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October,
2008

TOBACCO INDUSTRY NEWS
Production, Distribution, Regulation, Trade...

Cigarette Maker Altria Set to Acquire Leading Moist Smokeless Tobacco Manufacturer UST for $10.3 Billion

Richmond, VA - Altria Group, Inc., parent company of leading U.S. cigarette-maker Phillip Morris U.S.A. and cigar maker John Middleton Co., has agreed to acquire smokeless tobacco manufacturer UST, makers of Skoal, for $10.3 billion in cash.

“The combination of Altria and UST creates the premier tobacco company in the United States with leading brands in cigarettes, smokeless tobacco and machine-made large cigars,” said Michael E. Szymanczyk, chairman and c.e.o. of Altria. “UST provides Altria with the leading premium brands, Copenhagen and Skoal, in the highly profitable MST [moist smokeless tobacco] category. We will also acquire Ste. Michelle Wine Estates, a premium wine business, as part of the transaction.”

Once the transaction is completed, Murray S. Kessler, current chairman and c.e.o. of UST, will become the vice chair of Altria, and will be overseeing the integration while reporting directly to Szymanczyk.

The integration is anticipated to generate approximately $250 million in annual synergies by 2011, primarily driven by reduced selling, general and administrative and corporate expenses.

UST Inc. is a holding company for its principal subsidiaries: U.S. Smokeless Tobacco Company and Ste. Michelle Wine Estates. U.S. Smokeless Tobacco Company is the leading producer and marketer of moist smokeless tobacco products including Copenhagen, Skoal, Red Seal, and Husky.

“U.S. Smokeless Tobacco Company is the leading and most profitable moist smokeless producer and marketer due to the efforts of Murray, his management team, and employees,” said Szymanczyk. “They have a deep understanding of the growing smokeless tobacco category.”

Phillip Morris USA’s Marlboro brand holds a 41.8 percent retail share, both the nation’s largest and fastest growing cigarette brand. The company’s other major brands include Parliament, Virginia Slims, and Basic.

The transaction is subject to UST shareholder approval and customary regulatory approvals.


Arango Cigar Acquires Wholesale Assets and Exclusive Distribution Rights of Tinder Box International

Northbrook, IL - Argano Cigar and Tinder Box International have reached an agreement that gives Argano all assets and exclusive rights to distribute Tinder Box tobacco and tobacco-related products, such as cigars, pipes and tobaccos, and smoking accessories, to all of the Tinder Box/Vino 100 franchise locations, amounting to over 130 stores.

These products have been transferred to the Arango warehouse in Northbrook, Ill. from the former Tinder Box warehouse in St. Simons Island, Ga.

“This opportunity enables us to expand the breadth of products we can offer [Tinder Box retailers] from one supplier, and for us to work on new products for Tinder Box stores,” said Wayne Best, Tinder Box International vice president of operations. “Since Arango is centrally located, this should better serve all stores.”

Michael Gold, Arango’s president, said “I am happy to be associated with the widely known and respected Tinder Box/Vino 100 organization of franchisee holders, and look forward to a profitable partnership for all parties.”

Added Best, “Michael is known for providing exceptional service, and has a fine organization to operate Tinder Box Wholesale.”


Cuban Tobacco Region Lashed by Hurricanes Gustav, Ike; Flooding in the Dominican Republic

Pinar del Rio, Cuba - Hurricane Gustav, a highly dangerous Category 4 storm, lashed Cuba on August 30 with torrential rain after leaving a trail of destruction across the Caribbean. The storm ploughed through Cuba’s Isla de la Juventud before hitting the mainland in Pinar del Río - the heart of Cuba’s tobacco farming region - with maximum winds of nearly 150 mph.

Gustav had already claimed the lives of more than 80 people in the Caribbean by the time it made landfall in Cuba, having swept through Haiti, the Dominican Republic, and Jamaica, killing dozens of people and causing widespread damage.

No casualties were reported in Cuba, due in part to the evacuation of over 250,000 people from low-lying coastal regions. However, authorities described the storm damage as the worst since 1956. The 212 mph gusts registered in the city of Paso Real de San Diego were the highest in Cuba’s history, according to the provincial newspaper, the Guerrillero.

