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February,
2006

All Eyes on Kreteks

Shifting supply trends have changed the balance of brands in the U.S. marketplace in recent months, but it's the spector of federal legislation that has players in the kretek segment on guard.

By Joseph Finora

Clove cigarettes, also known as kreteks, are a relatively small segment of the U.S. cigarette market. Yet they continue to move into the spotlight as the niche industry goes through what will surely be remembered as a tumultuous period.

While they certainly have a touch of the exotic and mysterious about them -and have remained popular with smokers looking for something different, - the industry itself has been nothing short of volatile with several notable players saying good-bye to the niche market. The legislative side of the business is also filled with what at best can be described as a challenging environment.

"Kreteks are brought under proposed bans in 8-12 states," says Henry C. Roemer, III, executive director of the Specialty Tobacco Council, Inc., a trade organization in Winston-Salem, N.C. Florida, Kansas, Massachusetts, New York, and North Carolina each have bills pending at the time of this writing, proposing to varying degrees to ban flavored cigarettes. Many are watching for the dark legislative cloud that could come to rest over the specialty category. "If a ban on flavored cigarettes passes in West Virginia, we believe there is a high likelihood similar bills could be replicated in other states," notes Citigroup tobacco analyst Bonnie Herzog. The West Virginia bill proposes a ban on "candy- and fruit-flavored cigarettes," in the state. The argument has focused on the introduction of Camel Crème and Camel Twist, both part of the Camel Exotic blend line. A spokesperson for Reynolds America, the parent company, has argued that the line's been designed to reignite interest in the brand and is aimed at adult smokers under the age of 30 and not children. They are largely sold in tobacco shops and bars not accessible to children and are not advertised in magazines or newspapers. If the bill passes, other states may attempt similar measures.

Sampeorna, now owned by Philip Morris International, has left the U.S. market leaving American Kretek's Gudang Garam as the only viable challenger to Kretek International's market leader, Djarum.
Menthol has been given an exception and Roemer is hoping clove cigarettes will receive a similar treatment, which some states have provided. Kreteks are already banned in Utah, New Mexico, and Maryland. It can be argued that clove producers are fighting a multi-front battle. Any time a ban on all tobacco products emerges they are drawn into it. At the same time, other battles have been aimed specifically at the clove market. When flavored cigarettes as a category come into question, kreteks will again be put under the microscope.

The industry works hard to control its image. Marketing is generally limited to trade show displays and other to-the-trade communications. And demographic data on the customer base is hard to come by. What's known is that they appeal to a mature, adult smoker who can afford the higher prices and appreciate the nuances of a so-called exotic cigarette. Their overall sales volume is very low compared to conventional cigarettes and they have traditionally been handled by the tobacconist who can afford to stock an in-depth inventory for exotics and alternatives. Yet, in recent years, distribution has moved beyond the traditional tobacconist and into convenience and mainstream cigarette channels.

"Clove is a niche product within the industry," notes Darren Thibodeau, marketing manager for Kretek International in Moorpark, Calif. "Yet while the domestic premium market is consistently down year after year, the clove market is still showing growth."

The playing field in the U.S. continues to change, though.

Last May, a subsidiary of Philip Morris International (PMI) acquired 98% of Indonesia's P.T. Sampoerna for $4.8 billion. While Indonesia's third-largest tobacco company had nearly a 20% market share at home, its U.S. presence was small.

"As there was only a limited market for Sampoerna products in the United States, a business decision was made to cease distribution to that market following the acquisition," explained Richard James, manager of external communications at PMI. Until the sale, Sampoerna brands had been imported and distributed in the U.S. by Lignum-2 of San Leandro, Calif.

California-based American Kretek Company, the exclusive U.S. importer of Gudang Garam brands, has moved headquarters in recent months and could make a move to grow the brand here. P.T. Gudang Garam is Indonesia's dominant kretek manufacturer, but to date has not joined the Master Settlement Agreement in the U.S., limiting its ability to effectively compete with Kretek International's MSA-compliant Djarum brand at the national level.

While formal sales figures for the category are not available, casual retailer feedback reiterates that demand for kreteks remains vibrant. While some retailers are wishing for a return to the days when they were exclusively the ware of the tobacconist, others are pleased that they remain steady sellers and attract a different type of client that they might not otherwise have.

"We've been selling them for years," says Joe Lentine, manager of Owl Shop Tobacco Café in New Haven, Conn. "When they were only available in tobacco shops it was better for us. The pie has been cut into too many pieces." Lentine says mass distribution has cut into the tobacconists' offerings and weakened his ability to draw smokers into the shop. "When they first came out they were very popular," he recalls but adds that the venerable store still has a regular calling for kreteks.

On the opposite end of the country, Andy Usmani, sales associate at Tobacco Patch, a retailer in Seattle, Wa., which sells all kretek brands, says, "They're steady sellers. Mostly to women who often first learn about them from an older friend." It's usually a "walk-in," female client between the ages of 21-40 who buys kreteks, says Usmani. "They're not the regular smoker. They're doing it for the taste." They retail for about $7 a pack at Tobacco Patch and most sales are one pack at a time.

"We attribute a large part of this [kretek growth] to smokers switching to alternative product from domestic premium product. Despite the added cost, customers don't smoke as many cigarettes per day compared with standard domestic product," says Thibodeau, who adds that selling kreteks is "far more profitable" than even domestic premium cigarettes.

While kreteks have a loyal and possibly even growing following, and provide retailers with an exotic product backed with a strong profit margin, the future is not free from obstacles, mostly on the legal front. "Legislative issues threaten availability of these products in some states," admits Thibodeau. "Yet many consumers are finding a pleasant alternative, albeit occasional, experience in these products. We anticipate continued growth in the clove market at least for the next year."

Or as Henry Roemer of the Specialty Tobacco Council puts it: "Clove cigarettes have been enjoyed for over 100 years." With any luck, they'll continue to do so.


SMOKESHOP - February, 2006