I’m not sure I could have picked a better question.
In May, the U.S. Food & Drug Administration (FDA) announced its finalized version of the deeming regulations, a new set of rules that would regulate a variety of tobacco products including cigars.
(For more information about FDA’s regulation of premium cigars, please visit halfwheel.com/fda)
As part of the new regulations cigars will have to go through an approval process, which can be summarized into three date-specific categories.
- Feb. 15, 2007 — Any cigar that was on the market as of Feb. 15, 2007, the day Congress introduced legislation that would give FDA the authority to regulate cigars, is grandfathered. Companies will have to inform FDA which brands they believe meet the grandfather provision and my be required to submit documentation to FDA proving they meet the Feb. 15, 2007 grandfather date, but the cigars will not have to be submitted for FDA approval, meaning they won’t be subject to testing. Note: Any cigar that has not continued to be sold or had undergone packaging or blending changes could lose its grandfather status and have to apply under substantial equivalence.
- Feb. 16, 2007-Aug. 7, 2016 — Any cigar introduced after Feb. 15, 2007, but before the rules go into effect (Aug. 8, 2016) will have to submit for FDA approval, but companies can continue to sell these products until FDA rejects their applications. Companies have between 18-36 months before they have to submit their applications or remove their products from the market. Unless a company plans on not filing for approval, they will likely need to submit their applications by March 10, 2018, 18 months after the regulations take effect.
- Aug. 8, 2016 — Any company introducing a new cigar after Aug. 7, 2016 will have to submit that cigar for FDA approval—and obtain it—prior to entering the market.
Reader Steven has some specific questions about this. Before I answer this question, I would like to remind everyone that I am not a lawyer and this is not legal advice.
My question for you is in your opinion will retailers have the financial where with all to buy all of these new brands ( consumers always are looking for new brands) let alone the space, considering they may be replacing brands that are grandfathered under the new FDA rules or should they stick with what they have? Also, what is the threshold that qualifies a new brand to be considered “on the market” by the FDA? Is it just one store and one facing?
FDA has very strict rules about what it believes is needed to prove a product was marketed prior to Feb. 15, 2007. (Establishing That a Tobacco Product Was Commercially Marketed in the United States as of February 15, 2007, 5)
The key points are:
- The product must have been offered for sale and a company must have proof that it was being actively sold prior to Feb. 15, 2007.
- The company must show the product has been sold since Feb. 15, 2007.
- Any blend changes that were done other than because of natural variances of tobacco, i.e. the crop this year was stronger than before so some stronger tobacco was removed from the filler, would constitute a new product and as such the manufacturer would lose access to the grandfather path.
- Any major packaging changes would constitute a new product even if the blend has not changed. As such, the manufacturer would lose access to the grandfather path. FDA has guidelines about what is major and minor, but there’s no set rule. (Demonstrating the Substantial Equivalence of a New Tobacco Product: Responses to Frequently Asked Questions (Edition 2)*, 8.) That document says if the color of the box or band changed from red to blue, it would constitute new packaging. If you changed it from one shade of red to a slightly lighter shade, it may be considered minor. If you changed the logo from a horse to a picture of tobacco leaf, that’s new packaging. If you simply changed the size of a logo, it could be considered a minor change. In short, if you placed the old packaging and the new packaging on a table, could one reasonably consider the products to be unchanged. In short, Camacho is probably not okay, whereas Macanudo could retain its grandfather status.
- Finally, products that were sold exclusively in “test markets” prior to Feb. 15, 2007 are not eligible for grandfather status.
What’s interesting is that the agency has not established any similar rules for post Feb. 15, 2007.
Because flooding the market with 15 new products before Aug. 8 is not ideal for just about any cigar company, many are planning on selling one or a few stores a small quantity–sometimes just one box–of new cigars they intend on formally introducing after Aug. 8.
None of the above is speculation, but this is and I should be clear, I know nothing of what Pete Johnson wants to do with Monster Series.
A company like Tatuaje, which presumably wants to have a Monster Series release in 2017 and 2018, will probably sell a retailer or a few retailers a box (or a couple boxes) of—at the very least—the 2017 and 2018 Monster Series release. It could then begin selling them on a widespread basis anytime before Aug. 8, 2019.
Tatuaje could choose to apply for substantial equivalence for any of these products, though for the 2017 and 2018 Monster Series releases it probably doesn’t make financial sense unless it wants to continue to sell the cigar after August 2019.
For any products it opted not to apply for substantial equivalence, like say the 2017 Monster Series release, it would have until Aug. 8, 2019 before it had to stop selling these products. FDA could issue orders forcing retailers to remove the products from it shelves, but that’s assuming there’s any of the 2017 Monster Series left on shelves.
