Category: Also in TR

Evaluating the challenges and opportunities for leaf tobacco.
By George Gay
If you believe the publicity (and I’m not suggesting you shouldn’t), the route to being a “successful” supplier to the global leaf tobacco trade lies in the direction of consistently producing quality tobacco in a sustainable way and at a competitive price. Fine, but how do you achieve this, given that there are clearly internal conflicts even within the brief guide to success given here?
While pondering this, I decided to ask a number of leaf dealers and traders to rate what the important factors were in maintaining a healthy leaf industry by arranging the following factors in order of importance: (1) easy access to reasonable grower loan facilities, (2) quality seed availability, (3) input availability, (4) grower expertise, (5) grower support, (6) weather/climate, (7) curing fuel availability where appropriate, (8) type of sales system, (9) consistent offtake by buyers, (10) grower prices, (11) export prices and (12) government involvement. From their replies, which are logged in the table on page 30, I awarded 12 points for each time a factor was rated as the most important, 11 points for each time a factor was rated as the second-most important … down to one point for a factor’s being rated 12th most important.
The results were as follows:
56 points: consistent offtake by buyers
56 points: grower prices
56 points: export prices
40 points: grower expertise
39 points: easy access to reasonable grower loan facilities
36 points: input availability
34 points: weather/climate
32 points: grower support
29 points: government involvement
25 points: quality seed availability
25 points: type of sales system
23 points: curing fuel availability where appropriate
In part, some of the things that might seem anomalous here are down to the fact that my question was not specific enough. So, for instance, the fact that “quality seed availability” doesn’t appear higher up the table is not because the experts didn’t think seed was important, but because some of them took the view that seed wasn’t an issue any longer. It had been sorted out some time ago to the extent that just about all tobacco growers now use only quality seed. I assume, too, that with much tobacco being grown as part of a cooperative effort between growers and buyers, “grower support” and, to an extent, “grower expertise” were seen in much the same light by some. And while “weather/climate” might be capable of blighting some seasons, over the long term this factor might be seen as being neutral, though less so, perhaps, in this time of reduced stocks.
“Government involvement” was one factor that split contributors, with some who would welcome more involvement, some who reluctantly accepted that the time of government support was over, and others who wanted governments to have nothing to do with the specifics of tobacco production but who acknowledged that governments had a role to play in providing a stable, predictable environment in which to do business in general.
The biggest surprise to come out of this exercise as far as I was concerned was that “curing fuel availability where appropriate” came out bottom, because, after all, the guide to success at the start of this story mentions sustainable production. In part, the lowly position occupied by curing fuel availability was because two of the experts who took part were involved wholly with sun-cured tobaccos. But even so, this factor was not rated within the top five places by anybody, even though its contribution to sustainability, whether positive or negative, must be huge.
In answering a question about what the current supply/demand situation was in respect of the tobacco types and varieties in which his company was involved, one contributor said, in part, that though all markets were being impacted by changing cigarette consumption, those that were sustainable were likely to be less affected. There was continued pressure on growers “to remain profitable and invest in mechanization to produce crops grown in compliance with environmental and labor standards.”
It will be interesting to see how these issues are resolved in Zimbabwe in the time available given that, under the Sustainable Tobacco Program, starting in 2020, global cigarette companies are expected not to buy leaf tobacco produced in an unsustainable manner. In February, NewsDay Zimbabwe reported that not one tree seedling had been planted in Zimbabwe as part of a government reforestation scheme funded to the tune of $20 million by levies imposed on farmers since 2015.
The bottom line
Meanwhile, I think that it should be of no surprise that the top three places went to “consistency of offtake by buyers,” “grower prices” and “export prices.” Consistency of offtake dovetails nicely with the consistent production mentioned in the guide at the start of this story. And the importance of consistency of offtake was nowhere better illustrated than in India, where a onetime troubled flue-cured tobacco production industry was turned around after buyers stopped using it mainly as a country they went to when supplies from elsewhere failed to meet demand. As I write this piece, a successful—from the point of view of growers and buyers—Karnataka sales season is coming to an end, and what looks like being a successful Andhra Pradesh season is starting.
It is unfortunate, therefore, from the point of view of Indian growers, that while they are at last enjoying the fruits of a relatively stable industry, the authorities are introducing uncertainty by raising the prospect of reducing production in line with the diktats of the World Health Organization’s Framework Convention on Tobacco Control. Such a prospect would not be so negative if it were based on a concrete, rational idea, but it continues to be based on vague promises about pie-in-the-sky, unspecified “alternative” crops and other schemes.
The question of grower prices is a more complex one than is offtake, though the two cannot be separated. Logically, the producer should receive a price that makes it worthwhile to grow tobacco the following season, while the buyer should be able to obtain the tobacco he needs at a price that allows reasonable profits to be made further up the chain. But this supposed balance doesn’t exist in reality, certainly not in all producing countries. This can be clearly seen in Zimbabwe, where sales seasons over the past 20 years have seen grower prices that have fluctuated but that overall have not increased.
