JTI Debuts a New Design for Wave

MAY/JUNE 2015 VOLUME 18 n NUMBER 3

The Innovation Game: Bases Loaded Beyond e-cigs and vapor devices, new tobacco technologies are stepping up to By Renée Covino the plate with power. Will reduced-harm products and other innovations change up the competitive field?

2015 Vapor Expo Preview

The Dark Side of Taxation

Uhle Tobacco Company’s Journey PUBLISHER’S LETTER BY ed o’connor

Father’s Day 2015… Now 115 Years Old

Father’s Day turned 100 years old on June 20, 2010. Sono- So we’ve done the next best thing. Enjoy “Unforbidden ra Smart Dodd, often referred to as the “Mother of Father’s Fruit,” Renee Covino’s article on Cuban cigars appearing in Day,” was 16 years old when her mother died in 1898, the March/April issue of TBI (p. 30) with comments by Dick leaving her father, William Jackson Smart, to raise Sonora Dimeola, a premium cigar expert and long-time friend of and her five younger brothers on a remote farm in eastern the cigar industry, Victor Vitale, Marshall Gray and other ci- Washington. In 1909, Sonora heard a Mother’s Day church gar aficionados. Don’t have a hard copy? Your cigar article sermon inspiring her to propose that fathers receive equal is available to you on tobonline.com. recognition, lending credence to the old saying, “Behind For those of us excited about the dynamic growth of the every good man there’s a good woman.” electronic (c-cig and VTM) markets, be sure to With the assistance of her pastor, the Spokane, Wash- check out this issue’s Electric Alley column (p. 42) along ington YMCA and the Ministerial Alliance, Sonora’s idea with our profile of the innovative vapor company became reality. The first Father’s Day was celebrated in (p. 66). Finally, don’t miss Michael Gelfand’s Trench Market- 1910. Dodd suggested her father’s birthday, June 5, be es- ing column on Milwaukee’s renowned Uhle Tobacco Com- tablished as the day to honor all fathers, but to allow pany (p. 76). time to prepare the Alliance decided on the third Sunday Enjoy—and men, hug the ladies in thanks for originating in June. your special day! We dedicate this issue to fathers and to the women who Best to you and good selling, made the day possible. No special occasion would be complete without a cel- ebratory cigar. And while passing out cigars to all of you is what we’d really like to do, logistically it’s just not possible.

4 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 INSIDE THIS ISSUE

CIGAR SENSE Cigar Sense: Banking on Cigars 30 The decorated bank building from the 1800s might be the pull that gets so many passersby to walk into James and Sons Tobacconists, but it’s the invest- ment in excellent stogie sales practice that yields the high customer return.

FEATURES Cover Story: The Tobacco Innovation Game: Bases Loaded 46 Beyond e-cigs and vapor devices, new tobacco technologies are stepping up to the plate with power. Will reduced-harm products and other innovations change up the competitive field?

Electric Alley: The Hasty Taxman Cometh 42 Minnesota and North Carolina already tax e-cigs, and 14 other states have introduced bills to follow suit, but lawmakers are being accused of not fully grasping the industry or the true effects of their proposals. The Dark Side of Tax Hikes 56 Smuggling, theft and thriving illicit trade are the side effects of state tax hikes.

Are You Ready for Vapor Expo International? 62 Opening on June 17, this second annual two-day event will feature more than 200 vapor product suppliers and exciting educational seminars.

Are You Ready for Vapor Expo International? page 62 PAX Labs: Dedicated to Innovation 66 How a California company plans to revolutionize the vaping category.

Get Your Vape Game On 72 Are you ready to get your share of the VTM market?

Trench Marketing: Best of Both Worlds 76 Milwaukee’s venerated Uhle Tobacco Company shows that old-school values and modern technology can thrive together.

Publisher’s Letter 4 Father’s Day 2015…Now 115 Years Old

News & Trends 12 PAX Labs: Dedicated to Innovation, page 66 Federal Tax Hike Possible, Vaping Bans Proposed and More

TMA Report 20 A Roundup of Industry News

Category Manager: Vaping Devices 26 E-Cig Report Sheds Light on Sales Trends

Pipe in Hand 40 The Power of Pipe Club Camaraderie

Op-Ed: Why an Excise Tax on Won’t Work 74 Fewer legal sales won’t necessarily mean lower rates.

Product Profile 86 A Guide to New and Popular Products Trench Marketing: Best of Both Worlds, page 76 NEWS & TRENDS MAY/JUNE 2015

Davidoff to Debut Tampa Flagship Shop The 5,000-square-foot store will be the company’s largest in the world.

Davidoff of Geneva USA plans to store filled with premium cigar retail Tampa, with its rich cigar history, is cement its commitment to the Tampa space, multiple lounges both indoor a fitting home for the venture, adds Bay area with a new “Davidoff of Ge- and out, private lockers, and an ele- Jeff Borysiewicz, president of Coro- neva—since 1911” store in late 2015. gant full-service bar serving premium na Cigar Company. “We’re thrilled to Situated in the MetWest International alcoholic beverages. expand our retail operations and to Retail Village, the 5,000-square-foot “We are delighted to open a new serve cigar enthusiasts in the Cigar store will be the largest Davidoff flag- ‘Davidoff of Geneva—since 1911’ store City of Tampa,” he asserts. “We look ship store in the world—and the com- in our home market,” says Jim Young, forward to creating the ultimate cigar pany’s first licensed flagship store out- president of Davidoff of Geneva North experience in a community with such side of Las Vegas, Nevada. Davidoff of America. “We are particularly excited a long history of cigar manufacturing Geneva USA will open the new loca- to do this in partnership with Jeff and and rich cigar culture. It’s an honor to tion in partnership with Jeff and Tanya Tanya, who have been outstanding be partnering with Oettinger Davidoff, Borysiewicz, successful owners of Or- Davidoff partners for quite some time. the global leader in premium cigars lando-based Corona Cigar Company. They know how to provide consumers and luxury cigar stores, and it is ex- To create a destination in the Cigar with a premium retail experience, they citing to be building upon the legacy City, “Davidoff of Geneva—since 1911” know our entire product portfolio, and that Zino Davidoff started over 100 will feature a completely humidified they know our company.” years ago.”

12 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 NEWS & TRENDS MAY/JUNE 2015 Highlights Mistic Returns to the Raceway Washington

Company plans to continue racing sponsorships Legislators Tar- it began in 2014. get E-Cigarettes

Value-priced electronic maker Mistic has decided to continue to serve A new bill would give Washing- as co-primary sponsor for the No. 11 car piloted by KVSH Racing’s Sebastien ton the nation’s toughest laws Bourdais for the 2015 Verizon IndyCar Series. The company will also retain its as- regulating e-cigarettes. sociate sponsorship of the SH Racing Rallycross No. 7 Ford Fiesta ST car for the 2015 Red Bull Global Rallycross (GRC) season. Both sponsorships began in 2014. Proposed regulation in Washington state “While traditional tobacco historically has dominated auto racing in the past, we would require retailers to have a special have since become a prominent sponsor within the IndyCar and GRC circuits as license to sell e-cigarettes, manufacturers e-cigs and vapor products continue to replace smoking,” says John Wiesehan to list all ingredients in e-juices, would ban Jr., CEO of Mistic. “These platforms have enabled us to build awareness for non-tobacco-flavored vaping products our Mistic and HAUS brands among adult smokers as significant alternatives to and would tax e-cigarettes at the same traditional tobacco.” rate as other tobacco products (OTPs). At IndyCar and GRC racetracks during 2015, adult smokers will be able to As a result, consumers would pay a 95 visit the Mistic/HAUS kiosk and engage with members of the Mistic Pit Crew to percent tax on the items compared to the learn more about the company’s products. Fans will also have the opportunity standard sales tax they now pay for e-cig- to ride in virtual race simulators and compete against driver Sebastien Bourdais arettes and e-juices. in mock competitions. “Every time we raised the price of ciga- Last year Bourdais finished 10th in the championship with three poles, a win rettes we reduced youth smoking,” said at the Indy Grand Prix of , and a seventh place finish at the India- the bill’s sponsor, U.S. Representative napolis 500. He is a four-time series champion with 32 career wins, 49 podiums Gerry Pollet (D-Seattle), who views vaping and 33 poles. as an effort by the to cre- “We are thrilled to continue our relationship with Mistic for the 2015 IndyCar ate a new generation of nicotine addicts. and GRC series season,” says James “Sulli” Sullivan, KVSH Racing partner and “It’s not safe, it’s highly addictive and you principle at SH Racing Rallycross. “Our teams are coming off solid seasons and don’t know what else is in it,” he charges. are poised to continue their success this year, which promises to be very exciting His proposal spurred hundreds of va- with IndyCar’s newly designed aero kits and a host of new venues at GRC races.” pers and e-cigarette storeowners to testify Featuring racing at a combination of superspeedways, short ovals, road cours- against the bill during a public hearing on es and temporary street circuits, the Verizon IndyCar Series offers its international March 16 in Olympia, Washington. Con- lineup of drivers the most diverse challenges in . The top point scorer sumers who testified shared their stories is crowned the series cham- about transitioning from traditional ciga- pion and receives a $1 mil- rettes to vaping, many painting e-ciga- lion bonus. rettes as “a life-changing intervention.” The Red Bull Global Ral- They protested the proposal, noting that lycross Series features making e-cigarettes harder to find and extremely diverse tracks less appealing due to flavor limitations consisting of combina- might force some consumers to return tions of dirt and tarmac, to cigarettes and dissuade other smokers as well as other various from switching. obstacles. The HAUS GRC Retailers also protested the proposal. car will produce more than While some are expressing willingness to 600 pounds of horsepower adopt a licensing process, all expressed and can accelerate from concern over the idea of eliminating fla- 0-60 mph in 1.9 seconds. vors and invoking a huge tax hike. Andy Kibler, owner of Olympia Vapor in Tumwa- ter, reportedly referred to the proposal as “an atom-bomb approach to something 14 that could be done with a little more fi- TOBACCO BUSINESS INTERNATIONAL nesse.” MAY/JUNE 2015 NEWS & TRENDS MAY/JUNE 2015

Cigarette and Tobacco Tax Report States continue to propose tax hikes, but many are shot down.

In the first quarter of 2015, 19 state New York: Raise the cigarette tax by Virginia: Raise the cigarette tax by legislatures were pondering bills to $1.65 per pack (Senate Bill 2687); raise $1.70 per pack, the tax on roll-your- raise cigarette and/or tobacco taxes. the tax on moist snuff to the higher of own tobacco to 60 percent, and the While 23 states introduced such bills 95 percent or $3.63 per ounce (Senate tax on loose-leaf tobacco to $1.26 for last year, only Vermont actually enact- Bill 702) every four ounces (House Bill 1590) ed a tax increase on cigarettes of 13 cents per pack. North : Increase the ciga- Washington: Raise the cigarette tax The following is a look at some of rette and little cigar tax by 44 cents per by 50 cents per pack (Senate Bill 5729) the bills currently being considered at pack and raise the tobacco products and raise the OTP tax to 110 percent press time: tax to 50 percent; increase the tax on (Senate Bill 5808) moist snuff to $2.72 per ounce and the Alabama: Increase cigarette tax by chewing tobacco tax to 73 cents per Virginia: Increase the tax on 32.5 cents per pack (House Bill 45) ounce (House Bill 1421) cigarettes by 50 cents per pack; in- crease the tax on cigarettes by $1 per California: Increase the cigarette Ohio: Increase the cigarette tax by pack and raise the tobacco products tax by $2 per pack (Senate Bill 591) $1 per pack and increase the tobacco tax rate to 50 percent (House Bills product tax to 60 percent (House Bill 2559 and 2634, Senate Bill 534) Kansas: Increase the cigarette tax 64) by $1.50 per pack and raise the tobac- Wyoming: Raise the cigarette tax co products excise tax to 25 percent Oklahoma: Raise the cigarette tax by 65 cents per pack and increase the (House Bill 2306) by $1 per pack and impose an ad- OTP tax rate to 46 percent (House Bill ditional tax on all tobacco products 173) Kentucky: Add 60 cents to the equal to 100 percent of the current tax state’s cigarette tax rate and also in- rate (House Bill 1719) crease the tobacco tax rate to 40 per- cent (House Bill 132) Oregon: Raise the cigarette tax by $1 per pack (House Bills 1719 and 2555); : Raise the cigarette tax by increase the cigarette tax by $1.25 per $1 per pack and increase the tobacco pack (House Bill 2066); increases the tax rate to 76 percent on most tobac- current cigarette tax from $1.31 per co products except premium cigars, pack to $3.13 per pack (House Bill Tell Your Story which would remain at 15 percent 2166); raise the cigarette tax by $1.50 (Senate Bill 37 and House Bill 108) per pack and increase the OTP tax to in TBI 81.25 percent (House Bill 3053) Mississippi: A 50 cent per-pack in- Would you like to see your store crease in the cigarette tax rate (House Pennsylvania: Enact a new tax profiled in TBI? Or maybe you’d like Bill 81) on tobacco products at 65 cents per to share your point of view or see a ounce (House Bill 199) particular topic covered in our maga- New Jersey: Tax little cigars at the zine. If so, we’d like to hear from you same tax rate assessed on cigarettes Rhode Island: Raise the cigarette at tobonline.com/contact.

