RECIPE FOR SUCCESS CRYPTO BUSINESS How the tobacco industry is breaking into the world of NFTs RULES OF ACQUISITION Tips for expanding your retail footprint through a successful acquisition Erik Espinosa on his career, hit premium cigars and working with Guy Fieri AN OFF IC I A L MAGA Z INE OF TOTA L PRODUCT E XPO VOL 2 5 NO6 V NOVEMBER /DECEMBER 20 22
6 TOBACCO BUSINESS | NOVMEBER / DECEMBER | 22 F E AT UR E S N O V EMB E R / D E C EMB E R 2 0 2 2 ON THE COVER: ERIK ESPINOSA PHOTOGRAPHY BY: SLAV GORDEYEV 28 THE UNDERDOG’S ON TOP As Espinosa Premium Cigars celebrates its 11th anniversary, its founder, Erik Espinosa, discusses his personal journey in the cigar industry and how his brand has gone from boutique status to being sought out by the likes of celebrity chef Guy Fieri. 44 SECOND LIFE When Dr. Gaby Kafie received a life-changing diagnosis, he chose to leave behind one promising career to pursue a profession based on his passion for premium cigars. 62 SISTER ACT Yvette and Yvonne Rodriguez are often credited with being the first women to start a cigar brand in the U.S. Now they’re sharing their entrepreneurial story of how cigars helped them create multiple streams of revenue. 70 THE RULEBREAKERS How did Peter James Co. evolve from its origins as an accessory brand? Founder John Laurendi shares the mindset shift that allowed him to transform his company into a lifestyle brand. 54 TOTAL EXPOSURE Enrique Seijas’s family continues to make a name for itself in the cigar industry with its refreshing take on Matilde Cigars, a brand that’s all about the fine details. 28
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8 TOBACCO BUSINESS | NOVMEBER / DECEMBER | 22 C O L UMN S 12 | THE ART OF THE DEAL Smoker Friendly International has become the largest tobacco store retailer in the U.S. Learn how the company has used acquisitions to grow its business and what retailers looking to sell theirs need to do in preparation. 18 | THE BUSINESS OF NFTS NFT is more than just a popular internet phrase. Learn how cigar brands like La Flor Dominicana are leveraging this new form of technology to sell products in an innovative way. 22 | 2022’S BIGGEST MARKETING TRENDS What marketing trends dominated the tobacco industry this year? Professionals working in the convenience and premium tobacco channels look at the past year while also offering advice for 2023. 26 | AN UPDATE ON FDA REGULATIONS An update on the FDA’s progress while reviewing PMTAs for tobacco-derived and synthetic nicotine products and flavored product bans. 80 | A BLUEPRINT FOR GROWTH Learn how tobacconist John Higgins invested in an already established tobacco retail outlet, Spring Street Cigars, and turned it into a thriving multi-location operation. 88 | REIMAGINING MAKING MONEY AND DOING GOOD How retailer Cigar Sessions teamed up with several cigar manufacturers this year to raise $15,000 for Operation: Cigars for Warriors. 90 | BUYER’S GUIDE Just in time for the holiday season, Phillips & King has the gift sets and holiday samplers that your customers will be looking for in the coming weeks. STARTUP ASSOCIATIONS TOBACCONIST 80 90 N O V EMB E R / D E C EMB E R 2 0 2 2 12 Photography courtesy of Anthony Camera and Spring Street Cigars
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10 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 We’ve reached the end of yet another year, and though you’re probably expecting this letter from the editor to be about the upcoming holidays, it’s not. When I write “’Tis the season,” I’m referring to a season of growth and prosperity. This is the time of year when we start taking a look at our businesses and also reflecting on the year that has passed. How well did we do? How far have we come from where we were on January 1 to where we are as we’re ending the year? What targets did we miss and what goals did we actually accomplish? ’Tis the season to figure out where we are and where we want to go next year. If there were a theme to this issue, I believe it would be growth. In business, if you’re not growing, you’re failing to some degree. The problem with growth is that it’s hard to achieve and even harder to maintain. The best entertainers, professionals and business owners always have growth on their mind. They’re willing to reinvent themselves or try something new if it means it extends their reach or could take their business and products to the next level. Most successful businesses want to grow, and if you’re reading Tobacco Business, I believe it’s a safe bet that you want to grow your business as well as your career. The good news is that there are plenty of different ways to grow your business today: You can release a new product. You can collaborate with someone you admire. You can focus on a side hustle, or you can turn a passion into a thriving business. This issue is filled with the stories of entrepreneurs who launched a tobacco business after some defining life moment. Erik Espinosa, who is featured on the cover of this issue, excelled as a sales representative but came to realize that no amount of success led to the job security he wanted. So he took his knowledge of cigars and went on to launch his own cigar brand, Espinosa Premium Cigars. He’s found quite a bit of success as a brand owner, even making headlines this year by teaming up with celebrity chef Guy Fieri on a premium cigar release that has become one his company’s most popular products yet. Another story follows Enrique Seijas, who convinced his father to start his own cigar brand soon after he retired from a prominent factory in the Dominican Republic. Even after his father completely retired from the cigar business, Enrique picked up the mantle and created an impressive cigar brand that continues to