The reasons for this state of affairs seem rarely to be looked at, but one buyer who contributed to this report said simply that buyers imposed on growers terms that included stringent grading requirements and poor prices. As an example, farmers in Malawi received low prices on long crops and slightly improved prices on short crops. Over the past 10 years, grower prices for Malawi burley has been between $1 and $2 per kilogram. In addition, farmers were never contracted for more than the current growing season. How, then, could they look at borrowing money to finance their children’s higher education or a mortgage, etc., he asked.
Interestingly, shortly after these comments were made, the Malawi parliament’s agricultural committee asked the Tobacco Control Commission to change its tobacco classification system because, in its view, the current system did not favor tobacco growers.
Managing challenges
In the main, contributors seemed reasonably upbeat about the future of tobacco production, though not oblivious to some very obvious challenges that were being faced and that would be encountered to a greater extent in the future: the fall in the consumption of traditional cigarettes; the rise in the consumption of new nicotine/tobacco products, some without tobacco, some with small amounts of tobacco whose form and blend were different to those of traditional cigarettes; and legislation impacting the consumption of certain types of tobacco. Also raised was the perennial problem of trying to encourage tobacco manufacturers to be more forthcoming in respect of their future requirements.
Burley tobacco, buffeted by a fall in the consumption of American-blend cigarettes and legislation restricting or even banning the use of flavors in cigarettes, seems to be most threatened. Indeed, Alliance One International announced earlier this year that it would not be buying any burley from the U.S. market in the current season. The longtime U.S. leaf tobacco commentator Christopher Bickers reported in his newsletter that Alliance One had put its decision down to sales of cigarettes in the U.S. declining by about 3 percent a year and global cigarette sales following a similar trend. But Bickers suggested that there might be other reasons as well, including perhaps the state of burley inventories and speculation about the U.S. Food and Drug Administration requiring reductions in nicotine yields.
Another threat facing U.S. growers arose during the preparation of this report as China named U.S. leaf tobacco as one of the items on which it might increase tariffs in retaliation for those threatened by the U.S. in respect of certain Chinese goods. China buys from the U.S. mainly flue-cured; tariff increases would be felt almost entirely by growers of this type. And according to a story by Brian Murphy and Zachery Eanes for The News & Observer at the beginning of April, the impact on growers in North Carolina, USA, could be “devastating.” North Carolina exported leaf tobacco worth more than $156 million to China last year, making China the biggest national consumer of the state’s tobacco. Presumably, too, there would be an added if slight impact since China was considering also targeting U.S. cigarette imports.
Outside of this threat, most contributors were not expecting dramatic changes in the production of flue-cured in North America. Nor were they expecting much change in Europe in respect of this type. Change was expected, however, in China and India, where, for a variety of reasons, including increased domestic demand and production controls, the availability of this type of tobacco for export would be reduced. This would mean that South America and Africa would see increased demand for medium- and lower-quality flue-cured. South America would continue to dominate, but Africa, which can provide everything from filler to flavor styles, would become an increasingly strategic area.
In the case of classical oriental tobacco, both the demand and overall volume supply seem to be relatively stable, as they have been for some years, though a huge oversupply of mediocre-quality Izmir tobacco in Turkey is, for the time being, causing severe headaches for merchants, who seem to have been left holding the baby. But within the oriental type, volumes are changing in respect of individual varieties. In the case of Greece’s Basma crop and Macedonia’s Prilep, the mood is good, and production of the former is likely to remain stable while production of the latter might increase (also see “Vote of confidence,” page 20). But in respect of some other varieties, the mood is not so good because of a range of issues to do, directly or indirectly, with prices, an aging farmer base, taxation, labor shortages partly due to urban migration and opportunities provided by other crops. Katerini production is in decline in Greece, Yacca production is falling in Macedonia, and the production of Krumovgrad and other varieties are in decline in Bulgaria. It is possible that the production of some varieties will fall below their tipping point and will eventually disappear altogether. In Turkey, Izmir production will be reduced significantly this year as part of a necessary short-term correction. But while this might impact the size of the grower base, Izmir will remain the dominant variety for the foreseeable future.
One contributor said that he believed that classical oriental needed a good boost provided by a combination of higher green prices, long-term commitments by all sides, participation of governments that includes EU programs and the provision of industry finance for the modernization of tobacco farms and farming methods. Another speculated that classical oriental production could disappear within 20 years.
On a more general level, one contributor cut through the complexities by saying that demand for cigarettes would continue to drop, and so the supply of cigarette tobaccos would have to drop with it. One consequence of this would be that cigarette manufacturers were likely to continue to reduce the complexity in their supply chains by concentrating on fewer origins—origins that offered stability in all its aspects and opportunities for expansion. Once these criteria were met, it would all come down to a question of price: which origins could supply the required tobaccos—mainly medium grades—at the lowest prices while complying with a sustainable program. And what this meant, in all probability, was that, in the main, smaller-scale farmers would move to other crops while larger operators would stay with tobacco.
The writer would like to thank the following contributors to this story:

• Nikos Allamanis, doyen of the Greek classical oriental tobacco industry
• Rainer Busch, principal, NewCo
• Frederick de Cramer, coordinator, Sunel Tobacco
• Graham Kayes, executive vice president of business relationship management and leaf, Alliance One International
• Iqbal Lambat, president and CEO, Star Agritech International
• Grant Readings, Premium Tobacco
• Rick Smith, principal, Independent Leaf Tobacco
• Nikos Tzoumas, MD, Missirian
• John Wallace, principal, Leaf Only

Flexible production technologies may help stem the forgery of cigarette paper booklets.
Contributed
When people contemplate the illicit trade in tobacco products, they usually think about cigarette brands. Less known, but increasingly problematic, is the counterfeiting of tobacco accessories, such as cigarette paper booklets. Established brands in particular are susceptible to this problem, and manufacturers are challenged to come up with ways to prevent the forgery of their valuable trademarks. One potential solution comes from engineering. By applying innovative technologies in the production process, booklet manufacturers can make life considerably more difficult for brand pirates.
Today, a wide range of tobacco accessories are available. The time when a roll-your-own tobacco smoker would select his favorite product from only a handful of more or less similar booklets is over. Not only have new products found their way to store shelves; the diversity of individual brands has increased enormously. Do you prefer white, unbleached or green paper? Is your preferred product made of hemp or wood? Have you already picked its size and thickness? In addition, a booklet today often comprises more than just a package with papers. Some include pre-rolled paper, flat tipping paper or even a tray for mixing.
The market for tobacco paper booklets is not only more diverse than it was in the past; it is also growing. A 2010 survey found that more than 10 percent of smokers in Europe use predominantly RYO. Other research suggests that, when cigarette prices rise, smokers are more likely to switch to RYO than to illegal cigarettes. The legalization of marijuana in many jurisdictions has boosted demand for rolling papers, as well.

Tobacco pest control technologies would be more effective if they were carried out correctly.
By George Gay