As for the 2019 Monster Series release, Tatuaje could sell a box to a single retailer—or a few—and then apply for substantial equivalence. If FDA doesn’t reject the application by the time the company wants to sell the product, it could introduce the cigar and sell it in 2019.
Financially-speaking, it doesn’t make much difference to release the 2019 Monster Series simply to meet the grandfather date other than the cost of getting that early box to market. The advantage for Tatuaje and other cigar companies is that it wouldn’t have to get approval from FDA before it starts selling the product.
FDA says it has 180 days to process applications, but many cigar companies are wary of how long it will take, given that in other industries the agency has taken years before responding to applications.
Once again speculation here.
It seems unlikely in a world of thousands of applications for grandfathered cigars, potentially upwards of 10,000 applications for products from Feb. 15, 2007-Aug. 8, 2016 and new applications—in addition to applications from pipe tobacco, hookah tobacco and the e-cigarette industry—that FDA would put a ton of resources on trying to police what cigars were on the market prior to Aug. 8, 2016.
If the agency was concerned with these applications, it likely would have applied the same restrictions to the Feb. 15, 2007 date, but it hasn’t yet.
Ultimately, FDA knows that these products have 18-36 months before they have to submit an application or remove themselves from the market and so the cost benefit analysis of trying to police those products would deem this counterproductive.
It’s my opinion that if FDA wanted to try to stop this from taking place, it would have written the rules with at least one of three additional provisions:
- Apply the same standards as what’s needed to qualify for the Feb. 15, 2007 date to the Aug. 8, 2016 date.
- Shorten the window between when the rules go into effect from 90 days down to the originally proposed 30 days, something that would have certainly reduced the amount of products that will try the ship a box to one retailer before Aug. 8 method.
- Require manufacturers to signal much earlier whether they intended to apply for applications. If companies had say 30 days after Aug. 8 to tell FDA whether it intended to actually submit an application, it certainly would have scared some people from trying the ship some now, fully ship the product after Aug. 8 and wait a year to figure out whether or not we want to keep products on the market.Under the current standard, manufacturers can wait until late 2017 before they probably will need to determine whether a cigar is financially viable enough to go through the approval process. As of now, particularly for limited products, companies can rush to get the products on the market by Aug. 8 with no intent of actually applying for an application and they have three years before any actual consequence takes effect.
While I certainly can see a couple of companies trying to formally release a ton of products prior to Aug. 8, particularly with the trade show taking place late next month, I don’t think it will be that prevalent.
Simply put, 90 days is enough for someone to get a box sample from a box factory and a few bands along with some cigars, but it’s not enough time to get all of the finished goods ready to launch, particularly this time of year.
Factories, box manufacturers and those that produce bands are under a ton of constraints at the moment just because of the trade show. While some might have the ability to add a bit of production, most cannot suddenly double production to rush products to market.
For a company looking at the flood the market strategy, it’s probably not a wise decision given the competition in the current market. Do you want to try to sell five new lines that were rushed when there are 150+ cigar companies trying to introduce new lines that had the timeline to be properly executed? I would hope not.
And then there’s the money issue.
Many cigar companies use the trade show—and the orders retailers place—as a deposit of sort. They get a couple boxes made to display, 1,000 banded samples to hand out and then they take orders. Once the show is done, they place an order with the factory based on the orders they took. That’s why a large percentage of cigars introduced at the IPCPR Convention & Trade Show, which takes place in July or August, don’t show up until October or November.
As such, I don’t see this affecting retailers too much in the short term.
Most companies I’ve talked to are implementing a strategy where they might release one or two things early, but otherwise are sticking with their original plans, other than trying to get at least a box for any future products on to the market prior to Aug. 8.
Those products that are sold to a single retailer prior to Aug. 8 are unlikely to ever be seen by a consumer. Sure, some might put a box on the shelf and let it sell, but many will probably just have a single (good) customer buy the box or just have the retailer themselves buy the box as an individual from the store.
And for a last bit of speculation, I will not be surprised if FDA ultimately pushes back at least some of the implementation deadlines.
The agency admitted that it doesn’t have a full grasp of what the premium cigar market looks like in terms of the number of products. It certainly doesn’t seem to have an understanding of how the average turn rate (how quickly a product sells and is replenished) and as such, the probability of the agency being overwhelmed seems likely.
I think at some point the agency will have to make a decision about whether it wants to have a chaotic and potentially sloppy regulation for a few years or attempt an organized approach to regulation. Given some of the changes it’s already made, it seems like effectiveness is already outweighing immediacy and I imagine this logic will apply to everything other than e-cigarettes and vaping products, an area where the agency has a clear focus.
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For more information about FDA’s regulation of premium cigars, please visit halfwheel.com/fda