grow. You’ll also be both entertained and informed by the story of Yvette and Yvonne Rodriguez, twins of Afro-Cuban descent who created their own boutique brand, Tres Lindas Cubanas, and have been able to generate 11 different streams of income from their tobacco business. Why do stories like this matter? Business stories often center around profit. Someone comes up with a product idea, and it makes them lots of money. Someone becomes an influencer or celebrity, and they build a business empire around their newfound fame. That isn’t the case for many tobacco businesses. We all know that the tobacco industry—and, more specifically, the cigar industry—is full of family owned companies. Making a profit isn’t as easy as one would think with a tobacco product like a cigar, but the industry continues to grow and thrive. You see it with each press release and at the various trade shows each year. So why start a cigar brand or work in an industry that is so challenging to succeed in? The answer to that question can be found in the stories you’ll read in this issue. As we wrap up another year, let’s keep growth and opportunity in mind. How can we grow our businesses and improve ourselves in 2023? Just as there are many different reasons to start a tobacco business, one can also expect a variety of different benefits from taking on the challenge. I hope 2022was good to you and your business and that the new year will be just as prosperous! TB W ED I TOR ’ S LETTER VOL25 NO6 NOVEMBER/DECEMBER 2022 PRESIDENT Jason Carignan MANAGING DIRECTOR Ben Stimpson SENIOR EDITOR AND DIGITAL DIRECTOR Antoine D. Reid ART DIRECTOR Harrison Brackett COPY EDITOR Stephanie Banfield CONTRIBUTORS Thomas Briant and Storm Boen TOTAL PRODUCT EXPO TRADE SHOWDIRECTOR Ellie Hansen TMG SALES MANAGER Dawn Conger DIGITAL MARKETING MANAGER Brian Rodak TRADE SHOWOPERATIONS & LOGISTICS MANAGER Scott Gibson SENIOR GRAPHIC DESIGNER Rachel Esteffe TMG SALES ASSOCIATE Carly Gegorek TOBACCOBUSINESS MAGAZINE 5449 Endeavour Ct #1712, Moorpark, CA 93021 A DIVISION OF KRETEK INTERNATIONAL, INC. CHAIRMAN Hugh Cassar PRESIDENT AND CEO Sean Cassar CHIEF FINANCIAL OFFICER Don Gormly Tobacco Business is published bimonthly at 5449 Endeavour Ct #1712, Moorpark, CA 93021. Printed in USA. Copyright 2022 by TBI, LLC. Subscription rate is $45.00/year. Send paid subscriptions to Tobacco Business at same address as mentioned above. For reprint information, contact Ben Stimpson at 919.412.7380. Copying: Permission is granted with users of the Copyright Clearance Center Inc. To photocopy any ar ticle, with the exception of those for which separate copyright ownership is indicated on the first page of the ar ticle, provide a base fee of $1.25/copy. Tobacco Business International is a registered trademark of TBI, LLC. POSTMASTER: Send address changes to Tobacco Business, 5449 Endeavour Ct , Moorpark, CA 93021. TIS THE SEASON THE TEAM Antoine D. Reid, Senior Editor, antoinereid@tobaccobusiness.com TOBACCOBUSINESS.COM TOBACCO BUSINESS
12 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 One way to grow your tobacco retail business is through acquisitions. One business taking ownership of another established business probably conjures up negative thoughts for some, but in reality, acquisitions are not all bad. In many cases, they’re good. Businesses are acquired for different reasons. Some business owners are looking for an exit plan. The economy or a life circumstances may make it appealing to sell a retail store and make some money from its closing. For those looking to buy a business, growth is typically the goal. With each acquisition, a retailer is able to expand their store’s footprint. The acquired stores come with assets, new employees and also new opportunities in new markets. For Smoker Friendly International, acquisitions have been vital to the organization’s growth strategy for years. In August 2022, Tobacco Superstore was acquired by Smoker Friendly International. The owner and CEO of Tobacco Superstore, Joe Marelle, reached out to Smoker Friendly International’s CEO, Terry Gallagher Jr., about selling his company to him.While it can take awhile for some business owners to come to a decision of whether or not to sell, it took Marelle just 15 months to complete the deal. It’s business deals like this that have helped Smoker Friendly International become the largest tobacco store retailer currently operating in the U.S. In the interview that follows, Terry Gallagher Jr. and Dan Gallagher, Smoker Friendly International’s chief operating officer, offer tips for those retailers who are looking to sell their businesses and the entrepreneurs interested in growing theirs through an acquisition. TobaccoBusiness: What does Smoker Friendly International look for in terms of a possible acquisition? Terry Gallagher Jr.: If the chain is not within the current footprint of our corporate stores, there has to be enough scale to warrant “boots on the ground” or local supervision. We won’t typically consider a single store or a few stores that fall outside of our current geography. Obviously, if there is scale, we have an interest, as demonstrated by our purchases inFlorida,Missouri,NorthCarolinaandLouisiana inpast years— and the recent acquisition of Tobacco Superstores based in Arkansas with stores also in Tennessee, Mississippi, Missouri and Kentucky as well as Collett Enterprise’s Smoker Friendly stores in Indiana and Kentucky that were acquired in 2022. We look for chains that are well operated and profitable and accretive to our business. These chains have teammembers that are experienced and understand the business. They become valuable members of our Smoker Friendly teamand strengthen and add to the depth of our management team. DanGallagher: