Richmond, Virginia, USA, said that ENDS manufacturers who don’t submit a PMTA by the new date will be considered noncompliant. “It will be up to the FDA how they choose to enforce the industry after the deadline. Reasonable regulation is needed based on sound science.”

    What comes next cannot help but be influenced by the Covid-19 pandemic, said Broughton’s Allen, who emphasized that ENDS products are designed to deliver chemicals deep into the lungs. “We may not like or agree with regulation, but it is inevitable for any major industry and there to protect us. There is undoubtedly a loss in consumer confidence in the safety of ENDS and no data on the risk of long-term use.”

    The regulations, he added, must see to it that everything possible is done to ensure that “the safest of products are on the market [to] protect the public but also the long-term future of the industry.”

    At the manufacturer level, ECigIntelligence’s Page predicted, there will be fewer companies, “probably many fewer, clear winners and losers from the PMTA process.” For retailers and consumers, the long-term changes “will not be so dramatic once the short-term shock of many brands disappearing has been adjusted to.” What he termed the “wildcard” is whether the FDA turns out to prefer certain kinds of devices to others. “For example, if it seems to favor open or closed systems. That could have a substantial effect on retailing if some channels end up with lots of legal products and others with many fewer.”

    “The immediate—as in 10th September—impact on retailers and consumers is likely to be negligible,” Page said. “We don’t expect the FDA to start enforcement immediately on brands that have not submitted a PMTA application.” Over the longer term, of course, the number of available products will diminish. Just how long that “longer term” is remains an open question. “It could be a few months; it could even be a couple of years.”

    Page and his colleagues think it likely that there will be “some tolerance” shown to applicants who miss the deadline “as long as they can demonstrate they are well advanced in preparing their application and are serious about doing it.” Retailers and consumers, however, “can’t really prepare with any confidence. The ball is in the manufacturers’ court right now and then the FDA’s.”

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    ‘Appetite for enforcement’

    Patricia Kovacevic

    Most c-stores and major chains primarily sell products manufactured by companies that will have met the PMTA submission deadline, noted Kovacevik, and may legally continue to sell their products “for at least one year thereafter and longer if FDA issues a marketing order following the review of the respective products’ PMTAs.”

    At the same time, she noted, the FDA’s “appetite for enforcement is relatively low in general, and the product universe is so vast, with so many SKUs—potentially millions of SKUs—that it will take FDA months, if not years, to figure out what products need to be taken off the market because a PMTA or other type of premarket application was not filed by the respective deadline, and to issue warning letters, then to follow up with more stern enforcement action.”

    Another factor to consider is that a new administration in Washington, D.C., might bring “interesting developments not necessarily favorable to the ENDS industry,” Kovacevik added, “and change is always challenging.”

    Consumer choice will shrink, Avail Vapor’s Gowen concurred, because not every manufacturer will be able to afford the “enormous” expense of the PMTA process. “There is a big fear that we will see a shift back to deadly combustibles, unfortunately.” There is, she conceded, “a lot of politics in play at the executive, federal, state and local levels.” There is also what she called “an enormous amount” of misinformation about the vapor industry, which “as a whole has been unfairly blamed due to a few bad actors, and that includes the CDC [Centers for Disease Control and Prevention]. If a company wants to remain a player in the marketplace, the hope is they will submit a PMTA by the Sept. 9 deadline.”

    And for the remainder of 2020?

    “It’s difficult to tell at this point,” Gowen concluded. “It will certainly be an interesting year, as if it hasn’t been interesting enough.”

  • The Forest for the Trees

    The Forest for the Trees

    Photo: MSA

    Management Science Associates helps customers put their data to work.

    By Taco Tuinstra

    During TMA’s 2020 virtual conference, Management Science Associates (MSA) shared its insights into recent U.S. trade trends. MSA Senior Vice President Don Burke highlighted the most important developments in the nicotine market of the past 12 months, including new restrictions on flavors, a higher minimum purchasing age, the 2019 outbreak of vaping-related illnesses and, above all, the impact on sales of the ongoing Covid-19 pandemic.

    Burke’s presentation contained an impressive amount of information but demonstrated only a fraction of MSA’s capabilities. While many firms offer data, MSA goes a step further by processing the information in a way that enables customers to make optimal decisions. Using analytic tools, systems engineering and data management, the company teases out the nuggets that allow clients to solve problems and identify opportunities.