Massive damage to over 100,000 homes, thousands of tobacco installations, and electric and telephone lines was reported. State media reported that many buildings were under water and entire warehouses had been brought down. The storm is estimated to have caused billions of dollars in damage.

According to the Cuban government news agency AIN, 3,306 tobacco curing barns were destroyed and 906 tons of curing tobacco leaves were drenched by rain, despite having moved half a million bales of cured cigar tobacco leaves into safe storage prior to the storm’s arrival.

But with cleanup from Gustav still underway, Hurricane Ike roared down on Cuba’s more heavily populated eastern end on Sept. 8 as a Category 3 hurricane, forcing 1.2 million people to evacuate and proving more deadly than Gustav, with at least seven casualties. The storm made a second, but weaker landfall in the western Pinar del Río province, drenching the already Gustav-ravaged area with more flooding and damage.

Gustav was still only classified as a tropical storm when it hit Haiti, which shares the western part of Hispanolia Island with the Dominican Republic, but while stalled there it lashed the island with intense rains, causing flash floods, mudslides, falling trees, and debris.

Tobacco crops are not found in the fields at this time of year in the Dominican Republic or Cuba, where growers wait until the end of hurricane season to plant their crops.


New Cuban Machine-Mades to Debut

Havana, Cuba - Internacional Cubana de Tabaco S.A. (ICT), the Cuban-Spanish joint venture that produces machine-made cigars, announced it will launch several new cigars by the end of the year, presenting the new products in November at the Havana International Fair, Cuba’s leading commercial exhibition held annually at the ExpoCuba fair grounds.

According to reports, the new offering include additional Belinda and Troya frontmarks, as well as a new mini size in the Punch line.

ICT, established in 2001, supplies Cuba’s domestic tourist market as well as export markets, produces 10 brands and 44 frontmarks including Mini, Club, Puritos, Minutes, Universal, and Crystal formats from its main factory located in the Havana suburbs. One of ICT’s best-selling brands is Guantanamera, which is made with tobacco from Vuelta Arriba, Cuba’s second major tobacco producer.

According to the Cuban news agency AIN, ITC’s total sales in 2007 grew by 10.9 percent over 2006, with exports for the year up 11.9 percent over 2006, driven largely by European markets. According Blas Manuel Fernandez Concepcion, economic director of ICT, sales for the first eight months of 2008 will equal the total amount of cigars sold throughout the previous year.

Last year, the National Standardization Office and Bureau Veritas granted ICT the quality certificate for implementing the 2001 ISO 9001 quality standards.


National Tobacco Will Cease Louisville Tobacco Manufacturing, Distribution by Year-end 2009

Louisville, KY - National Tobacco Company, LP (NTC), a subsidiary of North Atlantic Trading Company Inc., announced that all tobacco product manufacturing and distribution at its Louisville facility will cease by year-end 2009.

Production of all NTC loose leaf tobacco brands, which is the primary function of the Louisville facility, will be transitioned to Owensboro, Ky. under a long-term agreement with Swedish Match North America Inc. NTC will retain all marketing, distribution and trademark rights over its brands. Specific plans for NTC Roll-Your-Own tobacco manufacturing and Louisville product distribution will be announced in the future. The company will continue to maintain its administrative headquarters at the Louisville facility.

Ron Tully, vice president of public affairs, stated, “NTC has come to this decision because the Louisville facility, built in the early 1900’s, operates well below capacity, is energy inefficient and consists of a series of unconnected, multi-story buildings with limited weight-bearing floors that cannot satisfactorily support modern manufacturing techniques. Declines in overall tobacco industry volumes, and increasing regulatory burdens on the industry also contributed to the decision to cease production and distribution at this facility.”

Tully further added, “The company deeply regrets the impact of this decision on our employees, their families and the Louisville economy. This decision is not the fault of any of our employees, many of whom have over 30 years of service, or are second or third generation employees. Unfortunately, the company cannot foresee any future developments, alternatives or improvements that could change this decision.”


Miami Cigar & Co. to Distribute Felipe Gregorio
Bahia Cigar Negotiations End with No Agreement


Miami, FL - Effective October 1, Miami Cigar & Company will become the exclusive distributor of the Felipe Gregorio premium cigar lines.