Can heat-not-burn products continue to grow at their current pace?
By Stefanie Rossel
All those stunned by the phenomenal development of e-cigarettes in the past decade may soon find themselves at a loss of words to describe the growth of heat-not-burn (HnB) tobacco products. According to some analysts, these products have the potential to dwarf the vapor category. For the time being, it’s the other way around. British American Tobacco (BAT) put the number of vapers worldwide at 55 million in 2017, compared with about 4 million users of HnB products—but the HnB segment is believed to be growing at a rate of 180 percent annually.
“Forecasting growth of the heated-tobacco category is still very much more of an art than a science, but it is relatively clear that in terms of growth rate alone, the category will be much more dynamic than other vapor product categories,” says Shane MacGuill, head of tobacco research at market research provider Euromonitor International.
He cites several factors. For starters, the HnB segment is growing from a smaller base. Also, the unit price of heated tobacco is broadly much higher than that of other vapor product categories, meaning that every new user or additional unit of volume grows value more speedily. “Heated tobacco might appeal to consumers which e-cigarettes do not seem able to reach or retain,” says MacGuill.
Breaking even
In contrast to the vapor industry, the market for HnB products remains highly concentrated. Three years after Philip Morris International (PMI) launched iQOS, though, competition has begun to heat up. Next to PMI, BAT, which has entered the race with Glo, and Japan Tobacco International (JTI), which markets Ploom Tech, are investing heavily to build scale. In November 2017, South Korea’s KT&G joined the multinationals in the category with the launch of Lil. Imperial Brands, too, may introduce a heated-tobacco product, according to analysts, despite that company’s initial skepticism about the segment.
The next generation of next-generation products (NGPs) is already underway. PMI and BAT are both expected to launch carbon-tip HnB products—called Teeps and Neo Core, respectively—this year. And, inevitably, copycats are trying to cash in on the success of the market leaders. There is at least one alternative heating device available that will fit iQOS consumables, wrote Jonathan Leinster, an analyst at Berenberg Bank.
Contrary to previous attempts at marketing heated-tobacco products—think of the hapless Accord and Premier—current efforts appear to be paying off. In terms of profitability, iQOS remains ahead of schedule. The product is expected to break even on a dollar basis in the second quarter of 2018, according to Wells Fargo Securities analyst Bonnie Herzog. At its recent investor day, BAT again increased its estimate for the size of the NGP segment. The company expects the heated-tobacco segment to account for 73 percent of its total NGP sales growth over the next five years, Leinster noted.
Big in Japan
In a recent webinar by Euromonitor on emerging and next-generation nicotine products, MacGuill, too, predicted a bright future for the category. He estimated that, by 2021, the top 10 HnB markets, led by Japan, the U.S. and Turkey, would together be worth $15 billion. Of the overall tobacco alternatives markets, he predicted, the segment would then constitute 45 percent, up from 17 percent in 2016.
By 2021, HnB products are expected to account for an estimated 22 percent of Japan’s conventional cigarette market, in which iQOS alone in October 2017 already held 13.3 percent, up from 11.9 percent in the third quarter of 2017, according to Euromonitor. In terms of market penetration, Japan is expected to continue to lead the global HnB segment by a significant margin.
Japan, of course, is special, not only because of its consumers’ famous appetite for new technologies but also because of its business environment. Due to a ban on vapor devices, there is little competition from other alternative products. Manufacturers in Japan can communicate with consumers comparatively freely, and its tobacco culture remains strong despite growing restrictions. Disposable incomes are high, and, at least for the time being, HnB products enjoy favorable tax treatment.
Decisive year ahead
For Leinster, the next year will be critical for NGPs. “We expect a firm indication in 2018 as to whether the heated-tobacco segment will have a significant presence outside of Japan or South Korea,” he said. Korea currently is the largest HnB market after Japan, with iQOS already accounting for 4.5 percent of domestic combustible cigarette sales. The performance of new products, such as BAT’s Raptor, the nationwide rollout of Ploom Tech in Japan and the national launch of Lil in South Korea, should provide useful indications about the future of the NGPs.
The industry will also be closely watching the outcome of PMI’s modified-risk tobacco product (MRTP) application for iQOS in the U.S., which the company submitted in December 2016. While the Food and Drug Administration is still reviewing the proposal and a determination isn’t expected until the first quarter of 2018, the company’s U.S. branch is said to already be preparing iQOS’ rollout. “If PMI were to be successful, this would be hugely supportive to the category globally,” says MacGuill.
Much of the HnB segment’s future success will depend on taxation. In Germany, for example, the consumables of cigarette-like HnB products, such as iQOS and Glo, are currently taxed as pipe tobacco, since they cannot be smoked directly. That means manufacturers benefit from a considerably lower excise rate—only a quarter of that for combustible cigarettes—and from the lower volume of tobacco needed in the consumables, which are about half the size of a combustible cigarette. As a result, selling HnB products is a lucrative business in Germany. A pack of 20 Heets (the iQOS consumables) retails at €6 ($7.13) in Germany, which corresponds to the price of 20 traditional cigarettes. Speaking to The Wall Street Journal, Michael Lavery, an analyst with Piper Jaffray, estimated iQOS profit margins to be between 30 percent and 50 percent higher than those on regular cigarettes.
Many variables
Other factors affecting the HnB category include pricing, consumer preferences, regulation and shareholder value. “Many of these factors are bivalent and could work for, or against, the category,” says MacGuill. If regulatory and fiscal authorities recognize that the new products present lower health risks than do traditional cigarettes, he says, this would obviously drive growth.
“Conversely, something close to tax parity between HnB and combustible cigarettes could remove room for maneuver for the industry in future years,” says MacGuill. “With respect to shareholder value, I think the accepted wisdom is that this will slow migration on the part of the companies over to HnB. I think this is true to a point, but it’s hard not to suggest that the emergence of iQOS is supporting PMI’s value currently, and then in the future we may see more and more recognition of the commercial logic in moving to reduced-risk categories and commensurate pressure on companies to do so.”
MacGuill assumes that HnB regulation will differ from that applied to vapor products because of the product’s symbolic content: tobacco. But the impact, he adds, won’t be uniform. “In some countries, the ‘symbolic’ presence of tobacco will lead to prejudice against the category. However, in others it may mean that heated-tobacco products are allowed where e-cigarette products are not, as with Japan currently,” he says. “The key impact will be in increasing the burden of persuasion and evidence building regarding the quantum of reduced risk—this is why the MRTP application could be so important. My sense is that the reduction of risk of liquid nicotine may intuitively be easier to metabolize for regulators and the public simply because ‘it looks different,’ whereas tobacco is assumed a priori to be harmful.”
Technology will also play a major role. “The more open the regulatory environment for HnB—and vapor products as a whole—is, the more incentive there is for innovation in important technical areas,” says MacGuill. “Big technical breakthroughs on vaporization, battery life or size could drive the appeal of HnB—or, conversely, increase the appeal of a competitor e-cigarette product type.”
The impact of next-generation consumers on the future growth of HnB products is still unclear. Members of the currently adolescent Generation Z—the successors to the millennials—are characterized by extreme health consciousness. MacGuill believes that’s a double-edged sword. “A real worry for the industry, I think, is that negative attitudes [among] Generation Z, and those coming beyond, to tobacco use—of any kind—harden so quickly that with or without risk reduction there is little ongoing demand for its products into the mid or longer term. However, if it can persuasively develop reduced-risk products [that] are thoughtfully designed and offer real value to the consumer, then health-consciousness can collide with other emergent consumer behaviors to offer the industry an opportunity.”
Challenging markets
While HnB products are increasingly successful in industrial nations, conquering lower-income countries might be more difficult because HnB devices are costly compared to combustible cigarettes. A possible scenario for these markets could be the emergence of a broad spectrum of HnB products, ranging from budget, me-too products to premium devices, such as iQOS—a development similar to that seen in the smartphone market.
MacGuill believes that consumers in low-income markets will be just as interested in reduced-risk products as their compatriots in richer countries. “There will be a demand for similar types of product within what is economically reasonable,” he says. Already, Chinese manufacturers are offering products that allow users to heat traditional cigarettes with the goal to reduce risk.
In the short term, these might be a solution in lower-income countries, as they would facilitate risk reduction while allowing consumers to continue to purchase more “cost-effective” traditional products, says MacGuill.
“In many lower-income countries, snus or other forms of smokeless tobacco could also be a competitor for heated tobacco.”
 