    “We help customers put their data to work,” says Burke.

    MSA typically serves industries where there is either so much data that it is difficult to manage or industries where business critical data are not readily available. Big data, of course, has become a buzzword in recent years. What sets MSA apart is its ability to determine statistical significance from sparse data. Unlike other data companies, MSA takes no ownership of the data it processes. This is a critical element in the company’s business model: MSA is paid to process, cleanse, match, integrate, report and analyze data—but not for the data itself. According to Burke, this keeps MSA unbiased and allows the company to direct clients to the most appropriate data sources for their specific business issues and to integrate those sources with their own data.

    20,21,22,23,24_TheForestForTheTrees.indd
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    Lessons from chemistry

    MSA is the brainchild of Alfred A. Kuehn. In the late 1940s, Kuehn was a chemical engineering student at the Carnegie Institute of Technology (CIT, now Carnegie Mellon University) in Pittsburgh, Pennsylvania, USA and an employee of Gulf Oil R&D. To obtain added perspective and greater control over his research, he was recruited for a business degree at the Carnegie Tech’s Graduate School of Industrial Administration (GSIA), which today is known as the Tepper School of Business.

    Alfred A. Kuehn

    One of Kuehn’s professors, Herbert A. Simon, who would go on to win a Nobel Prize in 1978 for his pioneering research into the decision-making process within economic organizations, instructed his class to study human behavior and learning processes. Most students set up experiments with rats in mazes, but Kuehn took a different approach: He developed a model of buying behavior based on his experience with chemical processes.

    During his research at Gulf Oil, Kuehn had worked on optimizing what was then the world’s largest oil refinery in Port Arthur, Texas, USA. Pondering professor Simon’s assignment, Kuehn realized there were many similarities between his work with petrochemicals and the task at hand. Chemical engineering distinguishes itself from other types of engineering by the fact that things are flowing. “In most other engineering areas, you are building an object, and it is static,” says Kuehn. “That means you need different kinds of measurements.” Kuehn viewed consumer behavior as a flow too. Just as crude oil is impacted by heat, pressure and mixing, consumer behavior is affected by advertising, promotions and price, among other factors.

    Encouraged by Simon, Kuehn started teaching economics at GSIA, bringing science to marketing. Until then, marketing was often taught like law—through case histories. But whereas in law, case studies are important because they become precedents for future law, marketing is dynamic and what was effective last year may be irrelevant next year.

    As he had done as a student, Kuehn took an unconventional approach in front of the classroom. “Instead of the normal methods of faculty members—they write a paper, often forget about it and then write another paper—I asked my students to implement the models we were developing,” he says.

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    Kuehn created and computerized a model of the detergent business to help Lever Brothers (aka Unilever) make business decisions. The project was so successful that CIT started using Kuehn’s marketing models as the basis for an instructional management game that was played by all MBA and professional executive students from 1960 until 1995. After that, only minor adjustments, such as changing the industry (watches instead of detergent) and geography (four countries instead of four U.S. regions), were made to the CIT game.

    Today, some form of GSIA’s original academic and scientific underpinnings—referred to as “management science”—is taught at most leading business schools. Impressed by Kuehn’s research, the Ford Foundation began sponsoring Kuehn summer workshops in 1959 to teach quantitative techniques and model building to select marketing faculty members. Some of the participants of that first workshop subsequently edited Mathematical Models and Methods in Marketing containing Kuehn’s marketing/advertising model, published by Richard D. Irwin in 1961.

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    Solving problems

    MSA’s first projects were solving steel industry and consumer packaged goods market research problems using analytic tools, systems engineering and data management technologies. Today, MSA serves a wide variety of additional sectors, including the pharmaceutical industry, casino gaming, the foods business and media companies.

    The company’s work has become sufficiently important that during the Covid-19 crisis, the governor of Pennsylvania had MSA declared an “essential service,” allowing it to keep innovating even as many other businesses were forced to cut back operations. “Many of the services we provide are to businesses dealing with food, medical records and other vital industries—so the information we process and manage for our clients is critical to keep those organizations operating” explains Burke.