trench marketing (Assembly Bill 1308); tax tobacco tax by $1 per pack (Senate Bill 375 and BY MICHAEL GELFAND products at 90 percent of the whole- House Bill 5732) sale price and increase the tax on moist snuff to $2.25 per ounce (As- Vermont: Raise the cigarette and lit- sembly Bill 1944 and Senate Bill 1213) tle cigar tax by $1.25 per pack and in-

crease the tax on moist snuff to $3.33 Facing the Music

Fidel’s cigar Shop dug itself efore tobacco became his bread and butter, Tom per ounce (House Bill 265) out of an early hole created by a Foster was training at the California Culinary BAcademy to become a professional chef. Back then, he looked forward to the day when he’d have a restaurant of contentious store name—now his own where he could play tastemaker for his customers it’s a thriving boutique cigar and prepare a sensory experience that would exceed their expectations every time they came in. But dreams and hotspot on the k reality often mix like oil and water, and Foster soon realized ansas city scene. that being a cook meant he would never see the front of the house—let alone get the opportunity to watch them eat the food he prepared. Disillusioned, Foster soured on his dream of professional cooking and left California to return home to Kansas City, 78 TOBACCO BUSINESS JANUARY/FEBRUARY 2014

16 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 NEWS & TRENDS MAY/JUNE 2015

Study Addresses Whether the Legal Purchase Age for Tobacco Should Be Raised NATO’s Tom Briant counters the findings of a study on the impact of raising the legal purchase age for tobacco products. A recent study by the Institute of Medi- the MLA from 21 to 25 will likely be issue of those minors who rely on fam- cine (IOM) makes the case that raising considerably less.” ily members or other people age 21 or the minimum legal age to purchase According to the study models, older to obtain cigarettes and tobacco tobacco products “will likely prevent there would be a 3 percent decrease products,” he pointed out. or delay initiation of tobacco use by in prevalence of tobacco use among A press release by NATO on the adolescents and young adults.” The today’s teenagers in adulthood if the topic stated that if a higher legal age is study was an outgrowth of the Fam- MLA were raised to 19, a 12 percent enacted, the same outcome will arise ily Smoking Prevention and Tobacco decrease if raised to 21, and a 16 per- with 18-, 19- and 20-year-old adults Control Act, which required the FDA cent decrease if raised to 25. who currently use tobacco products. to convene an expert panel to look into In response to the IOM study an- That is, these young adults would public health implications of raising nouncement, NATO’s Tom Briant noted likely turn to adults 21 or older to pur- the minimum age to purchase tobacco that the problem of underage tobacco chase tobacco products for them. products and report back to Congress. use will continue to persist until there is The NATO press release also pointed The IOM study focused on deter- a credible effort to change the willing- out that adults should have the right to mining the public health impact of ness of adults of any age to legally buy choose for themselves whether they raising the minimum legal age to 21 and then provide tobacco products to want to purchase legal products, in- and to 25. In a recent report on the underage youth. “While the Institute of cluding legal tobacco products. Since study results, the IOM stated that “The Medicine study states that raising the adults aged 18, 19 and 20 can vote and impact of raising the MLA [minimum legal age to 21 will substantially reduce serve in the military, they should be al- legal age] to 21 will likely be sub- the number of 15- to 17-year-olds who lowed to exercise their right to choose stantially higher than raising it to 19. begin to smoke or use tobacco prod- what legal products they desire to pur- However, the added effect of raising ucts, doing so does not address the chase and use.

AWMA Changes Name to Convenience Distribution Association New moniker better describes what the organization does, says the association.

Rob Sincavich, president of Wheeling, • Increased emphasis on govern- new custom-built online portal; West Virginia-based Team Sledd and the ment affairs, including the launch of a • Establishment of a Manufacturer 2015 chairman of the American Whole- sophisticated online State Advocacy Advisory Council designed to get great- sale Marketers Association (AWMA), has Center; er input from manufacturer partners; announced that the AWMA Board of Di- • Beefed up industry affairs and mem- • New emphasis on digital content rectors approved changing its name to ber engagement efforts, supported delivery to members, allowing the as- the Convenience Distribution Associa- by the hiring of two industry veterans: sociation to provide more information tion (CDA). The new name more effec- Steve Shing, formerly with GSC Enter- to members, and to make that content tively describes what the organization is prises, as vice president of member en- more readily available. all about, says Sincavich. gagement, and David Dresser, formerly The name change will be phased “It is who we are. It is what we do,” he of Core-Mark International, as vice presi- in over the next few months accord- explained. “We distribute convenience dent of program development; ing to Scott Ramminger, the associa- products in varying retail formats and • Increased collaboration with a wide tion’s president and CEO. “While the store sizes. We distribute convenience range of other industry associations in AWMA name has served us well, it products institutionally. When we talk to an effort to improve the efficacy of pro- has presented some challenges. Ev- our government representatives, they grams and encourage supply chain col- ery time we go to Capitol Hill we have will know who we are and what we do. laboration and efficiency; to explain who it is we represent,” It makes sense.” • The establishment of a series of he says. “Convenience Distribution The board also endorsed a wide- “communities” designed to allow col- Association is pretty clear. While we were making other changes, it was 18ranging program of enhancements to laboration and learning, both at person- TOBACCOthe association BUSINESS thatINTERNATIONAL include: to-person gatherings and through a a great time to get the name right.” MAY/JUNE 2015 TMA REPORT By FARRELL DELMAN

Breaking News From the TMA The following are excerpts from harm reduction, Farrell Delman, tobacco regulation and other tobacco-related news. President, TMA

…FDA launched a new “Harmful researcher Dr. Robert Califf, who is On the fda… and Potentially Harmful Constituents” currently overseeing FDA’s drug, medical (HPHCs) webpage with information device and tobacco policy, has been …U.S. Rep. Bill Posey (R-Florida) has on the preliminary HPHC list, industry named deputy commissioner of the introduced a bill to amend the Federal reporting requirements and the agency’s agency, raising speculation that he may Food, Drug, and Cosmetic Act to “clarify efforts to communicate to the public eventually be nominated to lead FDA the Food and Drug Administration’s about the “dangers of the chemicals after Commissioner Margaret Hamburg’s jurisdiction over certain tobacco and chemical compounds in tobacco departure at the end of March. products, and to protect jobs and products and smoke.” …U.S. Sens. Jeff Merkley (D-Oregon), small businesses involved in the sale, …Center for Tobacco Products (CTP) Richard Blumenthal (D-Connecticut) and manufacturing and distribution of Director Mitch Zeller announced changes Ed Markey (D-Massachusetts) met with traditional and premium cigars,” with the in membership to the Tobacco Products FDA CTP Director Mitch Zeller in March bill, which has 34 co-sponsors, referred Scientific Advisory Committee, to call on the agency to finalize without to the House Energy and Commerce including the resignation or termination delay its proposed deeming regulations Committee. of Chairman Jonathan Samet, Claudia for currently unregulated tobacco …The FDA Tobacco Products Barone, Joanna Cohen and Suchitra products including e-cigs, to strengthen Scientific Advisory Committee (TPSAC) Krishnan-Sarin, and the addition of three the proposed rules to address e-cig has reviewed Swedish Match North new members: Pebbles Fagan, Gary A. flavorings and marketing that they allege America’s application, filed in June 2014, Giovino and Thomas E. Novotny. The are designed to attract children, and to requesting that the agency approve changes follow U.S. District Court Judge mandate child-resistant packaging for 10 General-branded snus products as Richard Leon’s July 21, 2014 ruling liquid nicotine. “modified risk.” Swedish Match failed stemming from a 2011 lawsuit alleging …While keeping a bold-letter warning to get permission for a new label stating conflicts of interest in certain TPSAC about suicidal behavior and other that snus is addictive but substantially members, which requires the agency to psychiatric side effects associated with less risky than smoking, and seeks reconstitute the panel and bars the use of Pfizer’s smoking cessation drug Chantix, an exemption from a required health TPSAC’s 2011 Menthol Report. FDA on March 9 outlined several updates warning relating to oral cancer. …Duke University cardiologist and to its labeling. These include a new

20 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 TMA REPORT

warning about its potential interaction report from the National Research Council e-cigs by non-users of tobacco products; with alcohol in light of reports of unusual and Institute of Medicine states that while 4) health effects of e-cigs in non-users; or aggressive behavior when drinking there is insufficient evidence to draw firm and 5) knowledge, attitudes, beliefs while taking it despite information from conclusions, limited evidence suggests and perceptions about e-cigs. For more several studies and analyses by Pfizer that demand for illegal cigarettes information, write to workshop.CTPOS@ that found no difference in psychiatric would not change significantly from fda.hhs.gov. problems between people taking Chantix new regulations that modify cigarettes, and other smoking cessation treatments. such as lowering nicotine content or On harm reduction… However, FDA also said that Pfizer’s making other changes in product design, research did not examine all types of formulation and packaging. …Professor Michael Siegel of Boston psychiatric problems and had limitations …FDA Center for Tobacco Products University’s School of Public Health that prevented regulators “from drawing will hold the final in a series of three said Nate Miley, a member of the Board reliable conclusions.” workshops on “Electronic Cigarettes of Supervisors for Alameda County, and the Public Health” on June 1-2, California, became the first public policy On Other tobacco news… 2015 at the Marriott Inn and Conference maker to publicly back vaping as a Center at the University of Maryland strategy to combat cigarette smoking by …In a study published on PLOS ONE, University College (UMUC) in Hyattsville, attending the ribbon-cutting ceremony researchers at Duke University and the Maryland. CTP intends to “gather for the opening of a new vape store. University of Connecticut report that scientific information and stimulate At the opening of “Ready, Set, Vape” L-menthol, the menthol isomer added discussion among scientists about” in Castro Valley, Miley acknowledged to cigarettes, appeared to inhibit smoke- e-cigs, with a focus on the impact of the controversy surrounding e-cigs but induced irritation in mice, making it easier e-cigs on population health, addressing stressed his support for an intervention to inhale smoke and increase the dosage topics including: 1) prevalence and that helps smokers get away from of nicotine. patterns of use; 2) impacts on the use of cigarettes. …A new congressionally-mandated current tobacco products; 3) uptake of …A study by Lorillard researchers