We also look at their size in a geographic area, strong sales trends, profitable stores and strong people in the organization. What are the easiest and hardest parts about an acquisition? Dan: Making the deal is the easiest part. Preparing for the acquisition, integrating systems, getting personnel comfortable with Smoker Friendly and post-acquisition operations are the hardest parts. Terry: The easiest part on the front end is identifying targets we’d like to pursue. The harder part is getting from there to the deal! Are there any red flags that you look out for during the acquisition process? Terry: We go through a very deep dive during the due diligence process. Depending on the size of the acquisition, we will perform all due diligence internally and verify that the business is accurately representing its operations and financials before moving forward with a transaction. If it’s a more sizable entity, then we will perform our typical internal work but also have an outside firm come in and complete a quality of earnings analysis on the subject company. This O STARTUP : MARKETWATCH THE ART OF THE DEAL Learn howacquisitions can be used to grow your retail business with tips from the CEO of the largest tobacco retailer in the U.S. Photography by Anthony Camera Terry Gallagher Jr., CEO of Smoker Friendly International
14 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 is a much more comprehensive exercise than a CPA firm performing a traditional audit, and it rinses out anything that may be a red flag to us. In general, we are looking for very accurate and up-to-date financials, great inventory control, accurate lease files, correct licensing— business, tobacco, liquor, etc.—current tax and historical tax records, any outstanding employment or workman’s compensation issues, and any legal issues that may be lurking. Wewill visit stores and look at the retail operation in general: cleanliness, merchandising, product offering (inventory), branding, flooring, ceilings, lighting, age and shape of counters, fixturing and displays. This helps us determine what we face store by store in the integration process and what kind of deferred maintenance an operator may have. If a retailer has not made any significant capital expenditures in upkeep and modernization over time and we know we will have to, then that will affect the valuation of the company. A retailer either “pays now or pays later” when it comes to necessary capital expenditure. Dan: We also look at negative sales trends and unhappy employees. What is typically the reason a business owner is interested in selling their business and allowing it to be acquired? Dan: The target company has been in business for many years—usually over 20 years—and does not have a transition or exit plan that involves family or employees and wants to sell to exit. Terry: Within the tobacco store channel, the owner is typically interested in selling for the reasons Dan mentions. They have worked many years to build a good and profitable business, and they are ready to retire. Many of the owners do not have the next generation willing or interested in taking over or buying the business. Most operators within our channel do not have that solid exit strategy. This is the primary reason we built our platform for acquisition at Smoker Friendly and have executed the roll-up strategy that we crafted and have now implemented. Almost all owners in our trade class started their businesses in the mid- to late 1990s or early 2000s. Between the years they’ve worked at their businesses and the strengthening headwinds we all face from regulations and legislative and societal forces, we can put forward a very compelling case to exit and sell to Smoker Friendly. What sort of questions do you have for a business owner who is considering selling their business to your company? Dan: We have an initial list of questions used to evaluate a business that includes getting detailed information in the following areas: financials, specific product sales, personnel/HR, facilities, IT/POS platform, manufacturer contracts, suppliers, operations and legal. Terry: I think we usually shock the owner when they receive the initial email with the request for information we require just to begin the due diligence process. If an owner is contemplating selling, they should take the time to prepare internally so that they really have their ducks in a row. They should also be prepared for a timeline to closing that is likely longer than they may expect—it isn’t like selling a car or a home. We have a significant process that we go through from the time we begin the conversation up to closing. Even for larger and possibly more sophisticated retailers it can feel overwhelming providing the detail we require to complete a transaction. The level of information required with a public partner providing financing is significant. In general, what do you hope to accomplish with an acquisition? Dan: Increase store count in both current markets and new markets, increase profitability for the company, grow our team and create more opportunity for our workforce. Terry: We expect to get an immediate return on investment with each acquisition. During due diligence we create several different pro formas that show the level of how accretive the stores will be to our existing business based on valuation and other factors. This strategy is not one like organically opening stores or buying stores that are reclamation projects. We expect and we know we will get an immediate return when we get them integrated into Smoker Friendly based on all the work on the front end. What is the process like integrating each new store that’s been acquired into the Smoker Friendly network? Dan: A huge part of