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No Smoke, But Plenty Of Heat


News: Analysis & Commentary: TOBACCO

NO SMOKE, BUT PLENTY OF HEAT

Why the smokeless tobacco biz is starting to hack

For years, UST Inc. has chewed up the competition and spit out pure gold. Partly because the Greenwich (Conn.) maker of Skoal and Copenhagen brand snuffs has avoided the political and legal hassles that have plagued cigarette companies, it has posted profit numbers most consumer-products outfits can only dream about. Earnings have doubled in five years, to $387 million last year--enough to generate a hefty 32% net margin on $1.2 billion in sales.

Now, UST may be about to get chewed up. A study released on Dec. 18 by the American Health Foundation, a Valhalla (N.Y.) organization that focuses on research about the health hazards of tobacco, found that a single can of smokeless tobacco contains three times the dosage of cancer-causing chemicals found in a pack of cigarettes. (The average user of smokeless tobacco consumes three cans per week.) In Kansas, a team of lawyers is preparing a nationwide class action alleging that UST and others have known for years that their products are addictive and harmful. Meanwhile, tobacco has until Jan. 2 to respond to Food & Drug Administration proposals that would sharply curtail marketing of smokeless tobacco.

TRIPLE WHAMMY. Perhaps more ominously, UST's fundamental business is changing for the worse. Analysts expect profits to increase by 11% in 1996, but much of the rise will come from higher prices. Unit-sales growth for UST's smokeless tobacco through the first nine months of this year was a paltry 0.5%--after increases of 2.6% in 1994 and 2.3% in 1993 and twice those rates in the 1980s. From about 90% in the late 1980s, UST's market share has fallen to about 84%.

The problem: UST's traditional market of mostly young blue-collar males isn't expanding. Attempts to lure new buyers to smokeless tobacco--mainly former cigarette smokers or younger users--have failed. Competitors, meanwhile, have begun chipping away at UST. Swisher International Inc.'s Helme unit offers its Silver Creek brand in a two-for-one package, while Conwood Co. is selling its new Cougar brand for about half the price of UST's Skoal.

UST is fighting back, but slowly. It recently unveiled Skoal Flavor Packs, a pouch-like version of Skoal designed as an alternative to cigarettes. But similar products have had only limited success with their target market: cigarette smokers. Meanwhile, Joseph R. Taddeo, head of UST's tobacco unit, resigned in June after a dispute with CEO Vincent A. Gierer Jr.--analysts say over the course of new-product initiatives. Taddeo's replacement is marketing executive Robert D. Rothenberg. Gierer, Rothenberg, and other company executives refused interview requests.

Analysts expect Rothenberg to further shift UST's advertising emphasis away from stock-car racing and rodeo audiences to rock concerts and college campuses. Advertising spending is going up, too. One splashy promotion is UST's Rock The Smokies campaign, which offers a drawing for free tickets to a country-music concert to be held on Fourth of July weekend in Newport, Tenn. Anyone who sends in a coupon can ask for free samples of UST products.

But aggressive marketing could easily ignite more opposition from activists and regulators. "Statistics show that it's young people that start using tobacco, not adults," says Mitchell R. Zeller, a deputy associate commissioner at the FDA. "It's the President's goal that the next generation grow up without becoming addicted to tobacco." The new FDA rules would limit marketing efforts such as sponsorships and the handing out of free samples. The agency also is likely to pressure UST and stores to ensure that they don't sell to minors.

I.D., PLEASE? Some states aren't waiting for Washington. In October, Massachusetts forced UST to consent to stringent restrictions on the use of mail-order samples there, including checking driver's licenses to verify the age of those writing in for samples. This came after a six-month sting in which the state had minors clip coupons in Rolling Stone and other magazines, then write for free samples after claiming to be adults. "If you could fill out a coupon and sign something without showing any proof of age and get a six-pack of beer in the mail, people would be outraged," says Assistant Attorney General George Weber.

Diversification would seem prudent at this point. UST got into winemaking in the mid-1980s under the Chateau Ste. Michelle and Columbia Crest labels, but wine still only accounts for 7% of sales and 1.3% of operating profits, hardly enough to offset pressures on its main business. UST may have to come up with something else--or endure some bites into its peerless financial record.By Tim Smart, with Ed Brown, in New HavenReturn to top


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