22 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 TMA REPORT

Rana Tayyarah and Gerald Long that cannot be taken seriously.” recreational nicotine; 2) E-cigs reduce examined the vapor from blu eCigs …A study by BAT scientists and risks to health by 95-100 percent and SKYCIG’s e-cigs in comparison University of Louisville Professor Brad among those who switch and pose to smoke from Philip Morris USA’s Rodu analyzed levels of hydrazine in negligible impacts on bystanders; 3) Marlboro Gold and Imperial Tobacco’s various smokeless tobacco products E-cigs are a market-based public health Lambert & Butler cigarettes found that (STP) including snus, chewing tobacco, phenomenon that does not rely on the e-vapor contained mostly glycerin moist snuff and dry snuff, sold in the public spending, coercion, prohibition, and/or propylene glycol, that the aerosol U.S. and Sweden. Findings showed taxation, fear or stigma; and 4) The risks nicotine content was 85 percent lower that the compound, which is on FDA’s of harmful unintended consequences than the nicotine in cigarette smoke, list of HPHCs, is not prevalent in the like gateways to smoking are low and and that harmful and potentially STPs on the market today, and “in the unsupported by evidence thus far. harmful constituents (HPHCs) in minority of cases where hydrazine …In an opinion piece on CNN, mainstream cigarette smoke were 1,500 might possibly be present, the levels Marc Scribner of the Competitive times higher than levels in e-cig HPHCs. are substantially lower…than those Enterprise Institute writes that the Commenting on the findings, Professor reported previously.” U.S. Department of Transportation, Michael Siegel noted that they add to …A newly released 20-page which plans to issue a rule by the the growing body of evidence that document by Clive Bates of The end of April to ban e-cig use aboard e-cigs are “orders of magnitude safer Counterfactual blog provides an aircraft, does not have the authority to than tobacco cigarettes” and should put overview of e-cigs and the types of regulate vaping even if it argues that an end to e-cig opponents’ assertions e-liquids that consumers use. The it is interpreting “smoking” to cover that vaping is no safer than cigarette document offers evidence countering e-cig use. He cited a statement by the smoking. Also commenting on the “half-truths” disseminated by vaping U.S. Supreme Court that an “agency same study, Jacob Sullum of Reason opponents, and sets out four tenets: 1) may not bootstrap itself into an area magazine said given the data, “Anyone E-cigs provide a satisfactory alternative in which it has no jurisdiction” by who implies that e-cigarette vapor is to smoking and will displace cigarette stretching the language of a statute. about as dangerous as tobacco smoke use in the consumer market for TBI

24 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 CATEGORY MANAGER CIGARETTES

Mergers and Market Share In the cigarette category, a large merger is edging toward fruition.

ith the Reynolds American/ program,” notes Herzog. Lorillard merger looming on Currently, the deal calls for - Wthe horizon, there’s much , North Carolina-based Reynolds speculation about how the deal will pan American to purchase Greensboro, North out in terms of shifts in the competitive Carolina-based Lorillard for $27.4 billion. 85% landscape. While the deal awaits final The combined entity would retain the regulatory approval, industry observers Newport, True and brands, of retailers are optimistic about its future, with while selling Winston, , Salem and Wells Fargo’s Bonnie Herzog rating the brands to Imperial Tobacco for believe Reynolds’ probability of Federal Trade Commission $7.1 billion. The real coup for Imperial, (FTC) approval at 90 percent. however, would be acquiring Lorillard’s EDLP program will “An overwhelming 98 percent of blu e-cigarette brand. Imperial would retailers expect the FTC to approve also acquire Lorillard’s manufacturing, make it more the deal, with some retailers expecting R&D and headquarters in the transaction, minor modifications or additional brand which would become part of a new difficult for divestitures since several believe it will U.S.-based subsidiary for the UK-based be challenging for Imperial to maintain company, located in Greensboro. share,” wrote Herzog in a recent report With business going on as usual while Imperial to compete on the merger, who notes that the biggest the industry awaits a decision from FTC, potential issue has been whether Imperial here’s a look at cigarette market share by post merger. and some of the smaller manufacturers retail channel: will be able to effectively compete with the newly created entity. “Despite 45 Premium Vs. Discount this hurdle, we believe…negotiations Total Premium 40 Cigarettes are progressing towards ultimate FTC Cigarettes Sold approval of the deal as is or with very 35 (45 Billion) minor modifications to ensure Imperial 30 will have a fighting chance.” One key consideration by FTC of 25 relevance to retailers is the potential 20 impact of Reynolds adding Newport to its Every Day Low Price (EDLP) retailer 15 Total Discount program on shelf space constraints for 10 Cigarettes Sold

Imperial. “The majority of our retailer Number of Sticks Sold in Billions contacts do not expect the FTC to require 5 (15 Billion) changes to Reynolds’ EDLP for the deal 1 to be approved and expect Newport’s Sticks Sold Over 13 Weeks Ending 6/28/14 growth will accelerate if added to this

26 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 CATEGORY MANAGER CIGARETTES

Mass Merchandising Premium Cigarette Volume 3% by Trade Class Liquor Stores Warehouse Clubs (Data for 13 weeks ending 6/28/14) 3% 1% Grocery Stores 6% Drug Stores 6%

Tobacco Outlets 8%

Convenience Stores 74%

C-Stores still account for the vast majority of premium cigarette sales.

Source: Management Science Associates

Tobacco Outlets Discount Cigarette Volume 12% by Trade Class Drug Stores 5%

Grocery Stores 7% Liquor Stores 3% Mass Merchandising 2% Warehouse Clubs 1% Convenience Stores 70%

Source: Management Science Associates

28 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 Banking on Cigars

The decorated bank building from the 1800s might be the pull that gets so many passersby to walk into James and Sons Tobacconists, but it’s the investment in excellent stogie sales practice that yields the high customer return.

By Renée Covino

t’s hard not to notice something two sons involved in the business, special is going on at James continually strives for practices to Iand Sons Tobacconists in improve it. Sarasota Springs, New York even Like his customers, Kommer before you walk in the door. The was drawn to the building when door itself is a magnificent work he spotted it more than a decade of art—more than 6 inches thick ago (at the time it was a ladies’ of solid wood with ornate carvings boutique) and felt it “reeked of a and hand-carved antique brass cigar shop.” As luck would have hinges—attached to an equally it, the store became available for magnificent façade belonging to an rent shortly thereafter so Kommer old bank building dating back to signed the lease and ran with the 1866 that opens to antique wood old-world theme. floors, 8-foot windows, marble “We added to it with antique floors in the main showroom and pedal cars on top of display areas, tin ceilings throughout. carving out a lounge with an old “The building sells my business,” Cuban style and another one in owner Jim Kommer tells Tobacco an old English style,” he says. “We Business International (TBI), but wanted people to catch on to the he’s being modest. For the nine nostalgia going back to the days years that James and Sons has been when cigar smoking was readily in operation, Kommer, along with acceptable. We get a lot of people his wife and (as the banner implies) who want to just breathe it in;

30 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 they tell us it smells good in here and the whole atmosphere reminds them of their grandfather or their father and the ‘good old days.’ We get that all the time. It’s really a unique place and it feels good that they can get those memories just from walking into our store.” But in addition to its old bank façade and overall old-world appeal, James and Sons has learned a trick or two of the trade that enables it to bank on its cigar business. Here are a few tips that Kommer is happy to share with tobacco retailers looking to elevate their cigar game: Bet on boutiques—Boutique cigars are “what we focus on and what seems to work for us,” Kommer explains. “We carry the big-name brands, but we almost do it reluctantly.”

32 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 So what does Kommer like about boutique brands? “There’s a lot of passion in boutiques and I want to support those guys—that’s what it’s all about to me. And more importantly, they have very good cigars. And I don’t steer people wrong. I tell them exactly what I like and why I like it. It takes a little bit to get the more obscure boutiques in people’s hands, especially the older guys who are used to Punch, and the like—they get glazed over at times, but then they try it and come back and tell me they’re so glad they tried it and what else can I recommend.” When James and Sons Tobacconists first started out, Perdomo wasn’t very big but it was a boutique line the store carried. “Now it’s the No. 1 selling cigar in our store,” Kommer relays. “Now it’s

34 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 Humi-Highlights

A walk-in humidor is often one of the best assets a cigar building is the “warehouse humidor”—a building that retailer can invest in. Making it notable and noteworthy is actually a huge humidor filled with row upon row of often takes the cigar-shopping experience up several industrial racks holding cigar boxes. According to owner notches. How to do that successfully varies by store and Mitchell Hirsh (also known for his high-end watch what it chooses to highlight. Here are three humidor business, pens/men’s grooming accessories sold at Cigar personalities which stand out: King, and an online cigar business), the warehouse humidor A true cigar vault—James and Sons Tobacconists in boasts over 1 million cigars—and yes, often customers are Sarasota Springs, New York had the perfect space already invited to walk across the parking lot and pick up whatever carved out for a humidor in its former bank building from they can’t find in the store. It is a memorable experience as the 1800s—an old bank vault. And actually, there are two excellent Yelp reviews attest. of them: a main vault right inside the door, about 8 feet Humid in the desert—Cigarbox by FreyBoy Tobacco by 15 feet, and an “old records vault” around the back of in Las Vegas, Nevada is another humidor-noteworthy the building, according to store owner Jim Kommer. Both cigar store located in an industrial area (this one between vaults still work; Kommer had the combination changed, the Las Vegas Strip and the city’s downtown area). Its but he leaves the vault doors open for old-world effect. pristine humidor with every stick in its place is the first While a separate and larger cedar-lined humidor is statement to customers that it goes the extra mile for utilized for cigar stock, the two bank vaults are utilized humidor perfection. But beyond appearances, Cigarbox’s as storage locker humidors for members with about 60 store humidor (as well as its secondary “stock” humidor in lockers total. Best of all, the bank vault humidors serve as the back) both overcome their desert locale by switching great conversation pieces and add flair to the store. up the humidity based on the season and generally keeping A million and counting—Cigar King in Scottsdale, it in the low-to-mid-60s (which, it maintains, is the sweet Arizona takes advantage of its industrial location in spot for cigar longevity). The store also makes customers a serious humidor way. While the store’s large walk- aware of its advanced water-purification system in an in humidor impressively stocks oodles of hard-to-find effort to overcome the bad perception of Vegas water and premium cigars, perhaps its most impressive feature is a the “film effect.” The humidors’ blowers and system were sign that hangs in the humidor telling customers that if also picked for the way they could be maintained and they don’t see what they’re looking for, they should just controlled, avoiding fluctuation in humidity, according to ask. That’s because across the parking lot in a nondescript a company spokesperson.

36 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 “We’re very blessed with our business. We struggled for a while in the down economy, but our customers stood by us and we certainly want to give back to them.”

a sought-after brand—I don’t [even] live music, local entertainment and community-focused, always looking have to mention it. It’s grown over bourbon or scotch tastings sponsored for new and fun ways to give back to the years…it is an exceptional line of by a local liquor store. Instead of closing its community. “We’re very blessed cigars.” at 10 p.m. the store typically stays open with our business. We struggled for Raffle-dazzle them—It’s not until midnight or 1 a.m. on an event a while in the down economy, but uncommon in the cigar business night. “Customers absolutely love these our customers stood by us and we to invite a vendor in, roll an event nights and can’t wait for the next event certainly want to give back to them,” around it and offer customers a buy since we added music,” he says. says Kommer. In addition to throwing three cigars, get one free promotion Let there be lounge choice— customers/members a big holiday or something similar. “But ‘free’ really Cigar customers come to cigar stores party, the cigar retailer put together a doesn’t do well for our cigar business,” expecting lounges and, often, club special cigar-tasting night certificate Kommer believes. He got the idea from membership benefits, but one size that is available to local charities to one boutique vendor to raffle away a doesn’t fit all in this department, include in their charity auctions, raffles flat-screen television as the event hook Kommer learned. That’s why James and giveaways. The recipient of the instead of offering free cigars, and it did and Sons offers large public and certificate is entitled to the following: “extremely well,” according to Kommer. private seating areas as well as various • One cigar per person in the party Now he is sold on the raffle idea above levels of memberships, which feature (up to eight people); any other promotion. Be it a TV, an discounts, private lounge access and • Access to the Private Members iPad or a Bose stereo system, Kommer private humidor lockers. The private Lounge which includes the promotes the raffle event: “For every so back lounge features large leather aforementioned secluded back room many cigars purchased, the customer armchairs, wooden end tables, an old with large leather chairs, two flat- gets a raffle ticket for the hot item. brick fireplace, large flat-panel TVs screen televisions, a DVD player and The two or three boxes of cigars that with Bose surround sound and a DVD library, wireless Internet, wireless the vendor gives us at the event we are player. The exclusive Black Diamond printer, and a fax machine; now able to sell, and it covers the cost Club is the latest lounge addition, • One-on-one cigar expertise from a of the raffled product I buy,” Kommer located upstairs from the James and store employee who will walk the party explains. “It’s a win-win for all involved Sons main store. This is where the through the tasting. and it drums up more excitement than Cuban Lounge and English Lounge Regarding giving back to the anything we have done previously.” are found, which offer a “proximity community, Kommer adds that “We’re Make it a true event—What’s card,” meaning members have 24/7 always trying to upgrade and come more, the cigar events that James and access. up with something else to involve the Sons Tobacconists organizes are “true Love your locals—James and Sons community. It really works…people events” as Kommer sees them, with Tobacconists is not only family-run, it’s take notice of this.” TBI

38 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 The Power of Pipe Club Camaraderie

A pipe club can be a great way to boost sales.

