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April,
2006

N.A.T.O. Expo 2006

Retail tobacco shops embraced this year's trade show in Las Vegas with strong attendance as the NATO trade organization celebrate its five-year anniversary.

By E. Edward Hoyt, III

The 2006 N.A.T.O. Conference & Expo, held on March 28-29 at the Las Vegas Convention Center, drew tobacco retailers of all types as well as distributors to participate in a two-day event featuring an expansive exhibit hall of tobacco merchandise - including cigarettes, RYO/MYO, cigars, and smokeless, as well as ancillary products - and a series of information and educational seminars. New this year was an opening night gala dinner held by the affiliated trade association NATO. The guiding theme of this year's event was "Focusing on driving your growth and profits via high-margin products and best industry practices."

The National Association of Tobacco Outlets (NATO) celebrated its fifth anniversary this year by hosting the first-ever NATO Gala Awards Dinner on the evening of March 27th at the Flamingo Hotel. The first-class event, overseen by NATO's tuxedo-clad board of directors and officers, packed the balloon-speckled ballroom with over 500 manufacturer, distributor, and retailer members of the trade association. It was designed to "bring back a time-honored tradition of other national tobacco-related trade associations," explained Thomas Briant, executive director of NATO. Reaction to the evening, which featured a cocktail hour, sitdown dinner, presentation by NATO officials, and awards presentations for NATO's Pinnacle Awards, was overwhelmingly positive. Evening sponsors consisted of Philip Morris U.S.A.; R.J. Reynolds Tobacco Company; Tobacco Outlet Business Magazine; Conwood Sales Co., L.P.; John Middleton, Inc.; Swedish Match North America; Swisher International; and U.S. Smokeless Tobacco Company.

The 2006 NATO Manufacturer Pinnacle Award was presented to Swedish Match North America for its history of supporting NATO's legislative and membership programs. Also, NATO retail members Fred Hoyt of Smoke 'N Go and John Dan Gielen of Tobacco Plus received the 2006 NATO Retail Pinnacle Awards for their extraordinary efforts in coordinating efforts to defeat a proposed cigarette tax increase in Louisiana last year.

From left: Dan Carr and Chuck Pavona, Swedish Match North America, recipients of the 2006 Manufacturer Pinnacle Award; Fred Hoyt, Smoke 'N Go, (NATO President Velma Hartley), and John Dan Gielen, Tobacco Plus, recipients of the 2006 Retailer Pinnacle Award; NATO Vice President Andrew Kerstein; and Dave Kepler, NATO Secretary and Treasurer.
Tobacco Industry Overview
Bonnie Herzog, beverage and tobacco analyst at Smith Barney, again made her traditional NATO Expo presentation on the tobacco industry, identifying trends and assessments of legislative risks, taxation, and activities at the major public tobacco companies and how all of these factors affect the distribution and sale of merchandise in the retail outlet.

Current industry fundamentals continue to improve for the major cigarette companies, Herzog explained; with some price increases sticking, profits are slowly rising and higher margins returning. In the deep discount category, however, growth is stagnant, and some consolidation is likely to occur.

Coming off the heels of notably large tax increases in 2005 - the largest round of hikes seen in recent years - Herzog anticipates more modest increases this year, although potentially large increases in Texas and California are of particular concern: together, these two states represent 16% of total cigarette consumers in the United States. Overall, state fiscal conditions rebounded in 2005, Herzog explains, and with many state budgets now showing moderate revenue growth, pressure to raise taxes to fill budget gaps has eased. Last year, 10 state passed higher tobacco taxes for a weighted average of a 12.9% increase to $0.90 per pack.

Herzog said she has no doubt that increased smoking regulations "are the future," and expects more states to pass anti-smoking initiatives throughout the year. Studies have concluded that cigarette consumption is negatively impacted by increased regulation, she reports, although to a lesser degree than first estimated. The impact of smoking bans on consumption depends on how aggressive the legislation becomes, she notes, but adds that regulations affect all manufacturers equally, giving no company a comparative advantage.

The relative price gap between premium and deep discount brands has been maintained at a "reasonable" level, said Herzog, which is preventing a lot of the downtrending seen previously from higher priced brands to cheaper ones.

Counterfeit and illegal cigarette import volume declined for the past two years, Herzog said, and should continue to decline in 2006 as the recently enacted Patriot Act included a provision to create a new tracking system for cigarettes.

Innovation in the sector will continue to be a focus, and will likely play a greater role than in the past, Herzog says. Areas to watch are creative packaging design, reduced risk technology, and smokeless - a key expansion area for the major cigarette manufacturers which will be crucial in driving their top line in the face of a 30-year decline in cigarette sales. The smokeless category itself will see increased competition in 2006, Herzog predicts.


SMOKESHOP - April, 2006