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United States tobacco market: Conflicting rulings in federal courts over graphic warning labels
Tobacco in the US - a new market research report on 2014-03-24 18:28:04
To preserve sales revenue in the face of lower volumes, Philip Morris increased prices twice in the United States tobacco market during 2012, with other major manufacturers RJ Reynolds Tobacco and Lorillard Tobacco following suit. Rising prices prompted consumers to seek substitutes for premium cigarettes, including lower-tier cigarettes and other tobacco products. Manufactures are also trying to provide more value to consumers by changing the smoking experience. Philip Morris introduced a capsule cigarette following the success of RJ Reynolds in that growing category. Cigarette prices will likely continue to be prohibitively high as State and local governments seek to extract additional revenue and lower health care spending. Additionally, indoor and outdoor smoking bans have been enacted and extended at local and regional level, further restricting the legal smoking environment in the US.

Under the dual pressure of increased regulation and shrinking demand for their primary product (cigarettes), the leading tobacco players are now pursuing a portfolio strategy which gives them increased exposure to the "emerging markets" of tobacco, including traditional smokeless tobacco products, such as snuff and Swedish-style snus, as well as non-tobacco nicotine delivery platforms, such as electronic cigarettes. Once thought of as niche, these products will continue to be developed for the mass market thanks to increased investment by these major manufacturers. Both RJ Reynolds and Philip Morris were marketing Swedish-style snus in 2012 under some of their leading brand names, while Lorillard and, to a lesser degree, RJ Reynolds have entered the e-cigarette category. Philip Morris was test marketing a tobacco-free nicotine lozenge at the end of the review period.

Increased federal and local taxes on cigarettes have prompted changes in product from tobacco companies and in buying habits from consumers. Manufacturers are now selling pipe tobacco suitable for RYO use to avoid higher taxes. Meanwhile, "little cigars" have taken on the form and packaging of cigarettes to act as substitutes but avoid higher taxes. Legislators at federal and local levels are now attempting to close these tax loop holes so the advantages currently enjoyed by these cigarette alternatives may not last over the forecast period.

Major tobacco manufacturers continue to contest the Food and Drug Administration´s (FDA) regulatory authority over the US tobacco industry. Conflicting rulings in federal courts over graphic warning labels have led experts to believe that the Supreme Court will likely decide the conflict. In April 2013, however, the Supreme Court refused to hear an appeal to the 2009 authority given to the FDA. The FDA now has to create graphic warnings that do not violate the First Amendment, a process which is on-going. Furthermore, the potential for a ban on menthol cigarettes remains a possibility, despite the FDA´s decision not to act on the recent recommendation of a ban by its scientific advisory committee. RJ Reynolds and Lorillard have brought suits against the FDA, claiming that some committee members are not impartial. Also, FDA regulation has stalled innovation in cigarettes. The agency had a backlog in 2012 of 3,500 applications for product changes going back 18 months.

In the face of increasingly common smoking bans, cigarette consumers will continue to turn to smokeless tobacco products as a supplement or substitute for their smoking habit. Investment by the major players in new product categories, such as Swedish-style snus, increases the likelihood of greater adoption. Growth of hard snuff will be impeded by the withdrawal of category leader, Star Scientific, but RJ Reynolds continued to test market its dissolvable products.

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