By Jennifer Gelfand

f you’ve been trying to figure out but far enough in advance that you have providing snacks and beverages and/or how to bring more pipe smokers time to promote it. Six to eight weeks a promotion on pipe tobacco. You may Iinto your store, it may be time to should do the trick. also want to ask one of your vendors to consider starting a pipe club. Retailers sponsor the event by offering product who host cigar clubs or cigar events 2) Spread the Word samples or a special discount. understand the important boost their You’ll need to go beyond the obvious businesses receive by offering a social move of posting a sign in your store 4) Be a Good Host environment where aficionados can for your communication efforts. If you When the day is at hand, greet your share their passion for great cigars. Pipes have a customer email list, send out an new pipe club members at the door. Be are no different—there’s something invitation to your list and encourage prepared to facilitate conversation by compelling about sharing a passion for your pipe-smoking customers to bring asking attendees about their favorite pipes and with friends and their friends. A good inexpensive way to tobacco and where they most often peers. get the word out is through social media. enjoy their pipe. Also be sure to have As a retailer, you have the hardest Create a Facebook Group that interested flyers with the date and time of your part of launching a pipe club covered: customers can join to find out about next meeting available to hand out. the perfect venue for such a gathering. meetings. Be sure to encourage them to Your store can serve as a friendly, easy- invite their pipe-smoking friends to join. 4) Keep Your Pipe Club Growing to-find environment with plenty of Other great options are pipe forums Once you have held a few events, the tobacco from which to choose. Now all hosted by websites like pipesmagazine. pipe club should take on a life of its own. you need to do is follow a few steps to com or pipesmokersforum.com. However, you’ll still need to keep the ball get a thriving pipe club going: rolling by holding meetings regularly 3) Plan Your First Meeting and updating your social media sites. 1) Set a Date and Time Make sure your store looks welcoming Posting comments and photos is a great It might sound premature, but and inviting, and that there is adequate way to continue the momentum of your it’s hard to get people excited about seating for the crowd you anticipate. group’s growth, as is asking questions to something that doesn’t actually exist If you aren’t sure how many to expect, get feedback from fellow pipe smokers yet. So go ahead and set a time for your place chairs in small groups so that those about the group and about when you first meeting, preferably soon enough who attend can congregate without meet. It’s best to find a time and date that it’s worth putting on the calendar sitting among empty chairs. Consider that works well for everyone. TBI

40 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 electricALLEY

The Hasty Taxman Cometh

By Renée Covino

Minnesota and he e-cigarette taxman waits for For the e-cig/vape user, the Minnesota no one, not even the federal tax effectively doubles the price of the North Carolina Tgovernment. While the FDA product, according to Thomas Briant, still considers a national approach to the executive director of the National already tax e-cigs, regulating electronic smoking and Association of Tobacco Outlets (NATO). and 14 other states vapor devices, several state and local “A standard e-cigarette in Minnesota governments are pressing ahead with is now $14.99 to $16.99, but in states have introduced bills their own agendas for taxation, mostly without a tax they are $6.99 to $7.99,” racing to regulate them as a new source Briant tells Tobacco Business International to follow suit, but of desperately-needed revenue. But (TBI). “So that gives you an idea [of ] as more states attempt taxation, more what a 95 percent tax rate does.” lawmakers are being are questioning their hasty actions and Last year, 11 states looked at taxing accused of not fully faulty reasoning in an attempt to thwart e-cigs, including North Carolina, where them. the bill was met with opposition from grasping the industry Minnesota led the charge in 2012 groups like Americans for Tax Reform. placing a tax on e-cigarettes that In a letter to the Senate Finance or the true effects of is 95 percent of the wholesale cost. Committee, Grover Norquist, president Distributors in that state are required of Americans for Tax Reform, stated their proposals. to pay the tobacco tax or risk losing “Imposing additional taxes on these their license. Retailers must purchase innovative products will chase business e-cigarettes from distributors licensed out of the state and onto the Internet, by the state and are expected to “collect which is already a significant market and remit sales tax on e-cigarette sales,” to e-cigarettes and vapor products.” according to the Minnesota Department Norquist also cited studies showing that of Revenue. electronic cigarettes stand to improve

42 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 electricALLEY

“There is no evidence-based justification that supports imposing this brand new tax on vapor product retailers and their customers.” health and prevent disease. considering e-cig/vapor taxation, no from addicted smokers and those “The imposition of new taxes matter the proposed tax formula, in an who have quit smoking by switching on innovative products that reduce attempt to bring to light some of the to vaping and e-cigs,” he said in smoking and people’s dependence on misinformation and faulty reasoning, Heartlander Magazine recently. “So tobacco cigarettes is misguided and as many opponents see it. In March, there’s that. The concept that e-cigs will impede proven harm-reduction the American Vaping Association should be taxed at such an exorbitant methods,” he added. submitted written testimony to the New rate is exactly the wrong reason to do Nevertheless, North Carolina Hampshire House Finance Committee this from any point of view.” became the only state last year to adopt opposing Governor Maggie Hassan’s He went on to say that switching to a bill to tax e-cigs. The Old North proposal to impose a new tobacco e-cigs will be reduced by this “ridiculous state taxes e-cigs much more modestly excise tax on the sale of vapor products tax,” bringing harm to Ohio’s smokers than Minnesota—it assesses a tax of 5 as part of the 2016-2017 budget. In his who want to quit. His prediction is that cents per milliliter of nicotine solution. testimony, Gregory Conley, president they will keep on smoking and that This “results in a much lower tax on of the American Vaping Association, “over half of them will die prematurely e-cigarettes, about 5 to 10 cents per writes in part: from it.” single disposable e-cigarette, because “There is no evidence-based What’s more, Ross foresees that with each sealed nicotine cartridge has about justification that supports imposing such a tax in place, many vapers will find one-half to one milliliter of nicotine this brand new tax on vapor product a way to buy vapes without paying the solution,” Briant explains. retailers and their customers. tax. “Out-of-state and Internet retailers This year 14 states have bills in place “Discouraging the use of vapor and black markets will thrive, and will attempting to tax e-cigarettes: Hawaii, products by adult smokers is not sound seek no identification to check age, Indiana, Kentucky, Montana, Nevada, policy. nor will they pay taxes,” Ross said in New Hampshire, New Jersey, New “Thousands of smokers in New Heartlander. Mexico, New York, Ohio, Oregon, Hampshire will make a quit attempt Forbes also recently published an Vermont, Virginia and Washington. this year. Regrettably, among those opinion column from Scott Drenkard According to Briant, eight of these using traditional and often state- of the Tax Foundation citing several states are proposing to tax e-cigarettes subsidized therapies like the nicotine “faulty reasoning” points regarding using the current state OTP tax rate— patch or gum, approximately 93-97 Governor Gary Herbert of Utah’s applying a percentage of the wholesale percent will be smoking again within recent blog post on “8 facts about price as Minnesota has done. Four one year. e-cigarettes and their effect on public states are looking to tax each milliliter “If this tax is enacted, jobs and public health,” which purports to explain why or milligram of nicotine liquid as North health in New Hampshire will suffer. the governor has included new taxes Carolina has done. More smokers will continue to smoke on the products in his most recent But two states are attempting to and those smokers who do try vapor budget proposal. apply the state cigarette tax rate to products will be more inclined to “States need to carefully consider e-cigarettes. “I don’t know how they purchase them online or out of state.” whether they tax e-cigs or not, and would do that administratively,” Briant Similar sentiment recently came from how they tax e-cigs so adults are not tells TBI. “The products are completely a health official in Ohio. American discouraged from transitioning to e-cigs different—20 cigarettes in a pack versus Council on Science and Health from combustible cigarettes,” concludes one e-cigarette…it’s really odd. They’re Executive Director Gilbert Ross, M.D., NATO’s Briant. “As many studies have trying to set the same tax on apples says that Ohio’s e-cig tax bill will hurt shown, e-cigs are significantly less and oranges when they’re two different taxpayers more than it will help. harmful than combustible cigarettes things.” “The purpose of this harmful, and tax policy should not discourage Meanwhile, strong opposition destructive and counterproductive adults from trying e-cigs in place of is coming out against all states proposal is to attempt to extort money traditional cigarettes.” TBI

44 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 46 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 The Tobacco Innovation Game: Bases Loaded By Renée Covino

Beyond e-cigs and vapor devices, new tobacco technologies are stepping up to the plate with power. Will reduced-harm products and other innovations change up the competitive field?

Refined vapor products, an e-cigarette that better replicates the combustible smoking experience, heat-not-burn cigarettes, snus and other tobacco products potentially classified as lower-risk, even new gadgets for smokeless and new sizes for —tobacco innovation is alive and actively playing ball in 2015. All this is happening as cigarettes take steps back. According to Nik Modi, managing director of RBC Capital Markets, cigarette volumes are expected to continue declining at the same rate as in the past—about 3 percent—and promotional activity is likely to be lower. He and other industry experts look to category innovation as viable, growing facets of the market. “We have long believed technology will play a pivotal role in shaping the future of the tobacco industry,” states Bonnie Herzog, beverage, tobacco and convenience store analyst at Wells Fargo Securities. Meanwhile, some health officials are backing the new ideas; one health-consulting firm recently

47 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 even decided to back a Big Tobacco company nicotine is a serious health risk, according to eCigs upped the nicotine output of its that it believes to have big ideas. In March, the company. latest device by about 50 percent and Maryland-based Pinney Associates entered Altria’s MarkTen e-cigarette increased into a partnership with Reynolds American Refined e-cig/vape devices— its nicotine concentration by about 65 units Niconovum USA and R.J. Reynolds Advanced-generation electronic percent, according to industry reports. Vapor Company. Pinney Associates smoking devices have hit the scene fast Blu reportedly increased its nicotine CEO John Pinney said that Reynolds’ and furiously, especially since many concentration and incorporated a larger commitment to invest in reduced-harm consumers found fault with or did not battery to produce higher heat. products convinced the health firm to enter come back to some of the initial products. Njoy uses a pharmaceutical ingredient into the partnership because “If we can help Both cig-alikes and mod vapor devices in a new version of its device that it Reynolds accelerate a market transformation continue to have room for improvement. reports will increase vapor absorption in away from combustion cigarettes, then Regarding traditional e-cigarettes, the lungs and elevate nicotine delivery to our collaboration with them should [help some experts say that the early models about 70 percent of a cigarette. prevent] and disease while helping did not deliver enough nicotine to Some traditional e-cig companies are them realize their business imperatives,” satisfy a smoker’s cravings and so in unveiling new mod products, perhaps to reported the Winston-Salem Journal. One recent months, several companies have solve their earlier model inefficiencies particular area of focus for Pinney is to ramped up nicotine levels in their with certain customers. CIGR8, based in correct consumers’ misperception that e-cigarette brands. For instance, blu Las Vegas, recently launched a product

48 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 uses a “vapor delivery processor” that communicates up to 2,000 times a second with a smart memory chip to monitor and regulate each puff.

