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April 1999
Volume 26
Number 2

RETAILER & TOBACCO INDUSTRY NEWS (cont.)

New Hampshire Retailers Fend Off Tobacco Tax
Close Call Proves Importance of Waging Organized Fight
After coming up against voluble resistance from local smoke shop retailers, New Hampshire's Ways and Means Committee voted recently to recommend increasing tax on cigarettes, but not cigars and pipe tobacco. The revenue will be used to improve education in the state.

Cigarette smokers will now pay an extra quarter per pack, increasing the tax to 62 cents per pack, but cigar and pipe smokers will not be hit.

Testifying at the Ways and Means meeting were concerned consumers and several angry retailers, including David Garofalo, owner of Two Guys Smoke Shop in Salem, New Hampshire. Garofalo relocated his business from Massachusetts three years ago when tax hikes "ruined his business" and forced him to leave; he threatened to do it again.

"We could never afford such a thing," he said of the proposed increase. "We will not be able to get past the first day." OTP taxes, including cigars and pipe tobacco, which are currently not taxed in New Hampshire, would have been set at 37% of their wholesale cost.

"If we tax cigars, we would put several small businesses out of business, and we're not going to make a lot of money," Senator Fred King told the Associated Press.

"With mail order and Internet sales of cigars competing directly against in-state retailers, we would have priced them out of the market and thus hurt businesses," added Ways and Means Chairman Clifton Below.

Bad Hurricane Season Predicted
A top forecaster says the 1999 Atlantic hurricane season could be just as deadly as last season's, which caused severe damage in Central America. "The odds strongly favor us entering a new era for storms," William Gray, a Colorado State University weather forecaster, said at the National Hurricane Conference in April. Cyclical changes making Atlantic waters warmer and saltier are behind the upswing in storm activity, Gray said. The same conditions have not been seen since the late 1960s.

RJR Nabisco Announces Sale of its International Tobacco Business
RJR Nabisco Holdings Corp. has agreed to sell its international tobacco business to Japan Tobacco for $8 billion, along with the assumption of $200 million worth of debt. In addition, the New York-based company's Board of Directors approved a plan to separate R.J. Reynolds Tobacco - its domestic tobacco business - from its Nabisco food business.

Tokyo-based Japan Tobacco is the leading tobacco company in Japan, with a domestic market share of nearly 80 percent, and increasing sales overseas. In the deal, Japan Tobacco acquires all international rights to Camel, Winston, and Salem.

RJR Nabisco says it will use proceeds from the sale to strengthen the financial position of Reynolds Tobacco Co., which had total revenue of $5.6 billion in 1998. As an independent company, Reynolds Tobacco will have four of the leading U.S. cigarette brands: Camel, Winston, Salem, and Doral. The company will be based in Winston-Salem, No. Carolina.


Premium Cigar Imports Fall 29.6% in 1998
Domestic Glut Forces Market Correction; Top Regions Saw Big Production Cutbacks

After posting five consecutive years of double-digit growth fueled by intense popular interest, premium cigar imports fell by 29.6% in 1998 as distribution channels were forced to address a growing glut of inventory. Overall, corrected premium cigar imports totalled 344.3 million in 1998, compared to 489.2 million in 1997.

The year was marked by a dramatic weeding-out of startup factories throughout the Dominican Republic, as well as Honduras, Nicaragua, and the Canary Islands, as production shifted back to larger, established facilities.

Official import statistics released by the Cigar Association of America (CAA) indicated a documented 14% drop in imports; however, machine-made cigars imported from the Dominican Republic into the U.S. have been classified as premium cigars since 1997, overstating total U.S. premium cigar imports. The CAA estimates 100 million machine-made cigars were imported from the Dominican Republic in 1998, and 30 million in 1997. By accounting for these discrepancies, the CAA estimates that the Dominican Republic actually shipped 165.8 million premium cigars in 1998, compared to 238.4 million in 1997, a 30% decline.

The Dominican Republic remained the firm leader in premium cigar shipments to the U.S., shipping nearly twice as many cigars as the number two supplying region, Honduras, which saw imports decline by 26% from 117.4 million in 1997 to 86.6 million last year. Nicaragua posted similar declines, retaining its number three ranking, but reducing its shipments to the U.S. by 37%, from 43.6 million cigars in 1997 to 27.2 million in 1998.

Jamaica was the only nation among the top 15 supplying countries to increase its shipments to the U.S., aided by Consolidated Cigar's transfer of Royal Jamaican cigar production from the Dominican Republic to a new factory in Maypen, Jamaica. Overall, Jamaica shipped nearly 5 million more premium cigars to the U.S. in 1998, 23.3 million in all compared to 18.1 million in 1997, a 28% increase. Jamaica overtook Mexico in total premium cigar shipments to the U.S. in 1998, capturing the number four position and knocking Mexico, which shipped 55% fewer premium sticks, down to number five. Overall, Mexico shipped only 11.9 million premium cigars in 1998, compared to 26.2 million in 1997.

The Netherlands, ranked number six, saw premium cigar imports fall by 35%, while Germany, ranked number seven, posted a 28% decline. Eighth-ranked Indonesia retained the greatest year-to-year portion of the market, seeing premium cigar shipments to the U.S. fall by only 3% in 1998, to 2.8 million from 2.9 million in 1997.

The Canary Islands dropped from the number eight supplying region to number nine, with premium cigar shipments falling from 5.2 million in 1997 to 2.1 million last year, a decrease of 60%. Switzerland similarly dropped in the ranking, from number nine in 1997 to number 10 last year, posting a 53% decline in premium cigar shipments to the U.S., from 4.3 million in 1997 to 1.99 million in 1998.

While total shipments from the top 15 supplying regions fell by 30%, shipments by the remaining 19 origins grew by 90%, but accounted for less than 1% of the total premium cigars imported to the U.S. in 1998.

Winston "No Additives" Ads Deemed Deceptive by FTC
Settlement Adds Disclosure Statement

Advertisements for additive-free Winston cigarettes now carry a disclaimer saying they are no safer to smoke than other cigarettes under an agreement announced in March by federal regulators. The FTC claims the ads by the R.J. Reynolds Tobacco Co. as they originally existed were misleading and amounted to deceptive marketing.

Under the settlement, Reynolds agreed to include a disclosure in its ads that states: "No additives in our tobacco does NOT mean a safer cigarette." The disclosure appears in a rectangular box 40 percent the size of the Surgeon General's cigarette health warning and in a clear and prominent location. Disclosures are also to be placed on all in-store ads.

Commissioner Orson Swindle said he was convinced that "many consumers interpret ads containing express 'no additive' claims to mean that Winstons are not as harmful as other cigarettes."

Under the settlement, Reynolds must include the disclosure in all advertising for Winston no-additive cigarettes, regardless of whether the advertising contains a "no additive" claim, for a period of one year. After that, Reynolds must include the disclosure in all products that it represents as having no additives.

Public health groups had asked the FTC to investigate R.J. Reynolds' ad campaign in 1997, after the company reformulated its Winston brand to remove all additives. The groups applauded the settlement, calling it an important first step in cracking down on deceptive cigarette ads. The proposed agreement is subject to a 60-day comment period before the FTC decides whether to make it final.


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