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October
2003

GO Roll A Smoke!

Slow but steady growth in the roll-your-own and make-your-own segment opens doors for tobacco retailers as expert sources in an expanding niche.

By Bob Ashley

Smoke shop owners who keep track of the trends in their stores may have noticed a gradual increase in the sales of roll-your-own and make-your-own cigarette tobacco and accessories in recent years.

Nobody directly compares the increased popularity of roll-your-own (RY0) and make-your-own (MYO) cigarettes to the mid-1990s cigar boom. But there are similarities in the marketplace starting at about the time major cigarette companies and the attorneys general in 46 states approved the $246 million Master Settlement Agreement (MSA) in 1998. The MSA and subsequent state-level tax increases throughout the country dramatically drove up the retail price of packaged cigarettes.

"I can tell you that our roll-your-own category is five times what it was prior to the MSA," said Mike Gold, president of tobacco and accessory distributor Arango Cigar Co., Northbrook, Ill. "But to put things into perspective, back then it might have been 1 percent of our business. Now it's 6 percent. It's a growing business, but it's still a small number."

Arango distributes two of its own brands - Jason and American Sportsman, and also Top, American Spirit, Bali Shag, and Drum cigarette tobaccos in addition to others. "Ten years ago we carried a fraction of the products we sell now," Gold says. "We have expanded the line almost sixfold. And we don't feel it's reached its peak or potential yet."

The RYO/MYO categories are distinguished by the method used to hand-make cigarettes. RYO are made with loose-leaf paper, either using by hand or with small rolling machines. MYO cigarettes employ pre-made cigarette tubes with filters and a machine that "injects" the tobacco.

General estimates are that RYO/ MYO tobacco accounts for about 3 percent of the American cigarette market. Those who anticipate the RYO/MYO market will continue to grow point to Europe where the RYO/MYO market share is closer to 20 per cent. "Taxes in Europe went up much sooner than taxes in the United States," says Brian Levine, specialty product manager of Peter Stokkebye International Charlotte, S.C. "As taxes go up and prices go up in the United States, Americans are going to find more and more time to make their own cigarettes." That already is occurring, suggest many.

"There's no doubt that the growth we've seen is because of the increased taxes on cigarettes," says Darren Thibodeau, marketing manager for Kretek International Inc., Moorspark, Calif., importer of Look Out and Mynheer cigarette tobaccos from the Netherlands and Germany, respectively. "Price is a strong factor, but another factor is the uniqueness of the tobacco for some individuals. And the advent of some of the new tubes and rolling machines make it a lot easier to make cigarettes yourself."

The main appeal of roll-your-own is the price advantage, says Mark Ryan, president of Daughters & Ryan Inc., which operates as D&R Tobacco, Smithfield, N.C. In August, the company introduced nine new smoke shop blends at the Retail Tobacco Dealers Association (RTDA) trade show in Nashville, Tenn - among them, Three Sails, Two Timer, Cockstrong, Winter Gold, and Penhooker. "Even with that, the appeal of our tobacco is the quality and the broad variety. We've tried to get the very best tobacco in each category to fill the little niches."

At Cascade Cigar and Tobacco, a smoke shop in Portland, Ore., the popularity of RYO/MYO tobacco has caused owner Jan Esler-Rowe to set up a small roll-your-own counter to allow customers to experiment with the 20 or so cigarette blends that the store stocks. "Most people use the tube filler injectors," she says. "Cigars are our business, but roll-your-own is a very popular growing segment. We see an increase every time the states hike cigarette taxes."

RYO/MYO is an important segment that traditional smoke shop owners need to include in their inventory, says Donald Levin, president of Republic Tobacco LP, Glenview, Ill., manufacturer of best-selling Top tobacco, cigarette tubes and rolling papers, and Drum and Gambler tobacco brands. "What's nice about make-your-own for the tobacconist," Levin says, "is that it's a business that people come to their store for. Everybody goes to the drug store for cigarettes, but everybody goes to their tobacconist to buy roll-your-own tobacco. That's why it's important for a tobacconist to stock the product."

Smoker Friendly Discount Cigarette Stores LLC, Cheyenne, Wyo., features occasional Saturday afternoon RYO clinics in its six stores in Wyoming and Nebraska. "Sometimes we get four or five people. A couple of times, we've had as many as 20," says managing member Dell Peterson. "We generally run promotional discounts on make-your-own kits to encourage people to try them."

It's All About Price?
Peterson says that the increased interest in RYO/MYO cigarettes is fueled by cost, and that high-end brands elicit no interest from the vast majority of Smoker Friendly's customers. "The MSA really started it when the price of cigarettes went up so quickly in the first year and a half," Peterson says. "At that point, people started to look for an alternative. And as state taxes have gone up, roll-your-own has become a bigger part of the business. People who are rolling their own aren't looking for special tobacco. They are looking for a good price."

Bobby Stoker, president of RBJ Sales Inc., Dresden, Tenn., manufacturer of Stoker's No. 2 and Old Hillside cigarette tobacco and the importer of German-made El/Rey cigarette tubes and injectors, says he sees both economic and lifestyle implications in the increasing market for RYO/MYO tobacco. "There are certain people who are buying the high-priced tobacco, which is comparable to the cigar boom," Stoker says. "But the majority of the make-your-own segment is people trying to save a dollar." Larry Diamond, a tobacco buyer for distributor H.J. Bailey Co., Neptune, N.J., says one advantage consumers find with RYO/MYO tobacco is that it's typically higher quality than that used in mass-produced cigarettes even though RYO/MYO usually costs less per cigarette.