called the CIGR8 EZ Mod, which monitor and regulate each puff, counting effort to better protect our children. This offers a “longer battery life and increased down the puffs and creating “the perfect kind of personalized vaporizer perfectly vapor production,” with a suggested puff ” every time, according to the demonstrates how ubiquitous biometrics retail price of under $40, according to company. is becoming across all industries and the company. The product comes with a From the vaporizer realm, Vapor Corp. verticals, including the vaping world.” rebuildable atomizer/coil, a USB charger, (which oversees “The Vape Store” retail PAX Labs (formerly Ploom, a a 4ml refillable glass tank and an organic chain, in addition to its manufacturing/ trademark which was recently acquired cotton wick. CIGR8 Sales Director distributing arms) is releasing down the by JTI along with several patents) Peter Basham says the EZ Mod is “easy pipeline a patent-pending vaporizer has brought new personal vaporizer to use and easy on the pocketbook.” with a biometric fingerprint-locking innovation to market with its next- R.J. Reynolds Vapor Company system that will allow people to use generation PAX 2, building on the recently completed the final wave of their “unique set of biometrics to lock success of PAX, which sold well over a national expansion for its Vuse Digital and unlock their vaping devices,” Jeff half-million units and is “impressive, Vapor Cigarette, which is praised to be Holman, CEO tells Tobacco Business given the price point is typically around on a more advanced track to solve the International (TBI). “This will prevent $250,” according to Herzog. vapor inconsistency found in basic e-cigs. unwanted users, especially children, The original PAX has been described Vuse uses a “vapor delivery processor” from using the product. Vapor Corp. is by industry bloggers as the “iPhone of that communicates up to 2,000 times proud to be one of the first companies vaporizers,” and now PAX 2 expects to a second with a smart memory chip to to tackle this problem head-on, in an surpass that with major performance

50 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 “It’s not going to be a round tube with a glowing tip. It will be a really beautiful object with a ton of core technologies in it.”

improvements, such as a 30 percent our consumers if they discover them.” industry.” longer battery charge, faster heating At press time, PAX Labs also unveiled In short, PAX’s e-cigarette up and a 25 percent reduction in size. what it describes as a “fundamentally product aims to better replicate the It also claims to be more durable and different” e-cig and e-liquid platform. combustible smoking experience than easier to clean than the original PAX. A In the works for years, according to the current e-cigs on the market. It also lip-sensing technology was developed company, the product uses the nicotine looks different than existing products, “where the device knows when you have salts found in tobacco leaves rather than notes Monsees. “Packaged in sleek, it in your mouth and can adjust [the] free-base nicotine, which is what most stylish hardware that is convenient power setting [to] be more dynamic and products on the market use. and practical, represents a energy efficient,” says Adam Bowen, “The vast majority of consumers who major step in this new and constantly CTO. He also describes some “hidden try e-cigarette products are dissatisfied evolving industry,” he notes. features and functionality that we built with them, there’s no doubt about that,” Herzog says she is “encouraged by in, just because we have several engineers asserts James Monsees, CEO of PAX PAX’s expected e-cig lineup, which who are dreaming this stuff up and want Labs. “So what we’re trying to do is really sounds like a differentiated product and to make the product really engaging close that gap [between what people not just another ‘me too’ product.” She and fun. So there are some modes and want and what the industry has to offer] adds that she believes that “Innovation is functionality that’s built into the product and this is the product that’s going to do crucial to drive momentum in the vapor that isn’t even in the manual, but we that. It is a product that’s ultimately going category.” (For more on PAX Labs, see know this is going to surprise and delight to change the nature of the e-cigarette feature story, p. 66)

52 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 iQOS consists of a Marlboro-branded tobacco heat stick, as well as a pocketsize charger and a heating element.

Category innovation has also come in rolled out nationally in Italy and Japan. given way to other innovative ideas such the form of hybrid devices. As recently Additional markets are slated for as an inhalable nicotine spray marketed reported in TBI, the Mistic Bridge is 2015 and beyond. iQOS consists of a by British American Tobacco, which late a refillable tank, like the one used in Marlboro-branded tobacco heat stick, last year won approval from British drug personal vaporizers, that fits onto cig- as well as a pocketsize charger and a regulators. alike batteries like a cartridge. This heating element. Its second heat-not- allows users to vape any e-juice in the burn product is termed Platform 2; it Modified-Risk Snus?—Right at press convenience of an e-cig. is reportedly undergoing clinical studies time in April, the industry received news and will launch as a pilot in cities in that the Food and Drug Administration’s Heat-Not-Burn Sticks—This is2016. It contains a capsule of pressed Tobacco Products Scientific Advisory being labeled as the next innovation carbon that burns, but is separated from Committee (TPSAC) concluded by analysts like Modi because “It gives the tobacco stick portion of the cigarette- that Swedish Match North America’s smokers a better experience than e-cigs,” like design. (SMNA) General brand snus should he says. He does recognize, however, that Like Philip Morris, Reynolds had an not be allowed to carry modified-risk “Taste is the problem with these products early heat-not-burn product, Eclipse, tobacco product (MRTP) warning currently.” which first launched in the mid-1990s labels. While snus is not a new tobacco Specifically, these products are slender, with minimal success. Now its new innovation per se, the classification of tube-like devices that give users as much Revo—a cigarette that uses a carbon tip it as an MRTP would be enormously nicotine as the real thing by heating, not that heats tobacco after being lit—hit novel, and would set the stage for many burning, tobacco, say the Big Tobacco the market in February. The brand was new innovations to come. companies who make them, such as launched with a marketing campaign SMNA submitted applications for 10 Philip Morris International and Reynolds that let smokers know it’s different and General snus products, a move which American. The main distinction between harder to use than a traditional cigarette, many industry experts believed would them and e-cigarettes, which use liquid but that they should “stick with it potentially pave the way for the first nicotine, is that heat-not-burn devices because it’s totally worth it,” according FDA approval of an MRTP and set contain real tobacco. While these “safer” to Brice O’Brien, company spokesperson. a precedent for companies seeking to cigarettes are not new (Philip Morris Revo will reportedly cost about the same make similar claims. While FDA is not says it spent about $2 billion since 2008 as a premium pack of regular cigarettes, bound by TPSAC’s recommendations, developing such alternatives, reported which varies across the country but it typically follows the committee’s the New York Times recently), the newest averages around $6. advice. versions claim to be more technologically Scientific studies are underway and In a preliminary review of SMNA’s advanced. early reports show that there is far less application on the FDA website, the Philip Morris actually created a series cell damage with heat-not-burn devices agency did state that there was no of products which will be released over than with combustible cigarettes. evidence of an association between snus time. iQOS is the first and has already The heat-not-burn initiative has also and lung cancer or chronic obstructive

54 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 pulmonary disease. But it said that it had a better chance of success if they apply eliminates the risk of spills and leaks,” concerns about the company’s proposed only for modified-risk status—it said says Everett Dickson, CEO. softer warning because a number of that SMNA might have impeded its In the past six months the company has studies found associations between snus MRTP application by not separating it gained more widespread recognition with and pancreatic cancer, heart attacks, from the application for a warning label several major marketing partnerships, stroke and diabetes. change. including the Championship Bull Riding The cigarette and e-cigarette industries, Tour, NASCAR driver Reed Sorenson, some of which are also developing Miscellaneous Newsmakers—It and Tommy Baldwin Racing (TBR). MRTPs, have been closely following doesn’t take a new tobacco category Beyond gadgets, can the well- the progress of the SMNA application, these days to get innovation attention. established change its stripes? the first to be reviewed by FDA since Accessories and gadgets are still a Trendsettah USA based in Miami it gained authority to regulate tobacco sweet spot, including FLASR based is betting it can. The company just in 2009. SMNA requested to remove in Atlanta, which manufactures introduced Extendos by Splitarillos, warning labels about mouth cancer, pocketsize portable spittoons, which at 8.5 inches long is double the gum disease and tooth loss, and replace targeting moist snuff users. The length of a standard 4.25-inch cigarillo. a warning that smokeless tobacco is company said that it recognized the “In the last 25 years there have been not a safe alternative to cigarettes with need for more discreet and convenient three major innovations that have one that says its snus is less risky than disposal of moist tobacco by-product reinvigorated the machine-made cigar cigarettes. The company believed it had and in 2012 introduced the FLASR business and have the industry forever: a strong case, as snus use in Sweden has 4-ounce pocketsize portable tobacco the introduction of flavors designed to risen over the past 30 years, during which flask with unique bottle designs give the adult consumer a variety of time the country’s smoking rates have and a “revolutionary” Thumb-Lok taste profiles to choose from, the foil- fallen to the lowest in Europe. SMNA Twist Cap, innovation that “virtually wrapped cigars replaced the industry and some researchers attribute much of standard cellophane wrap to lock in the decline to smokers switching to snus. freshness, and the traditional five- But now the TPSAC vote is a setback, pack box of cigars was replaced by the with any potential future positive resealable pouch to lock in taste and outcome from modification to the freshness,” Bill Schoep, senior vice current application or a re-application president of sales, tells TBI. “We feel likely to be delayed for another 18- to Extendos is the fourth such industry 36-plus months, according to a statement innovation.” made by Nomura. Standard cigarillos are reportedly Nomura also said that it was unlikely made by halving the 8.5-inch product to that the first MRTP application was create multiples. “By simply omitting the going to get “everything correct” given process, we’ve recognized an opportunity the ambiguity of the FDA guidelines that some 100-year-old companies around the applications, but SMNA didn’t see,” Schoep adds. “It’s a direct and other companies can learn from response to tobacco enthusiasts’ request the latest development and “adjust for a product that allows them to enjoy accordingly.” twice as much from one cigarillo with Nomura noted that others might have less frequent relighting.” TBI

55 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 The Dark Side of Tax Hikes

By Jennifer Gelfand

very day, hundreds, if not the sale of large quantities of contraband thousands, of commuters cigarettes. In fact, experts report that Smuggling, Eemerging from the dark and more than 60 percent of cigarettes in gritty New York City subway are New York state are illegal. In some cases, theft and thriving confronted with the reality of illegal the contraband cigarettes were stolen cigarette sales. “Marlboros, Marlboros, from wholesalers or retailers, but most illicit trade Marlboros…get your Marlboros here,” cases involved cigarettes purchased in a murmur the seedy-looking sellers of lower tax state and brought to New York, are the side black market cigarettes who lurk in train where New York State’s $4.35 per-pack stations, subway stops and other places excise tax plus the city’s $1.60 per-pack effects of state where commuters are likely to pass by. levy creates a lucrative environment for What’s more, those individual illegal activity. tax hikes. sellers are just the tip of the proverbial “Penalties for trafficking in cigarettes iceberg—organized criminals have taken are weak while the incentive to smuggle cigarette trafficking a lot further, opening is strong,” notes New Tobacco Road, a small corner shops to use as fronts for website dedicated to chronicling black

56 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 market activity. “Smugglers purchase missions, cigarette trafficking is often director of the Bureau of Alcohol, tobacco products in states with lower lower on the priority list, competing for Tobacco, Firearms and Explosives, points taxes, transport them up I-95 to states scarce resources,” alleges New Tobacco out, the rise in black market activity also with higher tax levies, then sell them on Road. exposes America’s youth to tobacco use. the black market, reaping huge profits While states suffer the loss of tax “It is well-known that crooks don’t care and robbing states of legitimate tax revenues due to smuggling, retailers about the rules, the law, or our children,” revenues. The risk versus the reward is also lose out. As the availability of illicit he notes. “They care about the profits heavily weighted in favor of reward.” cigarettes grows, legitimate businesses they reap from illegal tobacco trade.” Generally, state law enforcement lose sales to black market competitors departments lack the necessary tools to selling cheaper cigarettes illegally. “If Beyond the Big City combat cigarette trafficking. Furthermore, you’re an honest retailer, you’ve got a lot The black market problem is not smuggling tobacco is largely treated to lose,” Jeff Smith III, an industry leader exclusive to New York. According to as a minor crime, with penalties that who represents the Virginia Wholesale the Mackinac Center for Public Policy’s aren’t severe enough to deter criminals. Distributors Association, told New annual analysis of estimated cigarette “Because officials are faced with many Tobacco Road. smuggling rates, after New York’s 58 other important law-enforcement As Richard Marianos, retired assistant percent, the most inbound cigarette

