Taxation and New Products

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Taxation and New Products

• Gregory N Connolly DMD, MPH
• National Smokeless and Spit Tobacco Summit
• September 22,2009

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New Smokeless Products and Acquisitions by the
Cigarette Industry

• Swisher 4.5 Billion RRJ 2005
• PM Acquired USSTC 16 Billion 2008
• PM Swedish Match International Joint Venture
• Introduction of New Forms Snus, Dissolvables ?
• Today 88 of the Smokeless Market Owned by the
  Cigarette Industry

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Components of a Tin of Moist Snuff and a Pack of
Cigarettes (2008)
PPremium brands Sources FTC Reports,
Annual Report of Altria and USSTC, Tax Burden on
Tobacco, NAAG, USB.
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Tobacco Products Sales
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• This flurry of smokeless category activity
  reflects the overall strength and growth of the
  OTP market. In addition to smokers desire for
  new smokeless alternatives, that growth is driven
  by new product introductions and flavor
  innovations.
• www.awmanet.org/dc/dc_cover0706.html

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Dual Users are a Big Driver of Current MST Growth

• Based on our research, we believe the bulk of
  smoker migration into MST is coming from dual
  users (consumers that dip and smoke). We estimate
  that about 30 of dippers also smoke. The
  proliferation of smoking bans has effectively
  increased the number of dipping occasions.

Source UBS Research, 2007, Natl Tobacco
Incidence Study UST
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Effective Prices of Other Tobacco Products and
Cigarettes per Alternative Tax Rates
Data sources Average price (except for
cigarettes) from AC Nielsen ScanTrak Average
cigarette price from Tax Burden on Tobacco
(2008). State tax rates from Tobacco Free kids.
Federal Tax Rates from U.S Department of Treasury
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Recent Changes in Federal Excise Taxes for
Smokeless Other Tobacco Products
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Smokeless Tobacco PricesData Sources
ACNielsen Scan Track Orzechowski, Walker (2008)
Prices and taxes are based on the following
unitsMoist snuff (1.2 oz) Dry Snuff (1.0 oz)
Skoal Bandits (1.2 oz) Camel Snus (20 pouches)
Camel Orbs (15 tablets) RYO (20 pieces) Small
Cigars (20 pieces) Cigarettes (20 pieces)
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Weight-based Taxation of New versus Traditional
Smokeless Products
TFK
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Quotes

• Moist smokeless tobacco volume is increasing
  faster in the nine US states that have a
  weight-based tax than in those with a percentage
  tax based on the wholesale price, indicating
  theres a latent growth in the category that may
  be realized if states convert to a weight-based
  tax. Retail and foodservice consulting firm,
  Willard Bishop.

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State Weight-based and Ad Valorem Smokeless
Tobacco Taxes(Number of States)
Moist Snuff Chewing and Smoking Tobacco
Weight-Based 18 9
Ad Valorem 31 41
Pennsylvania currently has no tax on
non-cigarette tobacco products. Kentucky taxes
snuff 19 cents per unit.
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Current Moist Snuff Among Youth Ages 12-17 Years
Data source U.S. Substance Abuse and Mental
Health Services Agency, National Survey on Drug
Use and Health, 2002 - 2007
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Note Sales and price data were derived from
ScanTrak scanner data licensed from ACNielsen, a
global provider of marketing research information
services, in US food stores with at least 2
million in annual sales, US drug stores with at
least 1 million in annual sales and all US mass
merchandisers, with the exception of WalMart.
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• New Snus Products not Expected to Hurt Cigarette
  Volumes
• The majority of our survey respondents (64) do
  not believe either of the new snus products will
  affect cigarette volumes by promoting current
  smokers to quit at a faster rate. Rather, the
  new snus product will most likely (1) attract
  smokers that have previously quit, (2) that are
  currently using moist snuff, (3) smokers that are
  looking for a temporary nicotine kick when they
  cannot smoke, or (4) smokers that would have quit
  anyway. This bodes well for RAI and MO share
  holders as these new snus products dont appear
  to be cannibalizing either Marlboro or Camel
  brands.

Citigroup Investment Research, 2007
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• New Snus Products not Expected to Hurt Cigarette
  Volumes
• The majority of our survey respondents (64) do
  not believe either of the new snus products will
  affect cigarette volumes by promoting current
  smokers to quit at a faster rate. Rather, the
  new snus product will most likely (1) attract
  smokers that have previously quit, (2) that are
  currently using moist snuff, (3) smokers that are
  looking for a temporary nicotine kick when they
  cannot smoke, or (4) smokers that would have quit
  anyway. This bodes well for RAI and MO share
  holders as these new snus products dont appear
  to be cannibalizing either Marlboro or Camel
  brands.

Citigroup Investment Research, 2007
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• When scientists have identified undesired
  compounds in a product, we have seen it as our
  responsibility to reduce or eliminate these
  compounds, if feasible.
• www.myeval.net (Swedish match No America)

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• We focused on innovation, introducing a variety
  of more approachable new products that would
  appeal to smokers. We also ramped up our
  communication with smokers, acquainting them with
  smokeless tobacco products.
• Butler, President USSTC (USSTC, May, 2008)

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Domestic Smokeless Advertising and Promotional
Expenditures 1998 2006 (Millions of dollars)
Source Federal Trade Commission Smokeless
Tobacco Report for 2006

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