The spirit of innovation and renewal associated with heat-not-burn products has also gripped the supplying industries.
By Stefanie Rossel
Potential future hurdles for the heat-not-burn (HnB) category left aside, the advent of next-generation products (NGPs) has already changed the tobacco industry significantly. What used to be a rather static, conservative sector focused on a single product—the cigarette—now suddenly exudes some startup spirit. In a world of continuously declining cigarette sales volumes, the rise of NGPs has lifted the mood.
Considering the increasing regulatory pressure on the traditional business, pursuing daring ideas and venturing into the unknown has become not an option but a necessity. Using leaf tobacco, HnB products offer the potential of risk reduction to smokers who, for one reason or another, have been unimpressed by e-cigarettes.
The fresh impetus the HnB segment has brought to the tobacco industry can be felt in the ranks of suppliers, too. Unlike e-cigarette production, which bears little resemblance to conventional cigarette manufacturing, the construction of HnB products requires cigarette-like components. As a result, it engages traditional tobacco industry suppliers, such as papermakers, machinery manufacturers and instrumentation companies.

How newcomer Skruf took the age-old snus market by storm.
By George Gay

As part of Imperial Brands’ latest preliminary results, chief development officer Matthew Phillips provides a roundup of the company’s next-generation products (NGPs) in which he includes oral tobacco. What he is describing in respect of oral products is mainly concerned with snus, so what he has to say gives you pause for thought. After all, snus has been around for a long time, which leads you to question how it can be seen as an NGP.
I don’t know what Phillips had in mind, but in fact it is not hard to make a next-generation argument for snus. For instance, snus is a fairly new category for Imperial. And just as a story is “news” to somebody who has never heard the story before, even though others might have read it months previously, snus would represent a new product to most of the people of the world because they would be unfamiliar with it.
Some might object, of course, that “next-generation” implies a technological advance, and, indeed, in most tobacco/nicotine NGPs there is a strong technical presence. But vegan cheese is an NGP, and it doesn’t come with batteries and chargers. With snus and vegan cheese, the technology is likely to be confined to the design, formulas and processing.
But for me, the strongest argument for including snus as an NGP comprises its lower-risk credentials. For most people with a close interest in such things, an NGP label on a tobacco/nicotine product strongly implies that the product in question occupies part of the positive end of the continuum of risk, and, in my view, snus sits quite close to nicotine-replacement therapies (NRTs) on this continuum. Snus has a long, well-documented history of reducing risk (far more extensive than that of any NRT), both in the sense that it is inherently safer to use than are other tobacco products and possibly some nicotine products and, importantly, in the sense that it has a track record of providing many smokers with an acceptable alternative to combustible cigarettes.
The trouble is, snus can seem not to be going anywhere. The EU bans it in all countries but Sweden, and in the U.S. the Food and Drug Administration, while not banning it, doesn’t allow the lifesaving potential of this product to be promoted properly.
Amazing pace
But this is not the full picture. Recently, Imperial sent to me a graph showing the increase in production at its Skruf subsidiary, which is almost exclusively involved with snus, and that increase is almost vertiginous. In 2003, its first year of production, Skruf manufactured 400,000 cans, while this year (Imperial’s 2017 financial year to the end of September) it manufactured 94 million cans. “Basically, since day one, we have been growing at what can only be described as an amazing pace,” said Jonas Yden, Imperial’s smokeless category director.
Skruf was started in Sweden by two entrepreneurs, Adam Gillberg and Jonas Engwall, who, while looking to disrupt a category, stumbled on snus, which, in 2003, was ripe for the introduction of something new. Ironically perhaps, given their goal, they took the name of the company and their original brand from an old spelling of a small community in Sweden, Skruv, which, by the way, is a clue to one of the acceptable pronunciations of the name, the other of which rhymes with “hoof.”
Gillberg and Engwall enjoyed immediate success with Skruf, which quickly proved to be such a dynamic brand that they were encouraged to launch it in Norway in 2004, in which year production was to hit 1.9 million cans. In 2005, with production headed for 4 million cans, Imperial bought a minority share in Skruf, and the next year Skruf launched a new brand, Knox, in Sweden, which helped take production to 6 million cans. Two years later, in 2008, Imperial acquired 100 percent of the shares of Skruf, and production hit 11.5 million. In 2012, with production heading toward 40 million cans, Skruf launched in Sweden a low-price brand called Smalands, which is named after the region of Sweden where its factory was located.
All this activity has meant that Skruf has taken a 42 percent share of the snus market in Norway, where the company sells only the Skruf brand, and an 18 percent share of the Swedish market, where Skruf is its premium offering, Smalands is its low-price product, and Knox is its medium-price brand, which, with 14 percent of the market, is what Yden describes as the “volume engine.”
Whole package
