Would You Snuff Out Your Cigarette for a "Snus"?

Are smokers ready to put down their cigarettes and get their nicotine fix from a tiny pouch of tobacco placed between their upper cheek and gum?

Industry leaders Philip Morris USA and R.J. Reynolds Tobacco have begun test marketing Swedish-style “snus” products using the names of their leading cigarette brands Marlboro and Camel. Snus, the Swedish word for snuff, is made up of finely shredded tobacco leaves encased in a tea bag-like pouch about the size of a Chiclet piece of gum.

Unlike the products used by most American dippers, Swedish-style snus uses a curing process that reduces moisture in the tobacco leaves. This, combined with placement in the upper portion of a person’s mouth where less saliva is produced, means those using it are less likely to spit than those who use a chewing tobacco, which is made up of long strands of moist, sliced-up tobacco leaves. This means snus is neater and more discreet than more conventional oral tobacco products. In fact, you could hold a conversation with someone who is using snus and not even realize it is there.

Still, most tobacco industry analysts--as well as the companies themselves--do not expect these products to generate significant revenue within the next few years. The products remain foreign to many consumers and, at the moment, their distribution is limited to a handful of test markets.

However, those on both sides of the tobacco debate are watching their introduction closely. Critics question the motives behind the products, saying they may be a way for the tobacco industry to recruit new tobacco users or keep current smokers from quitting.

Seeking Diversification

The tobacco companies counter that the products are simply a way to diversify within their industry and give adults who enjoy tobacco more choices, especially as smokers face increased restrictions on where they can light up.

To be sure, there are good business reasons for the tobacco companies to consider diversification. The number of cigarettes sold in the U.S. has been declining at an average rate of about 2% a year, while sales of smokeless tobacco products are rising at about 6% each year.

“If your customers are leaving your category for another, isn’t it better to keep them in your franchise?” said Bonnie Herzog, a tobacco industry analyst at Citigroup.

Herzog expects the snus products will help fuel the future growth of the smokeless category, which is already benefiting from increasingly tighter smoking restrictions and a more favorable tax status.

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But she expects the development could spell trouble for UST, the Stamford, Conn.-based company that leads the segment with its products Skoal and Copenhagen. Herzog has had a “sell” rating on UST. (She does not own shares of the stocks she covers.)