    Brown & Williamson became MSA’s first tobacco client in 1969. Today, MSA serves a wide variety of tobacco companies from minor players to multinationals. Separately developed expertise in antitrust regulations enables the company to manage multiple clients within the same industry without running into anti-competitive concerns. MSA boasts a customer retention rate of more than 96 percent, according to Burke, with many relationships lasting more than 40 years. “The only time we have ever lost a tobacco customer has been due to a merger or acquisition,” he says.

    The company’s services have expanded over time. Many MSA products now involve data-management and analytic platforms that manage billions of dollars in trade payments and other mission-critical retail execution applications. When the attorneys general of 46 states in 1998 signed the $246 billion dollar Master Settlement Agreement that ended their healthcare cost-recovery lawsuits against the tobacco industry, they entrusted MSA with the complex task of managing the constantly changing payments from many companies to all states.

    MSA offers its tobacco customers various services. For example, the company collects manufacturer shipment data for a “first read” on the market and distributor shipment data from more than 2,000 distributors for a near census-level measurement of tobacco volumes by store and by item. It also gathers survey and retail scan data to provide the additional measurement of consumer takeaway.

    The insights derived from that information vary by client, according to MSA, but many involve custom analysis of the effectiveness of promotions, assessment of price and price gap analysis, providing tools for forecasting the potential of new products or new product categories and current issues impacting the industry—menthol, flavor bans, new regulations, etc.

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    Examples of MSA services for the tobacco industry:

    • Every Monday morning, MSA processes and projects manufacturer shipment data to provide the first read on the U.S. tobacco industry for the previous week.
    • MSA collects data each week from approximately 2,000 candy and tobacco distributors to report to tobacco manufacturers the shipment volume of each item in the tobacco category to each retail outlet across all classes of trade.
    • MSA operates one of the largest CPG retail scan data programs, at the transaction level, enabling clients to view tobacco market basket information at retail every day and feature pricing and promotion performance, along with consumer demand trends.
    • MSA continually provides analytical data expertise to the tobacco industry to understand and improve overall industry performance.

    Saving money

    Perhaps one of the most striking examples of how MSA helped a customer save money is when Kuehn and the company, along with Andrew Brimmer, the first African American to serve as a governor of the Federal Reserve System, advised the U.S. government against developing a supersonic passenger jet in 1966. After France and Britain teamed up to develop what would later become the Concorde, the U.S. government asked Kuehn and MSA to evaluate the prospects for such an aircraft. MSA quickly determined that despite the prestige attached to having a supersonic transport, it would not be cost effective and successful from a financial and market perspective.

    Kuehn, who was also a pilot, demonstrated that the complexities of traveling at speeds faster than sound are so great that a supersonic passenger jet would not at that time be economical. “The original design included drogue chutes,” he recalls. “Landing with drogue chutes would expose passengers to the same stress experienced by a fighter pilot, going from 300 miles per hour to 10 miles per hour within two miles. And then they were trying to get special consideration—that wherever they arrived they would get priority on the airfield at the expense of everybody else. Furthermore, you were also supposed to forget about the great problems associated with sonic booms.”

    So MSA suggested that instead of building a supersonic transport, the U.S. develop long-distance subsonic jets that would offer time savings by skipping stopovers. “Going to London from the U.S. in those days, you landed in Newfoundland and Ireland—so if we had wide-body, longer distance planes that didn’t have to land, we could make up the time,” says Kuehn. Those long-distance jets went on to become the largest source of annual U.S. export earnings from 1969 until 1993 (after which, Tobacco Reporter readers will be pleased to learn, they were overtaken by shipments of charcoal filtered cigarettes to Japan, according to Kuehn). The Concorde, by contrast, retired in 2003, having swallowed millions of francs and pounds in state subsidies without turning a profit.

    MSA’s RockPoint data center

    Protecting data

    Needless to say, when handling confidential information for competitors in an industry, data security becomes paramount. A tremendous amount of care and some redundancy are required to handle, store and analyze such information.

    According to Mario Cafaro, MSA’s vice president of corporate IT, MSA’s two data centers are among the most secure in the U.S. They are backed up by two fully redundant Tier III equivalent data centers. These state-of-the-art facilities feature full SSAE 18 SOC compliance, highly secure tiers of multi-factor access controls, electric power from two utility companies, complete coverage through internal and external video monitoring along with numerous options for telecom, internet and cloud connectivity.