At this point, the obvious question is what has driven the sales that have made necessary Skruf’s huge increase in production, which Yden puts at about 10–15 percent a year. It was difficult to pinpoint any single factor, he said, because it was really the whole package that had been successful, including how the company had approached the trade, how it had worked with distribution and how it had worked on pricing. But given the challenges that tobacco regulations raised in respect of communicating with consumers, it was obvious that the product had to stand on its own feet. Skruf had been good at creating high-quality products with flavors and formats that consumers wanted—basically using an “outside in” perspective. And right from the beginning, the company had been clear about doing things differently—standing out. It had launched the first white can on the market, and that had created a buzz because it stood out against older brands whose packaging was normally dark in color. Even now, most of the products in Skruf’s portfolio are white, particularly in Norway.
But innovation isn’t everything, everywhere. Yden said that it was necessary to look at the situation from an individual-market perspective. In Sweden, a traditional market, flavors weren’t a big thing, but in Norway consumers liked flavors and new formats. In Norway there was a need for a higher pace of innovation, and Skruf had hit gold in this market with its fresh mint flavor. That had taken Norway by storm and now represents a “pretty big chunk” of the company’s total portfolio and total sales in Norway, according to Yden.
Apart from that, Skruf worked with what it called a living portfolio. It tried to bring new flavors to market each year to test if they worked. If they did, they were retained; if they didn’t, they were delisted and something else was tried to keep things interesting for consumers. This kept the brand alive because things were happening the whole time. But that was in Norway, Yden said. In Sweden the pace was more restrained.
I wondered whether Skruf’s success had been achieved at the expense of other manufacturers or whether the company’s products were attracting new consumers. In fact, it’s a bit of both, plus the fact that the snus category is growing well both in Sweden and Norway. Thirty percent of snusers come from smoking, and these ex-smokers can reasonably be regarded as new customers. And it is also the case that a lot of ex-smokers tend to favor flavored products, which is an area in which Skruf is strong, particularly in Norway.
Skruf’s success has brought it recognition in Sweden, where it has been awarded “super company” status in each of the past six years. These awards are presented by the Swedish version of Bloomberg Businessweek only to companies with specific—high—sales and profit growth.
In-flight construction
But as well as bringing recognition, success has delivered capacity challenges, and, as a result, Skruf has been engaged in what Yden describes as “building the rocket while we’re flying to the moon.” Later he expanded on this and paid tribute to the factory’s workers, who, he said, didn’t necessarily get all the credit they deserved. They had done a tremendous job in increasing their efficiency so that, with the same amount of machinery, they had managed to manufacture a lot more products in a given time.
Despite these efforts, by 2011 Skruf’s production had outgrown its factory, and the company had to build a new one with 7,500 square meters of space. But by 2011, production had reached “only” 28 million cans, whereas it was headed toward 75 million in 2015; so it is not surprising that, for about the past year, Skruf has been adding another 5,000 square meters to its manufacturing facilities, which, like a cigarette factory, comprise a primary department—though one deals also with a pasteurization process—and a secondary department. The shell of the new building was finished in the summer of 2017, and at the end of November machinery was being installed.
Yden told me the company was now “future-proof,” but I got the idea that he was holding some sort of talisman at the time. Skruf had almost doubled the floor area of the factory, he said, and it didn’t take long to install new machinery. So now the company could be a lot more proactive in terms of production planning than it had been before.
That raised the question of whether Skruf might expand its horizons beyond Sweden and Norway. Well, world domination would be nice, said Yden, though he was realistic about trying to sell the snus experience around the world. But even if the snus product has limited travel opportunities, the Skruf brand might have more. In the summer, the company launched a lutschtabak (paste) product in Switzerland under the Skruf name, and that is said to be “doing extremely well given the small size of the category and Switzerland.” The company also launched a new chewing tobacco product under the Skruf name, this one in Denmark, which was said to be “doing OK.”
But Switzerland and Denmark were small markets, even compared with Sweden and Norway, Yden said, and the focus for the foreseeable future would be on core markets, which are now defined as Sweden and Norway. Being an entrepreneurial company, however, Skruf would be keeping its eyes open everywhere there was an opportunity.
While the U.S. is a big market for smokeless tobacco products as a whole, its snus market is comparatively small, according to Yden. The product would have to be adapted before it would achieve in the U.S. the sort of consumer pull that Skruf would want. At the end of the day, he said, the company would love to launch all over the world, and it if it changed the product around just a little it might find at least a few other pockets of interest.
 