57 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 smuggling takes place in Arizona (49.3 percent), Washington (46.4 percent), “Smugglers purchase tobacco products New Mexico (46.1 percent) and Rhode Island (32 percent). As taxes rise, so does in states with lower taxes, transport criminal activity. In other words, it’s not a coincidence that New York’s cigarette them up I-95 to states with higher excise tax has increased by 190 percent since 2006 and black market trade in tax levies, then sell them on the black the state jumped by 62 percent during the same period. During 2013, Illinois’ market, reaping huge profits and robbing smuggling rate increased the most, with black market cigarettes going from 1.1 states of legitimate tax revenues.” percent of the market in 2012 to 20.9 percent of the market in 2013—that hike followed a state excise tax increase of $1 per pack enacted in mid-2012. Other measures that may help include Tobacco Road.” And now, there has Conversely, outbound cigarette boosting public awareness of the been an eruption of smuggling in the smuggling (where lower-taxed cigarettes problem and creating tougher penalties, Chicago and St. Louis area where local are purchased to sell in higher-taxed note the authors of New Tobacco jurisdictions have slapped new, huge tax states) was highest in New Hampshire Road, who feel that strong deterrents levies on cigarettes. (28.6 percent), Idaho (24.2 percent), are desperately needed. “States need to Virginia (22.6 percent), Delaware (22.6 create tougher penalties for cigarette A Sampling of Smuggling percent) and Wyoming (21 percent). trafficking and provide law enforcement Activity with more resources and more incentives In New York state, a tobacco strike Solving Smuggling to make stopping cigarette smuggling force is cracking down on illegal What’s to be done to curb the a priority.” Retailers can also help by cigarette smuggling and sales. Below craziness? “Rampant smuggling can be monitoring local activity and writing are a few examples of the criminal thwarted to a degree by cutting taxes, their legislators to support tougher laws activities that they have investigated. improving law enforcement operations, in the wake of incidents reported in the or both,” suggest Mackinac Center media. Operation Tobacco Road report authors Michael D. LaFaive and Such is the case with the 2015 study In June of 2014, Samir Ramadan pled Dr. Todd Nesbit. “We strongly suggest just released by the Mackinac Center for guilty to corruption charges in a massive the former route. Higher excise taxes are Public Policy, pointing to the continued cigarette smuggling operation allegedly the root of the problem so lower ones flood of tobacco smuggling along I-95, led by his brother Basel Ramadan. The should be at the forefront of a solution.” which has been dubbed the “New brothers, who lived next door to each

58 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 “It is well-known that crooks don’t care about the rules, the law, or our children. They care about the profits they reap from illegal tobacco trade.”

other, reportedly used business fronts in arrested in a pre-dawn raid of Providence, laundering and Social Security fraud, Virginia to purchase cigarettes wholesale Rhode Island convenience stores in Najd Khalil later tried to flee the and sold them untaxed in New York City which federal agents and state police country, but was apprehended. at a pace of roughly 20,000 cigarettes seized $100,000 in cash, four vehicles and a week, the indictment states. Records a large amount of illegal cigarettes. Black Marketer in the suggest the ring sold 1.37 million cartons A federal indictment stated that Bronx of untaxed cigarettes between December the group bought more than 30,000 In May 2014, Bronx resident 2008 and May 2013, generating more cigarette cartons from a Sam’s Club Mouhamadou Konate, 41, was arrested than $10 million in profits. The charges in Virginia using phony corporate for the possession and transportation allege that the operation cheated New accounts for businesses that didn’t of untaxed contraband cigarettes. York state out of $80 million in cigarette exist, moved the cigarettes to Rhode The New York State Department of tax revenue. Island and sold them at full retail price, Taxation and Finance seized black evading more than $1 million in sales plastic garbage bags stuffed with Fleeing Fraudster tax and pocketing huge profits. 997 cartons of Marlboro, Newport, In May 2013, Najd Khalil, his two Convicted of transporting contraband Parliament and Kool brand cigarettes brothers and four other suspects were cigarettes, food stamp fraud, money bearing Virginia stamps. TBI

60 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 Industry Event

62 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 Industry Event

Are You Ready for Vapor Expo International?

Opening on June 17, this second-annual, two-day event will feature more than 200 vapor product suppliers and exciting educational seminars.

n June, vapor category and educational seminars where manufacturers, distributors, attendees can learn about the latest Iwholesalers and retailers will regulatory developments and trends gather for a not-to-be-missed industry affecting the category. event. Vapor Expo International A State of the Industry presentation (VEI) is the “premiere trade show will open the show, with two industry that continues to bring the world of experts offering their perspectives on vapor together for two days to meet, where the category is today and where do business and learn what to expect it’s headed. Wells Fargo’s Bonnie as the vapor phenomenon continues Herzog will kick off the session, to expand across the globe,” says addressing: Ed O’Connor, president of TMG • E-Cigarette Sales Trends: A look International, owner of TBI, Vapor at the latest sales data, the category’s Consortium International and the prospects for Big Tobacco versus Tobacco Plus Convenience and VEI smaller contenders, and other market shows. trends; In addition to a jam-packed trade • The Retail Landscape: How will show floor showcasing every type traditional channels, such as tobacco of vapor product and accessory on shops and c-stores, and the up-and- the market today, the event will also coming vape shops carve up the feature peer networking opportunities market?

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• Cig-alikes vs. Tanks: Cig-alikes are viewed as an easier transition for smokers, but tank-style vapor devices offer economy—will one format prevail? • Tax Trends: Will the federal and/or state governments begin taxing e-cigarettes—and if so, how?

Troutman Sanders’ Bryan Haynes will follow that overview with a look at the e-cigarette regulatory environment, including an update on FDA proposals and state regulatory initiatives. An accomplished trial lawyer who has served as lead counsel in state and federal courts around the country, Haynes’ practice focuses on representing tobacco manufacturers, distributors, retailers and suppliers in all aspects of their businesses, including regulatory compliance, FDA requirements, administrative disputes involving a federal or state governmental entity, commercial agreements and tobacco taxation matters. Day two of the show will feature a Vapor Industry Overview Panel discussion focusing on the latest regulatory developments, product innovations and the evolution of the manufacturing and retail landscapes, as well as other market trends shaping the exploding vapor category. Representatives from the top associations, including SFATA, TVECA and AEMSA, will offer their perspectives and address questions about the future of this exciting category. TBI hopes to see you at this year’s VEI, which promises to be even bigger and better than last year’s hit show. For more information or to register for attendance, visit vaporexpointernational.com. TBI

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65 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 PAX Labs: Dedicated to Innovation How a California company plans By Jennifer Gelfand to revolutionize the vaping category.

“If we don’t innovate, we won’t succeed,” is the mantra of the management team behind PAX Labs, a manufacturer of premium vaporizers. It’s a fitting maxim for a company founded by two Stanford University students who met while pursuing master’s degrees in design. Chatting during a smoking break at school, James Monsees and Adam Bowen began ruminating on the many faults of traditional cigarettes and how they might improve that centuries-old design. That conversation led to the launch of Ploom, a company dedicated to finding a better option for smokers. Ploom went through the usual gyrations plaguing technology startups, including Chinese-made e-cigarettes beating its first product to market, difficulty raising funds, and a first product that failed to win consumers over. However, its founders persevered and, in 2012, unveiled the Pax. Similar to other personal vaporizing devices in that users take in nicotine and flavor in the form of vapor, the Pax allowed smokers to continue using traditional tobacco by placing it in a stainless steel bowl built into the loose-leaf vaporizer, which uses heat-not-burn technology. “The Pax 1 was a huge success,” says Bowen. “We’ve sold well over half a million of these

66 TOBACCOTOBACCO BUSINESSBUSINESS INTERNATIONALINTERNATIONAL MAY/JUNE 2015 vaporizers and for good reason: they have a lot of powerful technology built into them underneath a sleek exterior.” “Size or format, cig-alikes, tanks, mods—they all Now, the company—which recently lack the nicotine experience that comes from a changed its name from Ploom to PAX Labs— has followed up with a second-generation cigarette. So in our R&D we were laser-focused on product: the Pax 2. “It’s a dramatically improved version of the PAX product,” says solving this one aspect, and we did it.” Monsees, who notes that the company took customer feedback on the PAX to heart when designing its successor. “We captured as many consumer insights as we possibly can and all of that information has been rolled into a dramatically improved product in PAX 2.” The $280 PAX 2 is 25 percent smaller, lasts 30 percent longer and heats up faster than its predecessor. “We simplified the assembly of the product so that it only has one moving part, which is a button,” says Bowen. “That means it will be a lot easier to maintain and clean. It will also be more durable.” Many of the new features were things that customers had been clamoring for, but some were things that PAX Labs simply thought they should have. “For example, we developed a lip-sensing technology where the device knows when you have it in your mouth and can adjust [the] power settings [to] be more James Monsees and energy efficient,” explains Bowen. “It’s also just Adam Bowen co-founded PAX Labs a lot tighter- and clearer-looking than PAX 1.”

68 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 JUUL features: • Liquid-to-wick cartridge system • Small battery with a high discharge rate—200 puffs per day • Internal temperature regulation • Ease of use: simply insert JUULpod into JUUL and draw • Battery charges two times faster than the average e-cigarette • Indicator light communicates battery life and pull strength • Unrivaled patented technology • USB charger with magnetic contact • Available in four flavors: tabaac, miint, fruut and bruule

An E-Cig Entry market, PAX Labs concluded that using pure This PAX 2 won’t be the only innovation to nicotine rather than tobacco leaf was the come out of PAX Labs this year, according to problem. “You don’t find free-base nicotine the company’s founders, who are promising in nature…what you find are nicotine salts, to launch a game-changing e-cigarette. “It’s which is a nicotine complex mixed with a new category for us, one that we’ve been organic acids to form a salt,” Bowen explains. working on for years,” says Bowen. “It’s an “This was a huge discovery. We were then e-cigarette but one that’s fundamentally able to reverse-engineer what’s going on in different and better than anything on the nature, adapt it and turn it into a proprietary market.” technology that works perfectly As a smoker himself, Bowen has tried in our e-cigarette platform.” hundreds of e-cigarettes, hundreds of Shortly after that call, PAX Labs released e-liquids and has been frustrated with them JUUL, an e-cigarette that uses nicotine all. salts found in leaf tobacco, rather than free- This Spring, PAX Labs debuted a new base nicotine, as its core ingredient. “There e-cigarette, JUUL, unveiled with much is a huge, unsatisfied demand for a product fanfare by the company, which describes it like JUUL,” says Monsees. “The most as “the only alternative smoking product that conservative estimate is that 60 percent of delivers a nicotine experience truly akin to a smokers have tried e-cigs. That’s more than cigarette, with two times the nicotine strength 24 million smokers; however, only about 2.4 and three times the vapor quality of leading million became regular e-cig users, as most competitive products.” consumers returned to combustibles. That’s PAX’s Bowen had been promising a a huge gulf between what consumers want revolutionary e-cigarette product for several and what the industry has been able to offer, months, paving the way by recounting his until now. JUUL is the product that smokers own frustration as a smoker trying to find want. Smokers will try it and keep it, because a satisfying e-cigarette experience. “Size or it delivers the satisfaction they demand.” format, cig-alikes, tanks, mods—they all lack Bowen is equally enthusiastic about the the nicotine experience that comes from a product’s potential. “It’s fundamentally cigarette,” he told participants in a recent different from what’s currently on the conference call hosted by Wells Fargo. “So in market—a night-and-day experience,” he our R&D we were laser-focused on solving says. “We’re going to introduce in the very this one aspect, and we did it.” near future the first meaningful and really After extensive research on the e-cigarette viable alternative for smokers.” TBI

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Get Your Vape Game On Are you ready to get your share of the VTM market? By Norm Bour

here’s no denying it. The world Wells Fargo Securities projects that this is estimated that there are 6,000 to 8,000 of vaping is revolutionizing the new market will generate $3.5 billion in brick-and-mortar locations nationwide. Ttobacco landscape—which means annual sales in 2015, up from $2.5 billion That’s a huge jump from an estimated 1,500 your business needs to adapt to thrive in the in 2014, and that it will grow to to be a $10 to 2,000 shops in 2013. More and more evolving world of tobacco retail. billion market by 2018. By 2025, the VTM outlets and smoke shops are also finding market could exceed conventional tobacco. success pursuing the category, as evidenced Vying for the VTM Market What’s more, profit margins on hardware by the two examples to follow. As you probably know, the new vapor are excellent, and the margins on e-liquids market is becoming known as the VTM are even better. Pursuing Profits market, which stands for vapors, tanks and Already, vape-only shops are springing In 2014, Chad Love bought a Wytheville, mods. That includes e-cigarettes (e-cigs) up across the country, competing with Virginia-based smoke shop that had been or cig-alikes, vaping devices that are more traditional tobacco outlets and smoke a staple in the community for years. After mechanical in nature, and the world of shops for nicotine consumers. Though the rebranding the shop to Blue Ridge Smoke e-liquids. industry lacks metrics due to its newness, it and Vapor, he investigated his options to