Philip Wynne, the founder and c.e.o. of Felipe Gregorio, started making cigars in Honduras in 1990, then opened factories in Nicaragua and the Dominican Republic, where the Sinatra brand was produced. The Nicaraguan factory was later closed, but the Dominican factory continues to manufacture cigars.

Felipe Gregorio’s cigars include the Petrus, heavily favored in Europe; the traditional blue, which is favored more in the American market; and Power, which was rated among the top 25 cigars of 2008.

Wynne said that having someone else distribute his cigars had been on his mind for nearly a decade, and that he could not adequately devote himself to marketing and promotions while still being heavily involved with production. “I was far more valuable to the company in the factory, than out selling cigars,” he said.

Nestor Miranda, president of Miami Cigar & Company, said he was “delighted” to have the Felipe Gregorio brand join his company’s lines. Rene J. Castaneda, national sales manager, added that he felt none of the brands would suffer from the expanded product mix, which included La Aurora, Leon Jimenes, Don Lino, and Tatiana.

In separate news, Castaneda made it clear that negotiations between Miami Cigar & Company and Tony Borhani regarding future distribution of Bahia Cigars had been terminated. Word of a possible deal had been circulating since the 2008 IPCPR Trade Show in Las Vegas in July, where Bahia Cigars - once a major boutique brand - exhibited only an empty booth.


Mobile Cigar Lounge Co. Launched by NHL Vets

Tampa, FL - Two recently retired NHL veterans with an affinity for fine cigars - Stan Neckar and Dave Andreychuk - have teamed up with cigar industry veteran Juan Guillen to create the Mobile Cigar Lounge Co. (www.mobilecigar-lounge.com), an event rental company providing luxury an onsite cigar lounges in response to limitations imposed by smoking bans.

The impetus, recalls company president Neckar, came one evening after winning the Stanley Cup. “Half the team was standing outside having celebratory cigars and I was thinking, ‘there has got to be a better way.’”

The innovative solution created by the team is a classic Airstream recreational trailer transformed into a luxury mobile cigar lounge. Completely custom built of cherry wood, granite counters, hard wood floors, ostrich seating, five flat-screen satellite TVs, and the company’s signature “Cigarista” hostess service, the Mobile Cigar Lounge offers an upscale addition to events.

“We not only provide a great service but a unique and fresh option to the event planning industry,” says Neckar, who’s targeting the service to golf events, ultimate tailgating, fundraising, product launches, client appreciation, weddings, and other private celebrations.

“There’s nothing like it out there. The Mobile Cigar Lounge is a place where people can relax, enjoy good conversation and a great cigar, and be pampered. Our guests are very appreciative,” said partner Andreychuk. Since the company’s January launch, a number of respected Tampa organizations and events - including Outback Pro-Am, Alltel, Brighthouse Networks, and Jr. Achievement - have enlisted the Mobile Cigar Lounge as part of their events. “Organizations realize the added value of offering their guests an experience, a place where they feel appreciated for their contributions,” says Neckar, company president. “Many deals have been made over cigars.” A recent lounge guest, actor and long-time cigar enthusiast Frank Vincent, enjoyed Father’s Day with the Mobile Cigar Lounge. “I have never seen anything like it. What an amazing concept,” said Vincent.

The company offers a number of packages and other services including master cigar rollers, who are “always an entertaining and an educational crowd pleaser,” and Cigarista Cigar Servers, who add classic 1920’s panache. Based in Tampa, the company will be adding additional locations.


Star Scientific Wins Appeal in Portion of RJR Patent Lawsuit

Petersburg, VA - Star Scientific, Inc. has won an appeal in a lengthy legal battle with R.J. Reynolds Tobacco Co. over patents covering a process to reduce some cancer-causing toxins in tobacco.

According to a Reynolds spokesman, the August 25 ruling by a three-judge panel of the U.S. Appeals Court for the Federal Circuit in Washington means the lawsuit brought by Star Scientific Inc. against the nation’s second-largest cigarette maker is likely to go to trial.

Star, which sells smokeless tobacco products, sought millions of dollars in damages in the lawsuit, filed in 2001. It claimed that Winston-Salem, N.C.-based Reynolds had infringed Star’s patents for a method designed to reduce carcinogens called tobacco-specific nitrosamines, which form during the curing of tobacco leaves.

