Building brand value with the next wave of product.

By Joseph Finora

Just when you think there's no room left for innovation in the cigarette business, when the Master Settlement Agreement (MSA) and Big Tobacco dominance promises to do everything but completely wipe the "new guy" from the map, someone emerges with a promising and unique new business model. Being innovative and finding opportunity where others see a dead end is the heart of Ft. Lauderdale-based Third Millennium Tobacco's mission, providing competitive prices, high-quality, private-label manufacturing, and support services specifically for regional distributors who often find themselves in the middle of a hostile climate with seemingly constantly changing rules. The new business opportunity promised in this model is designed to create equity, while avoiding the pitfalls of the ever-shifting MSA playing field.

Very little can compare with the power of brand equity, which rarely comes cheap. During a time when launching a brand often means supporting it with a monstrous marketing budget, Third Millennium is offering regional distributors the ability to create their own brand which they can build and offer to other distributors. A full menu of support services follows.

Third Millennium, which has been in business in the United States for five years, has its cigarettes manufactured in Latin America. While it is working to fill orders it is developing a hi-tech, 100 percent MSA-compliant factory in Ecuador. Paraguay and Colombia are manufacturing locations that may come on line in the future.

"While Third Millennium Tobacco brands like Millennium and Buffalo, among others, fall into the deep-discount category," says Edwin Soto, president of the firm, "we prefer to call them 'value cigarettes.' Even though our cigarettes are less expensive than the premium brands, all of our brands use the best tobacco available."

Soto grew up in southern Florida and got in the tobacco business by handling cigars at a very young age. Starting as an eight-year-old in his parents' Miami retail shop, Soto later went on to work in cigar distribution and manufacturing and also ran a Las Vegas-based retail chain before designing his own label - Third Millennium Cigars, a brand which survived the boom-to-bust cycle of the go-go 1990's before hovering down to enjoy relatively lower but steady production and sales.

Today Third Millennium is actually two entities. Third Millennium Tobacco Corp. is for doing business with the non-MSA states - Florida, Texas, Minnesota, and Mississippi, plus Native American Reservations. Pan-American Tobacco Corp. works in full MSA compliance with the remainder of so-called MSA states. In addition to Soto, Alex Gimmelstein serves as director of the Miami-based company. While the firm is privately held, both executives report that business has been steadily increasing in each year it's been in operation.

"The generic market barely existed four years ago with sales at about two percent of the market. Now we're looking as high as 20 percent in some areas," notes Gimmelstein, a long-time veteran of the cigar industry. "We're offering quality and reliability with this product, as well as a competitive price. We're aiming to give customers what they're looking for."

Has Soto and company found the magic formula? It's too early to say but they seem to have their finger on the pulse of industry rumblings. "We're friends to the distributors," says Soto, who started rolling out the plan with Gimmelstein in 2001 with the goal of eventually having a presence in all 50 states via a national network. Third Millennium does not sell directly to retailers or the general public, and aims to protect distributors from MSA violations by helping them remain MSA-compliant on a variety of fronts.

"While foreign companies have not signed on to the MSA it does not mean they are free to do so," says Rob Scott, of Dallas- and New York-based Scott & Scott, L.L.P., an appellate law firm.

"It's not clear whether foreign companies can do this. If so it can be a big opportunity. No one's tested this yet, but so far, the slate is clear."

The Master Settlement Agreement is a legal contract established between 46 states and five U.S. Territories, with participating tobacco manufacturers. It provides numerous restrictions and prohibitions, including: bans on the use of cartoons in tobacco advertisements, youth exposure to sampling, certain sponsorships, and the use of most outdoor advertisements.

"This is a way for distributors to build equity within the MSA framework. We can help them get a bonded warehouse in every state. Supporting distributors 100 percent is important for us," says Soto. "Our image is a very important asset and we're willing to work with distributors in many areas to see that their needs are met. They do not have to worry about anything but seeing that the brands are getting into the hands of customers."

Third Millennium cigarettes come in soft or hard box packs and contain 20 cigarettes each. They are flue-cured filter cigarettes in both low-tar and nicotine versions, and feature full flavor, lights, ultra-lights, menthol, and menthol lights versions. They're American-type tobacco blends with porous-cellulose acetate filters.

The company will also discuss creating new or specialty/boutique brands. Promotion has so far largely consisted of displaying at tobacco expos and by calling on contacts the two have made over the years in the industry.

Also high on the list is providing a quality smoke with marketing support behind it. Part of the plan calls for offering first-rate tobacco backed with premium presentation material. Their products - which include such brands as Buffalo and Arrows - are hitting the shelves priced at about half of what premium brands are charging, however. Paris and Las Vegas are its private label brands.

Comprehensive Programs
Third Millennium offers a three-tier marketing program. Level One is for price-sensitive markets where a standard quality cigarette and basic support services are provided. Each level offers different degrees of inventory management assistance, as well as marketing and financial support, which can include flexible payment programs, according to both Soto and Gimmelstein. This includes assistance with warehousing, importation and partial ordering; providing marketing material such as retail posters; and payment terms which also include billing administration and letters of credit. Level Two is its premium service category. It offers all of the above-named services as well as continuous stock availability and replenishment, as well as a delivery feature.

The Advantage Level or third support level offers services of the previous two levels but features private label brands, choice of blends, and pricing advantage as well. Level Three also includes brand development/awareness/product launching, permit-registration services, as well as logistics management and networking programs.

The Millennium brand is a price-sensitive entrant that comes with the basic support services. It comes in full flavor, lights, menthol, menthol lights, and ultra lights. An exotic beach-scene poster and packaging that includes strong coloring should help the label climb shelves. The company's in-house brands, Paris and Las Vegas, come with the full-service Advantage Support Level and have artistic, sophisticated box graphics. Buffalo, designed for Native American reservations, also falls into the private-label category with Advantage support services. It comes in menthol, lights, full flavor, and ultra lights. A traditionally dressed Native American watching over a herd of buffalo conjures up images of the Old West. Arrows, billed as a Native American specialty, is also a full-line brand aiming to capitalize on Western imagery through its retail posters and box graphics.

With the Third Millennium model, distributors can build brand equity for themselves as they can qualify for lifetime exclusive distributorship of some brands. In other cases, minimum orders can be relatively low and terms can be negotiable. "They must grow the brand with us, however," Soto notes before adding that the distributor does not need to "worry about much else."

Third Millennium Tobacco, 2800 SW 4th Avenue, Bay 14, Fort Lauderdale, FL 33315, Tel: (954) 828-9201, Web: www.thirdmillenniumtobacco.com.

SMOKESHOP - June, 2004