72 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 about 85 percent tobacco and 15 percent vape products.The percentage of space devoted to vape products is growing; of their vape product inventory, e-liquids are the hottest sellers. While Dangerzone does not plan to offer fancy mechanical devices or mods, Pipe Palace will continue to focus on starter kits and e-liquids. Pipe Palace is known for being innovative and eclectic, with a solid collection of briar and Meerschaum pipes, lots of t-shirts and, of course, their staple of tobacco and now vaping products. In addition to regular and loyal customers, they also get a lot of we’re almost at half and growing,” he said. tourist traffic because the shop is located Blue Ridge Smoke and Vapor primarily close to major attractions—the Seattle caters to beginners; sales are equally Museum and the Seattle Aquarium. distributed between hardware and e-liquids. increase the shop’s profitability. Tobacco They don’t get into expensive mods and Embracing the Future of Vape products sold well, but the margins were mechanical devices since their customers As these examples show, tobacco shops getting tighter each year. aren’t looking for high-end products. are well-positioned to segue into VTM So Love remodeled and converted about sales. The bottom line? Making the half the store to vaping products. He added Time For a Change transition takes time and commitment, but a tasting bar and engaged an entirely new Pipe Palace in Seattle, Washington pays off handsomely for those who make crowd. He also supported loyal smokers who began as an antique shop in 1969. One of the investment. TBI were trying to quit smoking and converted its customers offered to sell custom and ______many of them to vaping. Education was a historic smoking pipes, which ultimately key component and instead of just to selling became more profitable than the antiques. Norm Bour is the them, he empowered his long-time smokers. Owner Debbie Hopgood seized the founder of VapeMentors, “We had many customers who smoked opportunity and converted Pipe Palace which offers online for decades and were never able to kick the to a smoke shop. She recently added educational programs, habit,” Love said. “Patches and gums didn’t vape products, working together with her services and resources work, but vaping did. The result was that we manager Lola Dangerzone. for anyone in the vape gained a loyal following that was appreciative “We recognized these were innovative space, including vape as well.” products, but had no idea they would shops, online stores According to Love, vape revenues are change the industry,” Dangerzone recalls and e-liquid brands. He’s also host of “Vape increasing by about 20 percent every month. of the store’s decision to start selling Radio,” a podcast series that interviews As this volume increases, they are devoting NJOY products. the masters of vape and thought leaders more retail space to vaping hardware and Dangerzone says Pipe Palace would like in the vape world. To learn more about e-liquids. to offer products that are “hip, cool and VapeMentors resources, contact him at “Initially about 20 percent was vape, but now inviting.” Their inventory has shifted to [email protected].

73 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 Op-Ed

Why an Excise Tax on Cigarettes Won’t Work Fewer legal sales won’t necessarily mean lower smoking rates.

By Michael D. LaFaive and Todd Nesbit, Ph.D.

he Washington State Legislature To measure the future impact of adding that illicit sources of smokes may be appears again poised to go to the 50 cents per pack onto the state’s existing undermining their goals. Tcigarette excise tax well. A proposal tax, we reran our model at the higher In 2004, economist Mark Stehr to hike the state’s excise tax by another 50 rate. It reports that smuggling will leap to published a paper that suggested up to cents to $3.52 per pack would exacerbate an 52.5 percent of the total market, moving 85 percent of the change in legal paid already large smuggling problem and offer Washington into second place among sales of cigarettes may be attributed to tax little in the way of gains to public health. smuggling states behind only New York avoidance or evasion rather than to people We have created a statistical model to state, whose smuggling problems are ending their smoking habits. measure the degree to which cigarette exacerbated by New York City’s municipal The authors of a 2014 study, “Do Higher smuggling occurs in most of the United excise tax of $1.50 and its proximity to Tobacco Taxes Reduce Adult Smoking?” States. Through 2013, our model reported tobacco state Virginia. published in the peer-reviewed Journal that Washington had the third-highest Perhaps more instructive is that the of Economic Inquiry, are skeptical as well. smuggling rate among 47 states. Our model is informing us that Washington is They write: “Considering all the evidence, estimate shows that, of all the cigarettes getting dangerously close to the point at we conclude that there is insufficient consumed in Washington that year, which revenues from a higher excise tax justification for the widespread belief that 46.4 percent were obtained as a result will turn negative. We estimate that the raising cigarette taxes will significantly of tax evasion or avoidance. The state’s higher excise tax will only raise about 3.3 reduce cigarette consumption among smuggling rate would be four points percent or $13.5 million more than it does adults—even young adults.” higher if we did not subtract out cigarette now due to a drop in legal paid sales of The reasoning behind this is simple: smuggling exports going to . 11.4 percent. people turn to illicit markets for cheaper We are not the only team of scholars It is worth noting that the state’s (and, we argue, sometimes more to tag Washington state with a very high own estimates aren’t too different. They dangerous) alternatives and those who still smuggling estimate. On February 19, estimate new revenues of $18 million smoke have a strong preference for doing the National Research Council and the to $20 million in the year following the so. Lawmakers should never confuse a Institute of Medicine released its own hike and a legal paid sales decline of 9.5 decline in legal paid sales with a decline in state-by-state smuggling estimates in percent. smoking rates. The former need not lead a report titled “Understanding the U.S. As a large percentage of Washington’s to the latter, especially to the degree that Illicit Tobacco Market: Characteristics, population lives along the Interstate-5 health advocates . Policy Contest, and Lessons from corridor, it does not strain credulity By opposing a further cigarette excise tax International Experiences,” in which they to suggest that large amounts of illicit increase, Washington legislators will avoid estimate Washington’s smuggling rate for cigarettes are being trucked up from forcing residents to accept substantial 2012 at 45.5 percent. Oregon, which maintains an excise tax of increases in lawlessness in exchange for In other words, two groups of analysts just $1.31 per pack. We also suspect that modest reductions in smoking rates. TBI working independently made nearly Washington’s busy port system facilitates identical smuggling estimates. Even if the illegal transit of untaxed smokes, but Michael LaFaive is director of fiscal policy both are off by 10 or 15 percentage points, our model is not yet designed to measure with the Mackinac Center for Public Policy Washington still has a rampant problem that. in Midland, Michigan. Todd Nesbit, Ph.D., that could get even worse. The state’s own We do recognize that supporters of is a senior lecturer in economics at Ohio State smuggling estimate for 2013 was 32.9 such tax hikes for health reasons are University and a member of the Mackinac percent of the total market. well-intentioned, but evidence suggests Center’s Board of Scholars.

74 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 trench marketing BY MICHAEL GELFAND

Best of Both Worlds

Milwaukee’s venerated Uhle Tobacco Company shows that old-school values and modern technology can thrive together.

urely you’ve heard the old axiom already been in operation for more than providing exceptional service. “We take a that says, “If it ain’t broken, don’t 40 years and it got to be a passion for us, lot of pride in the pipe tobacco products Sfix it.” Well, that’s the approach so we purchased it from Jack in 1982.” that Jack developed. He always strove to brothers Jeff and Jim Steinbock took Uhle Tobacco Company was a make his tobacco a superior product, and when they purchased Milwaukee’s successful, well-established business it still is today.” renowned Uhle Tobacco Company from then, and remains so today. “We love its founder, and that kernel of wisdom dealing with our customers; they’re very A Rich History continues to be the gift that keeps on loyal,” says Steinbock. “We’ve actually Uhle opened his store back in 1939, giving today. got a number of customers who’ve been and it has remained a single store “I was hired by Jack Uhle, who was coming into the store for more than 40 in downtown Milwaukee ever since. a friend of our father’s, in 1974. I was years, including a World War II vet who However, some things have changed. 19 at the time and my brother Jim had comes in every Saturday.” Asked why his Back when he first opened, Jack Uhle sat been working here since 1972,” recalls customers are so loyal, Steinbock says it in the front window of the store repairing president Jeff Steinbock. “The store had boils down to having great products and pipes and handblending pipe tobaccos

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Uhle Tobacco Company’s Jeff Steinbock

for his customers. Since then, of course, have been there. But we never did it, and out…they do. It’s a regular community Uhle has retired. The business also moved we don’t regret it because this is a very with lots of lively conversation.” two blocks away to a downtown location unique store. It’s an old-school tobacco That camaraderie coupled with a many decades ago. But aside from those shop whose flavor can’t be duplicated in focus on customer service is critical changes and the addition of some key some strip mall. for the store’s success. “We try to be as technology in the past five years, the “Uhle’s has a very welcoming welcoming as possible, which is hugely operation largely looks, feels and smells personality, but it is not new and shiny,” important because of competition we get the same as it ever did, and that’s not he says. “There’s lots of old wood on the Internet,” notes Steinbock. “We’ve likely going to change anytime soon. everywhere, and we’ve got a smoking got to be good in this area; you have to Landmarks like Uhle’s are often lounge but it doesn’t have a TV. It has a focus on service.” imitated, but as Steinbock points out, sign that says, ‘members only,’ and we’ll While Uhle’s continues to sell a wide you can’t make something authentic with often have new customers ask us how to array of tobacco products, including a can of paint. “This is it—the one and become members, to which we always say, pipes, pipe accessories, , cigarettes, only,” he says. “Of course, over the years ‘You just bought a cigar—you’re in.’ And vaping products and chewing tobacco, we have considered franchises or opening while they might not know anyone when it primarily focuses on premium cigars other locations because the opportunities they walk in there, [when] they come and pipe tobacco. “With cigars, we have

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Steinbock at the cigar counter with his son, Dave Steinbock

our own private label, which is made introduce a mediocre cigar now and by Camacho, which we sell for around hope to make it. Competition between $4 a stick, and we sell a ton of those,” manufacturers has gotten so tough, he notes. “So the range for our cigars is which means consumers are now getting from around $3 to $30 a stick.” the best cigars they’ve ever had. You see a little innovation now and then, such Progressing From Pipes as variations in sizes, because everybody “Originally, back in the 1970s we were is constantly searching for the next more focused on pipe tobacco, but since new thing. But quality remains the key then cigars have grown and pipe tobacco driver.” has not,” explains Steinbock. “That’s Aside from cigars, the vape category is a national thing. We still move good also becoming a trend, he adds. “I’ve also poundage in pipe tobacco, and we still seen a lot of interest in vaping products handblend and package it like we did from cigarette smokers. I wouldn’t in 1959, but customers are interested in dedicate half my store to it, but it’ s a cigars a lot more now.” nice little niche and I’d rather have it as Quality and consistency are key to a small niche than not have it at all and building a cigar customer base, notes end up sending someone down the street Steinbock. “Obviously, I was around to get it elsewhere.” during the mid-1990s cigar boom, and there was a lot of inferior product in Happy Customers Are the the market at that time. But today the Best Marketers product you see is the best I’ve ever seen, As a time-honored tobacconist in and that’s across the board. You can’t Milwaukee, Uhle’s continues to benefit

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from generations of customers passing haven’t done print advertising in any to know how it benefits his business and on the store’s traditional brand values form for years,” he says. “I remember we is quick to empower his employees to to the next generation, which has given used to spend a ton on advertising in the harness its power for the store’s benefit. the store a strong reputation across all Yellow Pages, and now we don’t spend “Just because I own the place doesn’t relevant age and income demographics. a dime on it because it just doesn’t pay. mean I have all the answers. Some of “We don’t have a typical customer,” says We tried advertising in local media and the best ideas come from people who Steinbock. “We get guys from college newspapers but we received poor results, are behind the counter, and we have all the way up to 90-year-olds, and they so we’ve moved past the old ways now. younger people here who have a lot come to us from all walks of life. So we The best method of marketing for any more knowledge about technology, the don’t have a specific target audience.” store these days is to cultivate an email Internet and social media than I do. So I Reputation apparently speaks for list, create a Facebook presence, and rely on them all quite heavily. itself, and according to Steinbock, it build a website.” “We put a POS [point-of-sale] system does so much better than advertising While Steinbock admits to being in place about four years ago, and it’s been in a newspaper. “Online advertising has far less than hands-on with today’s great,” he says. “Lots of the old-school clearly taken over from print, and we technology, he is more than savvy enough ways [in which] we conduct business