Imperial ‘thrilled’ with Nerudia acquisition

Although the huge and rapid success enjoyed by the Imperial Brands-owned Skruf can best be described as “amazing,” in one sense the story is about a strategy that Imperial has long followed—one in which it has been comfortable and successful in expanding its portfolio of product types, in this case snus.
This strategy—this ambition if you like—was on show earlier this year when Imperial, through its vapor technology company Fontem Ventures, acquired Nerudia, a company that seems set to help Fontem and Imperial move in the new directions being encouraged by attempts to switch smokers to less harmful products.
It was early days in the acquisition story when, in November 2017, Tobacco Reporter was in contact with Titus Wouda Kuipers, the CEO of Fontem Ventures, but his enthusiasm for the new venture was clear.
“We’re absolutely thrilled to have made this acquisition,” he said.
“Nerudia is a well-established and respected business, and its founders have an impressive track record of developing innovative e-vapor and nicotine products.
“The [next-generation products] category is evolving incredibly quickly. High levels of innovation and fast-paced product development are very important in order to attract and retain consumers in the face of major competition.
“Product innovation is at the heart of our ambitions at Fontem, and Nerudia’s proven expertise will provide a significant boost to our capabilities in this area.
“As a research and development company, Nerudia’s strengths lie in the front end of the innovation process—that’s to say, coming up with new ideas and scrutinizing them thoroughly, part of which involves a deep understanding of the intellectual property landscape.
“At Fontem, we already have good capabilities in the latter parts of the process … taking a concept to mass manufacturing and through to market launch. So it’s an extremely complementary acquisition, and we look forward to making the most of the exciting opportunities that lie ahead.”—G.G.
 
 
 
 
 
 

In the classical oriental tobacco business, securing supply may prove to be a greater challenge than sustaining demand.
By Taco Tuinstra

Despite the global decline in cigarette consumption, demand for classical oriental tobacco has remained remarkably strong. Prized for its natural aroma, oriental is a key ingredient in the American-blend cigarettes that dominate in Europe and the United States. Cigarette manufacturers in Indonesia, one of the world’s largest tobacco markets by volume, use oriental to manufacture “mild” kreteks. And the leaf seems future-proof to some extent; the leading heat-not-burn product blends are all believed to include oriental tobacco.
On the supply side, cultivation of classical oriental tobaccos is limited to only four countries: Turkey, Greece, Macedonia and Bulgaria. Attempts to produce the leaf outside of the traditional areas—in China and India, for example—have been unsuccessful, due to different soils and climates. “It’s like trying to grow American-flavor burley or flue-cured Virginia in Greece,” says Costas Gleoudis, chairman of N. Gleoudis Kavex in Thessaloniki, Greece. “Of course, you can grow them, but they will not have the same characteristics as the real classical oriental tobaccos.”
With village grading still ongoing in December, Sunel Tobacco Co. expected the classical oriental countries together to produce some 120.5 million kg of leaf in 2017 (see chart), compared with 106 million kg in 2016. Anticipating a crop of 68 million kg, Turkey was on track to produce more than projected, but the Balkan volumes fell slightly short of expectations, according to Frederick de Cramer, who recently retired as general manager of Sunel but continues to work as a consultant to the company.

 
The Turkish growing season was characterized by a wet spring, followed by a hot and dry summer. “Farmers continued to harvest until mid-October as the top stalks kept producing new leaves,” says de Cramer. In addition, the relatively high prices paid last year prompted Turkish farmers to grow more tobacco. “Combined, these factors led to a bumper crop in Turkey,” he says.
The classical oriental varieties cultivated in Turkey are Izmir, Samsun and Basma. De Cramer describes the quality of this year’s Turkish harvest as mediocre. While the heavy rains early in the season boosted yields, they also caused the tobacco to grow too fast. The low and middle stalks of the plants—representing about one-third of the crop—suffered as a result. The late planted crop, by contrast, features nice-bodied tobacco and mature styles, according to de Cramer.
Even with stable demand, de Cramer expects the Turkish crop to sell, due in part to shortfalls elsewhere. What’s more, currency fluctuations have made the country competitive on the global market. Compared with last year, the Turkish lira has lost 20 percent of its value against the U.S. dollar, even as the euro, which is used in Greece, has appreciated.