the integration is pre-closing and preparing our systems, our staff and the staff of the company we are acquiring. A big pre-close effort goes into IT integration, price book and vendor setup, lease assignments and HR. Terry: We are in the stores prior to closing. Operations, HR and IT are in the field meeting with store managers and other personnel and reviewing what is coming up and how the process will work and preparing for what will happen after closing. We really use those initial meetings to introduce our culture and start that process. We generally transfer all the stores into our system on the day of closing. We have internal auditors, and we will count and reconcile all inventory with the owner. We spend a significant amount of time and money after closing on training. We use field management and existing top store managers from other regions to train the new team members at their stores and ensure we start them off on the right foot. Dan Gallagher, chief operating officer at Smoker Friendly International
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16 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 How do you typically finance an acquisition? Dan: Through our partnership with our private equity partner, Main Street Capital (MSC), on larger ones or through cash flow on smaller ones. Terry: Before our transaction with MSC, we used our own money. After the transaction, we use other people’s money. Not only did we get a minority business partner with MSC, but we also acquired the ability to activate access to a significant amount of capital through MSC that has allowed us to finance the last three acquisitions and replace debt that existed previous to that relationship, which freed up other assets we owned. Do you encounter any issues when it comes to financing an acquisition that involves a tobacco retail business? Dan: Not since we have partnered with MSC. Terry: The large majority of banks and private equity firms will take a pass when it comes to retail tobacco. It is either prevented within their charter, ESG [environmental, social and governance], or frankly the personal biases and attitudes of the banker toward retail, tobacco or the combination. How do you scale your business’s operations and team to handle the growing number of stores that are part of your network? Dan: Most of the scale comes from within the company that is being acquired, and we always work to find opportunities for employees of the company being acquired. Terry: We have a template that Dan craftedwith input fromBenChaney, our CFO, that we use for acquisitions that tell us how many people we need, from field personnel to corporate staff, based on stores we add. It’s basically “plug and play.” As Dan mentioned, one of the wonderful things we get with each purchase is great people! Every acquisition has added depth to our bench. These operations and owners we acquired were successful because they have great store managers and store associates and have had long-term field and management folks who know their stores and markets and are generally very experienced in the tobacco store world. These people join our Smoker Friendly team and adapt quickly to our procedures and policies and become very valuable team members in our organization. Every acquisition gives us more talent and depth in management and more experience in not only store operations but acquisition expertise. These team members are invaluable, and without them working with our legacy team we could not acquire and operate the stores we have. How do you spread or maintain the Smoker Friendly company culture with all of these new locations you bring into your network through an acquisition? Dan: A big part is that we do not have a separate acquisition team, rather we utilize our employees to make it happen, from the pre-closing preparation to the post-close training that occurs. Post-closing, we send in teams of area managers, supervisors and store managers to work with the staff in the acquired stores. They work with them on both the X’s and O’s of operating a Smoker Friendly store, but just as importantly they work with them on the Smoker Friendly way and culture. We are very fortunate that these team members traveling to help with the integration are Smoker Friendly’s biggest cheerleaders. What have you learned about acquisitions over the years? Dan: That no two acquisitions are the same, and every company is unique in culture and operational procedures and strategies. At the end of the day, probably the single most important part of an acquisition is getting the employees of the company being acquired onboard and comfortable with Smoker Friendly and our team and culture. In fact, what may be our biggest success in the acquisition journey thus far is that we have had minimal turnover and great buy-in from our new team members. TB Are you looking to grow your retail business through an acquisition? Dan Gallagher, chief operating officer at Smoker Friendly International, offers the following three tips for an easy acquisition. 1. Prepare. If you are not thorough on the front end in all facets of the business, you will be in for a nightmare. 2. Take care of the people. You cannot complete an acquisition without people. They are the single biggest component when it comes to whether an acquisition will be successful. 3. Be patient. There will be bumps in the road, and there is a possibility sales or other areas of the business could fall short. If you stay the course and do a good job with the integration and take care of your team and customers, the business will begin to flourish. 3 RULES OF ACQUISITION With its latest acquisitions, Smoker Friendly International’s store count now stands at 290 locations across the U.S.