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are still effective, but with a POS system get them as knowledgeable about product listen closely to the salesmen that come we’re no longer flying by the seat of our as possible,” notes Steinbock. “That’s in because they have lots of information pants. Now we know exactly how many particularly important here at Uhle’s about what’s hot and what’s not,” he says. Fuentes, Macanudos and Perdomos we because we don’t have a walk-in humidor, And staying on top of the industry sold today, last week or last month. Now we have cases, and that requires much more might be what keeps Uhle’s going we can tell what’s moving and what isn’t, hands-on customer service.” for another century. “We’ve never so it eliminates a lot of guess work.” According to Steinbock, it’s imperative seen more challenges to our business that your employees be able to talk from the government,” he says. Social Media Maven to your customers to find out what “That’s a dark cloud hanging over As for leveraging the power of the they like—and what they don’t like— the industry. We don’t know what Internet, Steinbock is a firm believer in and what they’ve already tried. “The they’ll do to us. I think as a retailer, new media. “Whenever we plan our in- competition from the Internet is fierce, you have to dovetail your efforts and store events, that goes up on Facebook, but the advantage to the way we retail connect with the industry—even and we send emails to our regular cigars is it delivers more service and your competitors. customers and do everything we can deeper knowledge. With our way, you’re “The fight has to come from all of us,” once a customer is in the store to capture not just ringing up sales, you’re actually says Steinbock. “And I mean from all of their email address,” he says. “If you go suggesting and building future sales.” us together, not as individuals. We have through each [situation using] the old An important aspect of the knowledge to get consumers motivated to respond way of doing business it can get bland, he and his team impart to his customers to these things, too, if we’re going to so you’ve got to come up with new ways comes from staying abreast of industry survive. It’s not going to get better, but to promote events and get customers trends and potential regulatory actions we can stop it from getting worse. It’s excited.” from the local, state and federal not insurmountable in terms of fighting All of the effort, however, would be governments. “IPCPR and NATO are it, but we have to be smart and work wasted without properly trained employees. good sources of information for us, and with our competitors on this or we all “You have to work with new employees and I do a lot of additional reading. I also lose.” TBI

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Arango Adds Powerful Packaging New Lines Drew Estate announced that it will Arango Cigar Company has purchased now offer its Liga Privada Papas Fritas the assets and exclusive U.S. distribution cigar in a newly designed 50-count rights of Sheffield Exchange and will box. These new boxes will replace now be the distributor for Gawith the 4-count tins/28-count boxes that Hoggarth TT and Wilsons & Company the Papas Fritas line was previously (Sharrow). This latest acquisition falls in offered in and will, as a result, reduce line with Arango’s expanding portfolio, the single-cigar retail price to $5.25 giving smokers many more selections of MSRP from its previous price of $6.40. high-quality European tobacco products “Papas Fritas has been a good choice for and accessories. any Liga Privada fan looking for a short Gawith Hoggarth blends over 50 fine smoke,” says Drew Estate President pipe tobaccos favored by discriminating Michael Cellucci. smokers. The mixtures range from “We needed something for fans of traditional English and aromatic Papas Fritas who already had plenty of mixtures to ready-rubbed, plug, flake tins and wanted a better value, so now and even rope tobaccos. The company we’re offering the cigar with no tin. The is managed by the original founders’ tins will now become a collectors’ item third-generation family members. and the Papas Fritas will be a little more Arango’s Wilsons (Sharrow) inventory budget-friendly. It’s a win-win.” includes 16 nasal snuff selections that The Papas Fritas is part of Drew incorporate flavors such as menthol, Estate’s Liga Privada Unico Serie, eucalyptus, camphor and spearmint, as which features unique blends within well as vanilla, raspberry, strawberry, the Liga Privada brand family. The Papas cherry, apricot, lemon, rose and Fritas utilizes a Connecticut Broadleaf lavender. The Dr. Rumneys Selection is one of Wilsons’ most popular blends. Maduro wrapper, Brazilian Mata Fina This well-respected company predates America as a nation, where it has gained binder, and Nicaraguan and Honduran popularity with snuff connoisseurs. filler tobaccos. The small 4.5x44 cigar “Gawith Hoggarth traces its beginnings to the mid-1800s, while Wilsons was sports Drew Estate’s signature fantail. established in 1737,” notes Michael Gold, Arango’s president. “Both companies Drew Estate, drewestate.com have earned and maintained the tobacco world’s acclaim based on their uncompromising dedication to quality of their time-honored secret recipes. We at Arango look forward to broadening their availability throughout the U.S., and will continue to provide knowledgeable customer service and a prompt, one-stop shopping convenience.” The wholesale prices for Gawith Hoggarth pipe tobaccos range from $44.75 to $51.50 for their 17.6-ounce bulk boxes. Wilsons’ nasal snuffs are packaged 12 tins per sleeve, and wholesale for $33. Gawith Hoggarth and Wilsons inventory are now available for immediate shipment from Arango Cigar, which will showcase both lines at the Arango pavilion at the 2015 IPCPR show. Arango Cigar Company, Northbrook, IL, 800-222-4427

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JM Tobacco’s Corojo Nicaraguan New Entry JM Tobacco has introduced a Corojo wrapper to its value-priced JM’s Nicaraguan for La Pluma 100 percent tobacco, handmade premium cigar. “Our new line extension for the

JM’s Nicaraguan premium cigar is for heavy hitters who can handle a brawny Manahawkin, New Jersey-based La smoke,” says Anto Mahroukian, president of JM Tobacco. “The cigar features a Pluma Cigars has launched Principia, Corojo wrapper and is full-bodied. It is equally full-flavored thanks to its powerful an exciting new cigar that will join the all-Nicaraguan filler.” The company has been a leader in premium and value- company’s already successful releases, priced cigars since 1996 and offers several top-quality cigars at affordable prices. Origin of Species and Rights of Man, The JM’s Nicaraguan line appeared at last year’s IPCPR show. It is a handmade debuted in 2014. The Principia features a Cuban sandwich, with an all-Nicaraguan filler and maduro-fermented Connecticut medium- to full-bodied, full flavor broadleaf binder. This year, the Corojo wrapper takes its place alongside the with chocolate and coffee notes, with a original Sumatra and Maduro frontmarks. The Corojo offers a robust break to the San Andres wrapper and a Nicaraguan original Nicaraguan’s creamy, mild-to-medium smoke. binder and filler. The Corojo and Nicaraguan follow JM Tobacco’s focus on value, with an MSRP All three cigars were inspired by New of less than $5. Like all JM Tobacco offerings, the punch-cut Corojo comes in Jersey-based actor and entrepreneur eight traditional shapes from the 5.5x42 Corona to the 6.75x62 Gordo Grande. Jonathan Maccia’s love of science, The original Nicaraguan and Corojo are presented 50 cigars to a box, except literature, film and art. Maccia worked for the large-girth Gorditos, Gordos and Gordo Grandes—their boxes hold for many years at one of New York City’s 24. Mahroukian explains, “All the box art, graphics and text [are] now unified most highly regarded cigar shops and throughout our portfolio, varying only in their color combinations for easy went on to visit dozens of cigar shops identification. The MSRPs for all JM’s lines are also identical. We’ve made it easy during his travels and studies as an actor. for retailers and smokers to identify our The communal experience of smoking individual products.” JM Tobacco will cigars and trading stories with friends, show the Corojo-wrapped Nicaraguan both new and old, sparked his desire to at JM’s IPCPR booth (No. 12619), and create his own cigar brand in 2013. the cigars will be ready for shipping “Our first and second cigar releases immediately after the show. JM Tobacco, are called Origin of Species (referencing 888-377-2667, jmtobacco.com the book by Charles Darwin) and Rights of Man (referencing the book by Thomas Paine),” Maccia explains. “I’m enormously inspired by those two books and men— both in Charles Darwin’s writing on Introducing OCB Organic evolution and Thomas Paine’s belief in equal human rights for all.” La Pluma Republic Tobacco, the nation’s largest RYO/MYO Cigars, laplumacigars.com distributor, has introduced OCB Organic Hemp Cigarette Papers nationwide. The paper is chlorine- free, 100 percent organic with 100 percent natural Arabic gum. It is ultra-thin, giving smokers a slower burning, full-bodied cigarette with minimal ash. Packaging is printed with vegetable inks on recycled cardboard. Available in 1.25, single wide and king size slims, 24-leaf booklets will initially be offered as a 99 cent pre-priced consumer offer. OCB Organic Hemp Cigarette Papers are packed 24 booklets per box with 40 boxes per case. A three-tier counter display is available for merchandising, as well as prepacked bowl displays. POP support includes door decals, posters and corrugated signs. Republic Tobacco, 800-288-8888

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S&M Debut

S&M Brands, one of Virginia’s largest privately held growers, manufacturers and distributors of premium and innovative tobacco products, debuted Carnal Ecstasy at the 2015 Tobacco Swisher Sweets’ Plus Convenience Expo. S&M Brands Trending With offers Carnal Ecstasy in all of its Tastes of the Trendsettah LEX12 product categories of cigars in Tropics regular and wide, e-liquids and vapor Trendsettah USA has introduced two products. The Carnal Ecstasy line adds new flavors of its signature Splitarillos Swisher Sweets has added two tropical eight new retail SKUs in addition to the cigarillos: 18k Gold, made with a honey- tastes to its new line of Finest Fusion 105 retail SKUs S&M Brands added in maple syrup base, and LOUD, an ultra- Mini Cigarillos: Tropical Storm and 2014. sweet flavor. Island Bash. Tropical Storm offers a “We are treating the LEX12 brand “The ultra-sweet LOUD flavor profile refreshing blend of citrus and raspberry, line as a whole new growth category in is the equivalent of adding French and Island Bash is a fusion of fruit the industry,” explains Steven Bailey, vanilla creamer to your coffee—a punch and watermelon. These Finest president of S&M Brands. “Our LEX12 smooth, sweet experience,” says Fusion Mini Cigarillos join the Swisher products have enjoyed accelerated Bill Schoep, senior VP of sales at the Sweets Mini Cigarillos line (original, traction at the wholesale and retail company, which makes its products blueberry and grape) in a redesigned, levels, showing growth in sales and in the Dominican Republic. “18k Gold resealable three-count foil pouch. All profitability per unit.” offers a unique flavor with its hints of the mini cigarillos are available in S&M Brands has been developing of honey and maple syrup. We’re a buy two, get three price promotion. Carnal Ecstasy over the past two years confident that our customers will Swisher International, 800-874-9720 to perfect the velvety sweet aroma of enjoy these new experiences and we apricot blended with savory touches look forward to continuing to offer of a fine after-dinner drink. The entire innovative flavor profiles.” Trendsettah line is designed to appeal to its current USA, trendsettah.com customer base as well as the next generation of smoking enthusiasts. All LEX12 products are distinctively packaged in premium embossed tins with modern, colorful graphics. S&M Brands, SMBrands.com

90 TOBACCO BUSINESS INTERNATIONAL MAY/JUNE 2015 PRODUCT PROFILE maY/JUNE

Extendos Extension

Lifestyle brands manufacturer Trendsettah USA has introduced Extendos by Splitarillos. At 8.5 inches long, Extendos are double the length of a standard 4.25- inch cigarillo. “We created Extendos as an innovative lifestyle product aimed at the progressive consumer,” says Bill Schoep, senior VP of sales at the company. “It’s a direct response to tobacco enthusiasts’ request for a product that allows them to enjoy twice as much from one cigarillo.” Extendos are sold two to a pouch and will be introduced in OG Sweet (the signature flavor of Splitarillos) and a new ultra-sweet flavor profile, LOUD. As Schoep points out, “The cigar industry has seen three major milestones in the last 10 years: the introduction of a variety of flavors that appeal to our adult consumers, foil-wrapped cigars to assist in freshness, and the resealable pouch. We feel Extendos [will be] the next industry breakthrough.” Trendsettah USA, trendsettah.com

Winning Raves for Wave

JT International U.S.A. has introduced the latest Wave packaging, featuring a new tactile feel. The new Wave design will be available in the existing Kings and 100s size in all five popular Wave styles—Full Flavor, Menthol, Menthol Green, Blue and Silver. JTI International, 800-896-4612, wave-value. com, wavecigarettes.com

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