    The company’s hometown, Pittsburgh, too, offers considerable security advantages. The region just north of the city has one of the lowest seismic ratings in the U.S., and the Appalachian Mountain range protects the area from East Coast hurricanes, for example. What’s more, the data centers are in stable, well-established neighborhoods unlikely to experience social upheavals. In the nationwide protests following the death of George Floyd in Minneapolis, two Pittsburgh Police cars were burned, but the perpetrator was quickly identified and then turned himself in with his parents present, according to MSA.

    The human touch

    While the rapid increase in computing processing power and the rise of artificial intelligence (AI) have turbocharged data analysis, MSA continues to rely heavily on human input. “There is no substitute for a thorough understanding of the data-generation process and a strong industry domain knowledge,” says Kuehn. “A technology-derived fact is simply a statement until humans, with strong domain knowledge, can appropriately apply it to a solution for an industry problem or opportunity.”

    Informed business decisions, he explains, need to be based on appropriate definitions of problems or opportunities as well as data. “The creative approach to exploring and identifying problems and opportunities often includes as much “artistic thinking” as mere numbers,” says Kuehn.

    Steve Gongaware, MSA’s senior vice president of business development, states that MSA is always alert to opportunity: “MSA is keen to offer its insights to new sectors, such as the budding businesses of legal cannabis and CBD.” Its experience working with the tobacco industry places the company in a strong position to do so. “Over the years, tobacco has evolved into a very regulated business, managed very differently than your typical consumer good,” explains Burke. “Once CBD and cannabis gain broader acceptance and mature in their life cycles, they too may likely become regulated industries. So our ability to work with competing firms, our ability to understand all the implications that go into appropriately managing competing businesses and providing value to each of those businesses, will allow us provide appropriate direction to customers in the legal cannabis/CBD space as well.”

    In the meantime, MSA is helping its customers navigate the unprecedented environment brought about by the Covid-19 pandemic, which has upended existing consumer trends and made predictions ever more challenging.

    “What is known this year is the great impact on tobacco consumption of the stay-at-home orders. Consumer confidence is required to return to closer-to-normal behavior and to reduce unemployment levels and potential government stimulus activities,” says Burke. “These variables, all difficult to predict, not only impact overall category consumption, but also each of the individual segments of the tobacco market.” (See box below.)

    “What we have learned is that lockdowns carry a cost, so we must quickly learn about the tradeoffs. Determining what the impacts may be will require continued fast learning and rapid adaptation as the current social turmoil is unlikely to soon create stable market conditions,” he says.

    If anything, the coronavirus crisis has demonstrated the importance of actionable insights—not just raw numbers—to achieve the understanding required to optimize decisions. With its impressive record of helping customers create great value from data, MSA is in a strong position to provide such insights. Whether it is the Covid-19 situation, the illegal THC vaping crisis or an analysis of supersonic jets, MSA has the data and analytical skills to provide the business knowledge that clients need to navigate uncertain situations.

    This year’s trends

    The most significant trend in U.S. tobacco sales noted by MSA this year has been the increase in unit volume. The stay-at-home situation, where consumers are free to use their tobacco products of choice rather than being restricted from smoking or chewing, has contributed to an increase in cigarette sales, marking a break with the typical 4–6 percent annual decline in recent years.

    MSA is also continuing to find strong growth in the “modern oral” category, where items such as pouches, similar to snus, deliver nicotine without tobacco.

    Also, the illegal THC vaping crisis in the last half of 2019, along with vapor flavor restrictions, resulted in declines in the vapor category for the first time in many years.

    MSA has seen a significant increase in growth of lower priced tobacco options, including pipe and roll-your-own tobacco, as unemployment levels have increased, bucking the trend of the past few years when record low unemployment resulted in declines in these categories.

    For more MSA insights, please view TMA’s webinar.

    Taco Tuinstra is Tobacco Reporter’s editorial director.Based in Raleigh, North Carolina, USA, he coordinates the work of staff writers and contributors.On his watch, Tobacco Reporter has won several awards for editorial excellence.Since joining the magazine in 1997, Taco has visited more than 75 countries to meet industry representatives in their markets and to report tobacco news firsthand.