18 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 In August 2022, La Flor Dominicana launched its first non-fungible token (NFT) project, The Golden Bull, a new iteration of its popular Andalusian Bull cigar. La Flor Dominicana took a different approach to selling this product. Rather than selling it directly to retailers through sales representatives or at this year’s Premium Cigar Association (PCA) trade show, the company chose to sell it through anNFT that anyone could bid on in an auction. Seven NFTs were rolled out in an auction during the month of August. None sold for less than $78,000, and in total the company earned $600,000 through this innovative sales method. NFTs are quickly becoming a “thing” in business. Although the NFT category is still in its infancy, its long-term impact on businesses is starting to become more evident. NFTs are digital representations of assets and represent smart contracts between creators and their customers. In the case of La Flor Dominicana, the NFT—which was an animated image of the Andalusian Bull—is a contract between the manufacturer and the winner of the individual auctions. With this, the holders of the NFTs are contractually granted the exclusive right to order a set amount of the Andalusian Bull that’s been presented in a special size. Non-NFT holders can’t order this product and would need to purchase it from or obtain the product through someone that does own a Golden Bull NFT. NFTs grant special perks and access to their holders for a lifetime, but they can also be resold, benefiting both the seller and the NFT’s original creator in the process. To launch its NFT, La Flor Dominicana worked with UREEQA, a company that helps creators manage and monetize their creative work. The company uses technology that validates and verifies the ownership, authorship and originality of creative work. UREEQA works to offer added protection of work beyond just copyright. “We believe at our core that basically anyone who creates anything is a creator. From our standpoint, we all enjoy creations in some form, whether they’re paintings, music, architecture, luxury handbags or cigars,” explains Shannon Powell, head of sales and marketing for UREEQA. “Our mission was really just to build, maintain and evolve a secure digital ecosystem for proving and validating that any of those original creations can be tokenized. Take a luxury handbag, for example.Wewanted a luxury handbag company to be able to sell their handbag via NFTs and have the consumers know, ‘Oh, that is a real thing. It’s been validated by UREEQA.’ We are that validator.” UREEQA offers three different services that each offer some form of protection depending on whichmedium the creator is working within. Each category offers its own challenges that UREEQA tries to help solve. In the case of La Flor Dominicana, Tony Gomez, who serves as vice president of the company, was leading the charge. Powell notes that Gomez came into the project ready to innovate and was looking toward UREEQA to help him work through the technological barriers and hurdles of selling a cigar through an NFT. “We were able to help him navigate through that by providing our patentpending validation solution and our experience in the space,” says Powell. With each NFT auction that UREEQA and La Flor Dominicana hosted, it was UREEQA’s responsibility to validate all of the data attached to each NFT for both the purchaser and Gomez’s company. UREEQA validated the winner’s information, as well as that of the cigars and the golden humidor that the winners of the auction would receive. All of this information was hashed into the smart contract attached to theNFT, whichwas thenwritten onto the Ethereum blockchain. This highlights another issue UREEQA had to help with: the different terms and unique nature of NFTs and crypto in general. With cigars being part of a very traditional industry, UREEQA knew it would have to help La Flor Dominicana familiarize its customers with NFTs and the world of Web3 in general. The blockchain was another important piece of the puzzle that needed to be explained. Without the blockchain, the layers of protection granted to the NFT holder and to La Flor Dominicana wouldn’t be possible. “The blockchain in its most basic form can be thought of as a public ledger. It’s a series of data that everyone can go onto the internet and see,” explains Powell. “The data can always be updated, but it can never be erased, so it’s excellent for tracking [the] ownership of something. Unfortunately, it doesn’t make it a great tool for tracking the validity of something. That’s I STARTUP : SALES THE BUSINESS OF NFTS Photo: Adobe Stock So, you want to launch an NFT for your business? Not so fast! Learn how La Flor Dominicana teamed up with UREEQA for its first NFT project and how you can prepare for your own.
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20 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 kind of where we [UREEQA] come in. We validate something before or after it’s been hashed and tracked on the blockchain.” Education is just as important in the NFT and crypto space as it is in the cigar industry. When working with any client, UREEQA approaches each project from a place of education. UREEQA also works hard to address any pain points companies may have in regard to the volatile nature of the crypto and NFT categories. “We understand that the world sees crypto as this big negative thing right now because we had such a dramatic drop-off when we went from the bull market to the bearmarket, but we have to look at it fromthe angle of ebb and flow. We have rises, we have drops. That happens whether you’re investing in real estate, stocks or crypto. We just try to come at it from a point of education and ensuring that we’re protecting, educating and informing our clients as best we can,” says Powell. Powell admits that the current state of the crypto market offered the most challenge when launching La Flor Dominicana’s NFT project. “A lot of projects are launching, and people think they’re going to be super exciting and successful, and they’re not,” Powell explains. “Back when we were in the bull market, people could drop projects with very little marketing, and they get bought up while not having real-world utility. We’re not really in that market anymore. With this project, it was important that Tony provide real-world utility. He really put in the work to market the project and inform and educate potential buyers.” La Flor Dominicana’s Golden Bull NFT was a unique product launch that wasn’t guaranteed success, but with the press coverage and money it was able to raise, it was one of the most notable cigar releases in recent years. Powell believes NFTs will continue to evolve and grow in importance in the coming years and predicts the cigar industry in particular will adapt them more into their business plans as their usefulness continues to become more evident. “From a manufacturer or retailer perspective, the blockchain is such a convenient way to track ownership,” says Powell. “Look at this process we did with Tony. We know who owns those seven NFTs and therefore who has the right to buy the limited number of cigars on a monthly basis. It’s tracked, and it’s very public. From an actual operational standpoint, we know who the owners are and how many cigars they’re ordering on a monthly basis. I think that’s a much more efficient process now that it’s tracked through an NFT.” Powell has three tips for tobacco businesses interested in creating and launching their