Philip Morris Testing Chewing Tobacco in Atlanta

Source from:  Atlanta Business Chronicle - by Justin Rubner Staff Writer 12/13/2007

With U.S. consumers buying fewer cigarettes every year, Philip Morris USA Inc. is looking to Atlanta to help snuff out falling sales. The nation's No. 1 cigarette maker has chosen Atlanta as the only test market for its first loose chewing tobacco. The tobacco giant is branding the products under the Marlboro name and is aggressively stocking the shelves of stores from Suwanee to Cobb County with long and fine-cut blends of original and wintergreen flavors. The company chose Atlanta based on positive market research here. Spokesman David Sutton says metro Atlantans have a strong brand loyalty to Marlboro. He calls the city a "robust test market." "For moist smokeless tobacco, Atlanta came out high," Sutton said. The company also chose the city based on the strong sales presence of Philip Morris, a unit of the Altria Group Inc. (NYSE: MO). He declined to give the number of employees in the area. While the test started quietly in late October, Sutton says Marlboro's substantial distribution operations have led to a strong presence already. He wouldn't say how many stores are carrying Marlboro chewing tobacco, but said the products are in "just about any store you buy cigarettes." While cigarette sales have been dropping 2 percent a year for several years -- 2.4 percent last year -- chewing tobacco sales have been on the rise. For Philip Morris, cigarette shipments dipped 3.5 percent for the first nine months of the year, according to a November Securities and Exchange Commission filing. Conversely, Citigroup Global Capital Markets Inc. says chewing tobacco sales last year grew 6 percent and predicts the trend will continue for years to come. Nationwide, chewing tobacco is the No. 2 tobacco product after cigarettes. More chewing tobacco is sold than cigars. The decline of cigarette sales is due to a number of factors, according to Citigroup analyst Bonnie Herzog. One of the top reasons, after health concerns, is the widespread introduction of smoking bans. In 2005, legislation was approved in Georgia that bans smoking in most enclosed public places that allow minors. Many other states have passed similar laws, if not more restrictive ones. "Smokeless products have an added appeal to smokers when they cannot light up," she said in an August report. Another reason is increased prices caused by higher tobacco taxes. Just in September, the U.S. House of Representatives voted to offset the cost of expanding health insurance to children by including a 61 cent-per-pack increase in the federal cigarette tax. Georgia levies a 37 cent excise tax per pack of 20 cigarettes. The excise tax on chewing tobacco, meanwhile, is only 10 percent of wholesalers' costs. As a result, the profit margins on chewing tobacco are generally higher than in the cigarette industry. With these trends, Marlboro is not alone in venturing into the chewing tobacco business. In 2006, Reynolds American, the No. 2 cigarette maker in the country behind Philip Morris, agreed to buy Kodiak snuff maker Conwood Sales Co. for $3.5 billion. The leading maker of chewing tobacco in the United States is Connecticut- based UST Inc., which produces Copenhagen, Skoal and Husky. The company in 2006 had a 62 percent market share in the industry, according to an SEC filing by No. 2 competitor Conwood. According to Citigroup, Conwood has a 25 percent share. Sutton says the Southeast is a top market for chewing-tobacco users. The strong following could be attributed to the fact that so much tobacco is grown in the region, as it has been for more than 200 years. According to The University of Georgia's College of Agricultural & Environmental Sciences, the state had more than 26,500 acres devoted to tobacco production in 2001, and produces 64 million pounds per year. Tobacco ranks third in cash receipts from row crops in the state, the university says. Nationwide, $3.7 billion worth of chewing tobacco was sold last year, or more than 1 billion cans. Georgia data could not be obtained. But for the fiscal year that ended in June, the state of Georgia collected $26.6 million in excise taxes from chewing tobacco products, according to the Department of Revenue. Sutton says the chewing tobacco category is extremely competitive. As a result, Philip Morris is pricing the products above discount brands but less than premium ones. The company recommends $3 a can. Prices in Atlanta have spanned from an introductory price of $1.50 to $3.75. Sutton says it's far too early to gather good intelligence from the test here. But he did say the company was "very pleased with the distribution in Atlanta." As for how long the test would take, that's also undetermined. Philip Morris started testing another type of chewing tobacco, a pouched product called "snus" (pronounced snoos), in Dallas in August. Snus is popular with some consumers because it does not require them to spit. Snus for years has been widely popular in Scandinavia. He says the company has no plans to end that test anytime soon. "The real hope is for us to fully gauge consumer reaction, to learn as much as we can," Sutton said. "We're going into this with an open mind." So, is Marlboro chewing tobacco getting consumers fired up? At least one metro Atlanta store, a Shell gas station on Powers Ferry Road in Buckhead, has had moderate success with the products. Store manager Anil Bhandari says he's selling about 20 cans a week. Chewing tobacco as a whole, he says, is a good seller with the most popular brand being Copenhagen. Bhandari is seeing a lot of repeat customers. To get more new customers, though, he says, Philip Morris will need to advertise more. Brand loyalty, after all, is strong with tobacco. "It will take time to catch on," he said. Enditem