"The market definitely is increasing," Diamond says. "Basically, it's a cost thing. A lot of people on fixed incomes smoke the lower end products, while college kids smoke the higher end." Because of the economics of the marketplace Stokkebye International President Eric Stokkebye doesn't draw too many parallels between the cigar boom and the increased interest in RYO and MYO cigarettes. "The cigar boom was a social type thing," Stokkebye says. "It became a fashion fad. It was a statement by people that they were doing well.

In contrast, Stokkebye says the increase in roll-your-own and make-your-own cigarettes is almost the opposite. "Money is tight and the cost of cigarettes has gone up - fueled by the MSA and state tax increases," Stokkebye explains. "Roll-your-own and make-your-own are looking for a price edge, although I do see our Bali product as more of a lifestyle product." Stokkebye, famous for its pipe tobaccos, offers three Danish-made mass market RYO and MYO tobacco brands - Bali Shag, McClintock, and Long, the latter of which includes a MYO starter kit with an injector, tubes, and tobacco that will make about 200 cigarettes.

For the more upscale cigarette smoker, the company markets Danish Export, Norwegian Shag, Amsterdam Shag, Turkish Export, and Stockholm Blend under the Peter Stokkebye name that are suited more specifically for traditional smoke shops. "It's our way of doing a bulk roll-your-own tobacco for the smoke shop so they can sell it by the ounce or by the can. They can private label if they want to, or they can empty the cans into a jar in their store and sell it by the ounce," says Stokkebye's Levine. "We encourage smoke shops to be creative to get the consumer to come back to them to buy again."

While some companies draw little distinction between roll-your-own and make-your-own cigarettes, Stokkebye prepares different cuts of tobacco for each. "Make-your-own tobacco is cut and processed so that you can use it with tubes and the injectors and you get what would look like a factory-made cigarette," Levine says. "Roll-your-own is cut thinner and it's a little moister blend so that it is easier to roll. It can be the same tobacco. It just depends on the blend we are going for, although, generally, with the roll-your-own we use a milder leaf because you don't use filters."

It's All About Quality?
The increasing popularity of RYO/ MYO tobacco has garnered its own Internet-based webzine - www.ryomagazine.com. "Make-your-own and roll-your-own often initially attract people for economic reasons," says Doug Kennedy, president of Andromedan Design Co., Ashland, Ore., and publisher of ryomagazine.com. "But when people start using really good tobacco they find the flavor so satisfying that they rarely go back to mass-market cigarettes. Smoking then becomes more of a hobby, like cigars or pipes. They know what they are putting in their cigarettes and there are dozens of tobaccos to experiment with.

"When people make their own cigarettes, they are involved in an active process, and it changes the way they smoke cigarettes. Usually, they make one at a time, rather than grabbing something out of a pack. They understand the cigarettes they make taste like the cigarettes from 40 or 50 years ago." According to Dan Miller, director of brand equity for Santa Fe Natural Tobacco Co. Inc., Santa Fe., N.M. - manufacturer of American Spirit natural cigarettes and four kinds of American Spirit RYO cigarette tobacco - such attitudes are becoming more prevalent in the RYO market. "There is definitely a lifestyle component," Miller said. "We find a number of consumers who like the ability to control the size of the cigarette they are smoking and the ritual of touching the tobacco, and knowing exactly what is in there."

Republic's Levin sees a cigar-boom parallel in the number of manufacturers and distributors who have gotten into the RYO/MYO business as its popularity has increased. "There are more brands out there than the market is going to absorb," Levin warns, noting that small manufacturers using tobacco of questionable quality popped up all over Central America and South America during the cigar boom. "Eventually, the market is going to contract and wholesalers are going to end up with a lot of bad tobacco. The demand is up. Every year it's going up. Is it up enough to add five new brands every year? No."

Like Levin, Diamond is concerned about rogue manufacturers disturbing the market. "We've never had such an influx of new manufacturers as we have today," Diamond says. "And a lot of them aren't selling quality product."

Dean Rouse, president of M&R Holdings Inc., a seventh-generation tobacco grower and manufacturer of Farmers Gold RYO tobacco, also advises caution to the retailer. "Retailers who are getting into it now need to be conscious of the quality and the price of the product," says Rouse, who is also chairman of Friends of Tobacco, a non-profit association that promotes the economic benefits of tobacco.

"We are seeing a lot of people who have tried to capitalize on the roll-your-own market from their garages," Rouse says. "They are not complying with all the rules and regulations, and they are not going to be here very long. It's going to leave a bad taste in the mouths of the retailers." Rouse contends that the poorly written MSA agreement has, until now, allowed rogue manufacturers and distributors to proliferate.

"The MSA as written has a lot of loopholes in it that a lot of folks have figured how to get around," Rouse says. "The attorney generals and the cigarette companies created a mammoth mess that is unenforceable. They didn't know how the tobacco industry works. All they wanted to do was collect the taxes." That may be changing as the states approve supplemental MSA laws that will more closely track wholesale sales, and punish retailers dealing with non-MSA signators.

Cascade Tobacco's Esler-Rowe says that because of state penalties tied to the MSA, she's very careful about who she buys her tobacco from. "I get approached by people all the time who want to sell me cheap tobacco," Esler-Rowe says. "If they can't prove positively that they have signed the MSA, I won't deal with them." That's sound advice for all tobacco retailers.


SMOKESHOP - October, 2003