own NFT. First, make sure you have the time needed to be successful. Take the time to step back and look at the big picture, she advises. This includes knowing the current state of the market and how other competitors have launched NFTs of their own. The main idea is to take the time to do the proper research that will allow your NFT to launch successfully. That leads to the next requirement: You need an engaged audience to promote and sell your NFT to. “Come up with a good marketing strategy that is really focused around building a community,” she says. “The best way to launch an NFT collection and have it be successful is to really focus on building that community. You also need to educate that community prior to the launch.” When educating your audience on NFTs, it’s also important that you are fully aware of what you yourself don’t know. Be willing to reach out to other companies and individuals who knowmore than you do about crypto and NFTs and ask them for guidance and help. Be open to the possibility of partnership with another company that may have more experience in the NFT space and launching a product with them and with their help. “I find with this Web3 space it’s an industry where people are so open and willing to help because things are changing so quickly and we’re all just here trying to educate and support each other,” says Powell. Launching an NFT is something that shouldn’t be rushed, and it does take work, but the end result is worth it. The best NFTs are those that offer the buyer some benefit if they own it. Think of what utility you can attach to your NFT and communicate it to your audience ahead of putting it up for sale. Tobacco businesses thrive on sales, and just because crypto and NFTs seem futuristic and off-market for traditional products like cigars, cigarettes and pipe tobacco, it doesn’t mean they can’t be adapted and made to work. Get ahead of the game and start doing your research on NFTs and crypto—they will undoubtedly change and evolve over time, but in some way, shape or form, they are the future—and they are here to stay. TB New to crypto? Here are some of the common terms and phrases you need to know to know in order to understand the world of cryptocurrency: 1. Airdrop: A marketing action during which coins or tokens are sent to a wallet address in order to promote awareness of a new digital currency. 2. Bitcoin: A decentralized digital currency that can be traded for goods or services through a peer-to-peer bitcoin network. 3. Blockchain: A shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. 4. Cryptocurrency: An encrypted data string that denotes a unit of currency. 5. Decentralized Autonomous Organization (DAO): An entity with no central leadership where decisions, management and entity ownership are governed by a community organized around a specific set of rules enforced on a blockchain. 6. Ethereum: A decentralized, open-source blockchain with smart contract functionality. 7. Hash: A process that can be used to validate the authenticity and integrity of various types of input. 8. Minting: The creation of new tokens on a blockchain through a computational process to validate information, create new blocks and record information to the blockchain. 9. Non-fungible tokens: Known as NFTs, unique cryptographic tokens that exist on a blockchain and cannot be replicated. They often represent realworld items like artwork, real estate and luxury goods, such as cigars. 10. Wallet: A device or program that stores cryptocurrency keys and allows you to access your coins. 10 MUST-KNOW CRYPTO TERMS
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22 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 2022 is nearly over, but many tobacco businesses are already looking ahead to the new year and making their marketing plans. A new year often calls for new strategies and plans as new regulations are introduced and consumer behavior changes. Tobacco Business reached out to several marketers within the tobacco industry and asked a very simple question: “Marketingwise, what was 2022 like for your company?” 2022 was a challenging year for tobacco manufacturers like 22nd Century Group that primarily target the convenience channel. There has been increased regulatory pressure aimed at traditional tobacco products. Companies also faced more uncertainty due to the prolonged authorization process instituted by theU.S. Food and Drug Administration (FDA). This has had a negative impact on many marketing efforts within these tobacco businesses as they’ve been unable to develop a comprehensive, long-term plan for their products without an approved marketing order from the FDA. “These pressures are accelerating with the President’s nicotine standard and the FDA’s view on menthol, as well as state and local regulations and excise tax policies,” said John Miller, president of 22nd Century Group’s tobacco division. “However, crisis situations also lead to opportunities to pivot and innovate for the best organizations.” What some may view as a hindrance, Miller sees as a big advantage. The biggest market trend in recent years is the emergence of the modified-risk tobacco product (MRTP) category and the product marketingmessages that are crafted using science-based and regulatory approved product claims. “We believe it’s brands with an MRTP designation that will ultimately comprise the MRTP category set within retail stores. They will rapidly evolve and become a focus for adult smokers seeking alternatives to today’s ubiquitous category offerings. This is in a way similar to what happened to the beer category with the non-alcoholic (NA) beer products,” Miller explains. “In some regions of the country, theNAbeer category is estimated to be up to 5 percent of the total beer volume. With consumer trends and expectations shifting, NA beer is well positioned for future growth. There is no reason to believe the same won’t happen within the tobacco category.” BIC, known worldwide for dominating the lighters category, saw innovation as a key trend that contributed to the company’s continued growth in 2022. According to Adam Grzybek, BIC’s convenience channel lead, the company came into 2022 knowing it wanted to build on the growing popularity of its BIC EZ Reach lighter. BIC created what Grzybek described as being a strong marketing plan that was centered around the wildly successful Snoop Dogg and Martha Stewart BIC EZ Reach lighter campaign, which was first launched in May 2021. To date, this campaign has amassed 6.5 billion impressions, according to reports from Double Click, Google and Meta. Using celebrities to promote lighters was unusual and helped drive wide interest and engagement among retailers and consumers alike. “This has allowed BIC to penetrate new channels and interact with new consumers,” Grzybek explains. “The BIC EZ Reach lighter was 75 percent incremental to our convenience business in 2022 and has also greatly aided in further penetrating [alternative] markets and reaching a new consumer.” PremiumCigar Insights While the convenience tobacco channel faced obstacles mostly in the form of regulations, the premium cigar dealt with its own set of marketing challenges. The COVID-19 pandemic created a high demand for premium cigar products, which has led to more competition overall 2 STARTUP : MARKET I NG A YEAR IN REVIEW: 2022’S BIGGESTMARKETING TRENDS Photo: Adobe Stock Several marketing professionals discuss the year’s biggest marketing trends and offer tobacco businesses tips to supercharge their 2023 marketing plans.