The appeals court overturned a lower-court ruling in 2007 that declared the patents invalid. The appeals court sent the case back to U.S. District Court in Maryland.

“Our company really believes that we ultimately will be successful in the lawsuit” said Sara Machir, Star’s vice president of communications and investor relations.


R.J. Reynolds Makes Camel the focus of its Menthol Brands

Winston-Salem, NC - R.J. Reynolds is modifying its portfolio strategy by shifting its premium menthol Kool brand from a “growth brand” to a “support brand.” The company will focus Kool’s future marketing and promotional support to geographic areas where the brand demonstrates strong consumer appeal.

At the same time, it is refocusing its investment in the premium menthol category on the Camel brand, which is primarily known for its non-menthol styles. The company believes that Camel’s strength provides significant opportunities in the expanding premium-priced menthol category, in which the brand currently has a small but growing position. Camel has long been the company’s primary growth brand, based on the strength of its unique positioning and product line, taste signature, and innovative marketing approach.

The move is part of numerous changes in the organizational structures at RAI and its largest subsidiary, R.J. Reynolds Tobacco Company in an effort to streamline non-core business processes and programs to allocate additional resources to strategic growth initiatives.

In addition, planned reductions in the RAI and R.J. Reynolds Tobacco workforces will generate savings of about $100 million by year-end 2010, with annualized savings of approximately $55 million thereafter.


Survey by Association for Women Cigar Smokers Paints Portrait of Female Cigar Consumers

Austin, TX - The Association for Women Cigar Smokers (AWCS) and Cigar Research have recently completed their first annual survey of women cigar smokers. The survey, given to both men and women, was used to find out if there were significant differences between the genders, and to find any data relating to the buying and smoking habits of women.

“The habits of female cigar smokers has long been hazy,” AWCS states in its summary of survey results. “While numbers relating to the size of this consumer group are yet unknown, some information was gathered about women cigar smokers.”

According to the survey, a majority of women smoke once a week, and 67.5 percent of women spend between $100 and $1000 per year on cigars. The founder of the Association for Women Cigar Smokers, Heather Haddad, said, “This data is very exciting to female cigar smokers because it demonstrates in a tangible way that women are an important demographic. It’s our goal to continue to determine the size and scope of this market so that industry will begin to create products with women in mind.”

With regard to the question of why women buy cigars, the survey found “personal experience with a brand” was the most powerful response (82 percent), and women found themselves indifferent to box and label design (73 percent and 55 percent, respectively).

One of the main differences that the survey found between genders was the differing feelings elicited by smoking a cigar. “While women responded that they feel powerful (24 percent), attractive (25 percent), strong (15 percent), fun (43 percent), and rebellious (22 percent), men, when asked the same question, responded in much lower numbers. Instead, men felt peaceful when smoking cigars (97 percent), a sentiment that was shared by 76 percent of women. Women also indicated that their primary motivation for cigar smoking was because they liked the taste of the tobacco.”

The survey was conducted online with a sample size of 100 male respondents and 83 female respondents. Results were anonymous.

The full results of the survey are available to the members of the Association for Women Cigar Smokers. Additional information about the survey is available at womencigarsmokers.com and cigarresearch.com.


Congress Seeks Crackdown on Black Market Tobacco Sales

Washington, DC - The House of Representatives on September 10 moved to crack down on contraband cigarette sales, passing HR 4081 on a vote of 379 for and 12 against. The bill targets those who sell tobacco products across state lines without paying state sales taxes, virtually banning the mailing of tobacco products, and requiring vendors to notify tax officials in receiving states when they use commercial delivery services. The bill raises cigarette trafficking from a misdemeanor to a felony and empowers the Bureau of Alcohol, Tobacco, Firearms and Explosives to inspect companies that distribute large volumes of tobacco products. The bill is now before the Senate.The bill would impose shipping and record-keeping requirements on those selling cigarettes and smokeless tobacco over the phone or through the mail or Internet, and make failure to comply with state tax laws a felony. It is currently a misdemeanor.

It would also require Internet and other remote sellers to verify the age and identity of purchasers to cut down on sales to minors. Delivery of cigarettes and smokeless tobacco through the U.S. Postal Service would be ended.



SMOKESHOP - October, 2008