De Cramer is encouraged also by renewed interest from the Far East, especially from Indonesia. Confronted by an unprecedented decline in cigarette sales and domestic content requirements, Indonesian manufacturers had scaled back their purchases of tobacco in recent years, but now their stocks are running low and need replenishing.
Greece’s tobacco growing season was similar to that in Turkey, with heavy rains at the start giving way to heat and drought. The rains fell primarily in the Katerini growing regions, contributing to a slightly lower quality of that tobacco style compared with last year. Greece’s other classical oriental tobacco variety, Basma, was less affected by the rain and is of higher quality than last year, according to Kavex.
“The overall quality of the Greek oriental 2017 crop is lower than the 2016 crop,” says Kontos Alexandros, general manager of Seke. “The weather conditions were not in favor for enhanced quality.”
“The Katerini variety was heavily affected by the weather conditions, and the quality is definitely lower than the 2016 crop, with much higher inclusion of low-quality leaves—perished, mixed—especially in the low stalk positions,” he adds.
Contrary to Kavex, Seke rates the quality of this year’s Basma as slightly lower than last year’s, due to higher inclusion of low-quality leaves in the low stalk positions.
Gleoudis describes the quality of this year’s Bulgarian crop (Krumovgrad) as low and that of Macedonia (Prilep and Yaka) as good. As often, estimates of the crop sizes vary per player. For example, while Sunel anticipates 9.5 million kg of classical oriental in Bulgaria, Seke puts the figure at between 7 million and 7.5 million.
Retaining farmers
Like de Cramer, Gleoudis and Alexandros expect oriental to remain in demand. The end of EU tobacco growing subsidies in 2006 forced Greek tobacco farmers to focus on commercially viable varieties—i.e., Basma and Katerini. The less popular types have been discontinued so that production today is aligned with customer requirements.
A bigger challenge, says Gleoudis, will be to sustain production. In many origins, farmers are aging. In Greece and Turkey, the average tobacco farmer is more than 50 years old (growers in Macedonia and Bulgaria are said to be slightly younger). Oriental is a notoriously labor-intensive crop; when given the opportunity, young people opt for more comfortable jobs in the cities or even in other countries. After Bulgaria joined the EU in 2007, many rural workers moved to member states with better employment prospects.
In Greece, the depopulation of the countryside has slowed in the wake of the country’s severe economic crisis. A lack of opportunities in the cities has convinced some tobacco growers to stay in their villages, but this situation is unlikely to last. When the economy recovers, the pace of urbanization will likely pick up again, notes Gleoudis. The 2017 Greek oriental crop was grown by 14,800 farmers, according to Seke, with 11,700 of them producing Basma and 3,100 growing Katerini.

Turkey’s growers face the problem of social insurance—or lack thereof. Young people prefer working a minimum-wage city job that carries insurance over toiling uninsured in the fields. Leaf dealer initiatives to offer some coverage have proved cost-prohibitive because doing so requires employing the farmers year-round, even though tobacco production is a seasonal activity. “What is the farmer going to do in winter?” asks de Cramer. “Unless our customers are willing to pay for it, it is hard to justify.”
To retain growers, the industry is trying to make the job of the farmer more profitable and a bit easier, primarily through mechanization. But oriental tobacco is not an easy crop to mechanize. It is often grown in hilly terrain, and the plant’s characteristically small leaves present a challenge for machines.  Nonetheless, progress has been made, according to Gleoudis. The greater challenge, he notes, will be to mechanize the curing process. “Here, we face some difficulties,” he says.
His sentiment is echoed by de Cramer. A relatively new technique known as “sock curing” or “sausage curing” brings down the farmers’ per-kilogram cost dramatically—but it also compromises quality, which in turn impacts the price. “Sausage curing works only for certain grades,” says de Cramer.
Despite the challenges, de Cramer, Alexandros and Gleoudis are sanguine about the outlook for oriental. Sunel and Kavex continue to invest, even as the industry consolidates. Alexandros expects future demand for classical oriental tobaccos to be “stable-plus.”

De Cramer also sees opportunities for oriental in the wake of the U.S. Food and Drug Administration’s push for lower-nicotine cigarettes. Unirrigated and unfertilized, oriental tobacco has comparatively low levels of nicotine already, and he says it would be relatively easy to reduce them further. “We are doing some trials already,” says de Cramer.
The vacuum left by Leaf Tobacco A. Michailides’ withdrawal from the Balkans is being filled by other leaf merchants. After heavy investments in Macedonia, Bulgaria and Albania, Seke says it is now the region’s second-largest tobacco firm. The company has built a €6 million ($7.22 million) factory in Macedonia, which is scheduled to start operations in April. The new facility can store and process 3 million kg of classical oriental tobaccos. Earlier, Seke modernized its factory in Xanthi, Greece.
Missirian and Ozege have reportedly formed a joint venture, combining their forces in Turkey, Greece and Bulgaria.
Kavex recently spent €2 million to upgrade a production line and install the latest Tomra sorter for the detection and removal from tobacco of foreign matter. The investment, says Gleoudis, demonstrates Kavex’s commitment to classical oriental tobaccos. “It shows we believe in the future.”