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24 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 as manufacturers compete for revenue dollars. Wholesaler Santa Clara has noticed aggressive promotions across distributor and e-commerce channels this year. More e-commerce websites have been seen offering sitewide discounts on tobacco products, but what’s made these different businesses stand out from one another is improved service, product innovation, quality offerings and investments to grow efficiencies. “With 2021 in the rearview mirror, we have faced a slight leveling off in terms of B2B sellout in 2022,” says David Joyce, Santa Clara’s director of wholesale operations. “It has remained important for us to be creative and market our extensive portfolio of premium cigars in a way to capture or exceed revenue over the prior year. For example, some adult consumers likely traded down to less expensive cigars as high inflation created a difficult market environment. As a result, we built catalog promotions around mix-and-match deals to offer value to our partners and strengthen the average order value. We have emphasized our private label offerings and quality promotional campaigns. This strategy places focus on big premium cigar brand names that are exclusive to Santa Clara. The products are generally more affordable, and the profits and margins are typically high.” This year, asmany companies increased the number of limited edition releases, Maya Selva Cigars spent much of its efforts developing a new product catalog. During this process, the Maya Selva Cigars team worked on creating a more unified corporate image in all markets while offering its partners more of what they needed based on local regulations and through scheduled promotions. Filippo Costi, Maya Selva Cigars’ chief commercial officer, noted that one trend that’s been growing year over year is also the focus on the female cigar smoker and making sure this demographic of cigar smokers is included in many company’s marketing plans. Another trend within the cigar industry in 2022 was the return of big events, including trade shows and national festivals. Luis Falto, owner of Tabacalera Falto, noted that more companies are turning to short videos to bring attention to their products and companies. The 2023 Marketing Plan With a new year just around the corner, how should tobacco businesses be preparing their marketing plans? Here’s the advice and tips our panel offered to help supercharge your tobacco business’s marketing efforts in 2023. Filippo Costi (Maya Selva): “Be clear about the DNA of your brand, and always be honest.” Luis Falto (Tabacalera Falto): “Boutique is the way to go. Customers are looking for special and unique cigars—something in small quantities that’s seen as exclusive.” Adam Grzybek (BIC): “In established categories such as lighters, it is critically important to lead with safety and quality, to bring innovative products to market, and to be bold with how you message to the consumer. The status quo will no longer move the needle. Safe, high-quality and innovative products—combined with disruptive marketing that leverages an effective and compelling story—will help brands to better connect with the consumer, connect to a wider audience and ultimately drive incremental sales.” David Joyce (Santa Clara): “The cost of goods and doing business continues to rise while demand has stabilized after the pandemic surge. We would advise tobacco marketers to focus on one’s strengths and do your best to remain competitive to retain customers. Be resilient and evaluate weaknesses so that marketing opportunities rise to the surface. That will go a long way to help you achieve your business goals. Staying engaged and up to date with a diverse and quality product portfolio that generates retail turns and profits is key. When dealing with the trade, look for quality, reliable and time-tested partners who understand your business. Finally, practice best-in-class customer service to generate loyalty and customer retention and to increase sales performance.” John Miller (22nd Century Group): “Innovation in the tobacco category is creating new opportunities for products with authorized claims, such as VLN [very low nicotine]. The relationship with regulatory bodies and government agencies needs to shift. As tobacco product marketers, we should actively work to align ourselves to not only the interests of adult smokers but also create a new dynamic with regulators. The industry and regulatory agencies should focus on delivering to adult smokers science-based, truthful messages and encouraging adult smokers to make informed choices based on their individual needs.” TB FILIPPO COSTI Maya Selva LUIS FALTO Tabacalera Falto ADAM GRZYBEK BIC DAVID JOYCE Santa Clara JOHN MILLER 22nd Century Group Meet Our Panel
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26 TOBACCO BUSINESS | NOVEMBER / DECEMBER | 22 Federal law and U.S. Food and Drug Administration (FDA) regulations require that tobacco products that were introduced into the market after Feb. 15, 2007, must have a premarket tobacco product application (PMTA) submitted for review by the FDA. In order to receive marketing authorization from the agency to allow a product to continue to be sold, the law states that the FDA must determine that a tobacco product is “appropriate for the protection of the public health.” The products that require PMTAs include cigars, pipe tobacco, electronic cigarettes, hookah tobacco and modern oral products. There were two deadlines for filing PMTAs with the agency. For products made or derived from tobacco itself, the FDA deadline was Sept. 9, 2020. Under a law passed earlier this year, for products with nicotine made or derived from a source other than tobacco itself, for example synthetic nicotine, the PMTAs were due by May 14, 2022. The FDA has updated its website with metrics and reporting for PMTAs through July 31, 2022. Below is a summary of the updated PMTAmetrics. Tobacco-DerivedNicotine Product PMTAUpdate The agency received PMTA applications by Sept. 9, 2020, for more than 8 million products that have nicotine derived from the tobacco leaf itself, the vast majority of which were electronic nicotine or vapor products. Specifically, the agency received PMTAs for 8,013,850 e-cigarette and vapor products, 2,310 cigar products, 1,356 hookah tobacco products, 579 pipe tobacco products, 76 roll-your-own products and 61 smokeless tobacco products. However, through its PMTA review process, and as of July 31, 2022, the FDA has refused to allow or denied marketing authorization for some 7,746,047 e-cigarette and nicotine vapor products, whichmeans the products need to be removed from the market. This leaves approximately 267,000 e-cigarette and nicotine vapor products under pending PMTAs. The agency has stated in a report that it expects to finalize the review of these remaining PMTAs by June 30, 2023. These remaining PMTAs include applications for Juul, Vuse, Njoy, Logic, Blu, Smok and Puff Bar. Besides these PMTA refusals and denials, the FDA has issued orders authorizing the sale of 23 electronic cigarette devices and nicotine e-liquids sold by R.J. Reynolds Vapor Company, Njoy and Logic. However, of the 23 products authorized, the only flavor allowed is tobacco-flavored nicotine e-liquids. To date, the FDA has not authorized any flavor other than tobacco flavor for electronic cigarette and nicotine liquid products. Synthetic Nicotine PMTAUpdate The FDA received PMTAs for almost 1 million synthetic nicotine products, the vast majority being vapor products. As of September 6, 2022, the FDA has refused to accept PMTAs for more than 800,000 products containing synthetic nicotine. At the same time, the agency has accepted PMTAs covering 350 synthetic nicotine products for agency review and is still processing more PMTAs for products with synthetic nicotine. The new law passed by the U.S. Congress provides that a product with synthetic nicotine can remain on the market if the FDA issued a marketing granted order (MGO) by July 13, 2022. If an MGO was not issued by July 13, 2022, the product is illegal to market. At this point in time, the FDA has not issued any MGOs for products that contain synthetic nicotine. The FDA issued an announcement in early August 2022 stating that manufacturers, distributors and retailers may be subject to FDA enforcement if products continue to be sold without first receiving an MGO. Generally, FDA enforcement actions are first targeted at manufacturers, and a warning letter is issued to the company informing them that their products are illegal to market. If the company continues to sell its products, then the FDA can pursue further action, including assessing fines, seizing products and seeking an injunction in the courts. Menthol Cigarettes and Flavored Cigars On April 28, 2022, the FDA published two new proposed regulations. These regulations are known as product standards. A product standard is the power that Congress gave to the FDA to reduce or eliminate an ingredient in a tobacco product or a constituent in tobacco smoke. This is a very significant power because it can result in products being removed from the market. One of the proposed regulations would prohibit menthol as a flavor in cigarettes, roll-your-own cigarette tobacco and heated tobacco products. The second regulation would also prohibit any flavors in cigars. Federal law requires that an agency request comments from the public about proposed regulations. The FDA receivedmore than 175,000 comments on thementhol cigarette ban and almost 72,000 comments on the flavored cigar ban by theAugust 2, 2022, submission deadline. In addition, a Gallup poll conducted in August 2022 found that less than a majority of Americans, only 42 percent, are in support of banningmenthol cigarettes. In response to this significant number of comments, the FDA issued an announcement that it “will need ample time to comprehensively review and analyze all of the comments.” In addition, a Gallup poll conducted in August 2022 found that less than amajority of Americans, only 42 percent, both Democrats and Republicans, are in support of banning menthol cigarettes. Because the FDA announced it will need “ample” time to read all of the comments, it could take nine to 12 months—or possibly longer—for the agency to read through the comments on the menthol ban and flavored cigar ban. The FDA will then decide whether to draft any changes to the proposed regulations, and if it does, that process may take up to three months. After any changes are made, the FDA will need to send the final proposed regulations to the White House Office of Management and Budget (OMB) for its final review and decision on whether the FDA can proceed with implementing the regulations. During this time, the OMB will meet with members of the public for their input on the final regulations. This processmay take up to twomonths or longer. Also, in the proposed regulations, the FDA asked for the public’s feedback on making the effective date of the regulations two years after the final regulations are published instead of the usual one-year time period before the regulation takes effect. Some manufacturers recommended in their comments that the FDA consider making the regulations effective six years after the final regulations are published. Then, there is also the possibility that lawsuits could be brought against the FDA regarding the proposed regulations, which may further delay an effective date. So, by adding up the estimated time periods for the FDA to read comments, make changes and obtain OMB final approval, it could take almost a year and a half before the final regulations would be published. Then, when publishing the final regulations, the FDA will need to determine if the regulations will actually go into effect in one year or two years.When adding up all of these time periods, the estimated timewhen the menthol cigarette ban and flavored cigar ban may go into effect is approximately two and a half to possibly three and a half years from now. TB F ASSOC I AT I ONS : NAT I ONAL ASSOC I AT I ON OF TOBACCO OUTLETS AN UPDATE ON FDA REGULATIONS Thomas A. Briant, Executive Director, National Association of Tobacco Outlets From premarket tobacco product applications to the ban on menthol cigarettes and flavored cigars
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