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On 22 June 2009, the Family Smoking Prevention and Tobacco Control Act (FSPTCA) gave the US Food and Drug Administration (FDA) regulatory authority over tobacco products. The FDA's first efforts under the FSPTCA banned flavoured cigarettes, including clove cigarettes, in September 2009, arguing that such cigarettes appealed to youth. However, the ban on characterising flavours does not currently apply to cigars.
In April 2009, the top distributor of clove cigarettes in the USA, Kretek International Inc., which imports Djarum brand tobacco products from Indonesia, began offering clove-flavoured cigars in limited markets and launched across the USA in July 2009.1 These new filtered cigars, close to the size of a cigarette, are flavoured and include clove and cherry flavours. Clove cigars exceed the weight limitation of three pounds per thousand units for little cigars and standard cigarettes, which means the Djarum clove cigar is classified as a large cigar for tax purposes. Policymakers and public health advocates immediately criticised the clove cigars, suggesting that Kretek was trying to circumvent the ban on flavoured cigarettes.2
In addition, Indonesia, the world’s top producer of clove cigarettes and the source of the vast majority of those smoked in the USA, filed a complaint with the World Trade Organization (WTO) in April 2010, arguing that the FDA flavour ban was discriminatory against clove cigarettes compared with menthol cigarettes, which are still allowed to be sold and are primarily produced in the USA. A WTO dispute settlement panel agreed with Indonesia in 2011, and the decision was upheld on appeal in 2012.3 To date, the USA has not allowed the sale of clove cigarettes or banned the sale of menthol cigarettes.
In this paper, we describe how Kretek International Inc. launched a cigar replacement product in anticipation of the FSPTCA and its ban on flavoured cigarettes, including clove. Specifically, we examine the timeline of Kretek International Inc.'s development and marketing of their clove cigar, analyse clove cigar sales before and after the flavoured cigarette ban, as well as review tobacco import data from Indonesia before and after FSPTCA.
In October 2009, Congressman Henry Waxman sent a letter to Kretek International requesting documents concerning the company's introduction of clove-flavoured cigars. We reviewed the documents obtained and cited by Congressman Henry Waxman and the Committee on Energy and Commerce in their letter to the FDA's Commissioner on March 2011.4 In addition, we reviewed newspaper stories that addressed various events as they related to the Kretek Clove Cigar.
Clove sales and import data
Convenience store data on clove cigar sales from 2009 to 2012 were obtained through Nielsen's Convenience Track system, which tracks sales data weekly from a sample of convenience stores in 30 markets through a combination of in-store retail scanner equipment (ie, barcode readers), as well as audits of sales in stores without scanner equipment. These market areas include a collection of counties, usually containing at least one large metropolitan area and together project sales for the total US market. Nielsen's convenience store sample is representative of all convenience store types and includes chain stores, non-chain and independent convenience stores (including one store owners), as well as convenience stores found in gas stations. Using a proprietary mechanism, Nielsen applies sample weights to scanned retailer data before reporting.
Data on the quantity and value of cigars and cigarettes imported from Indonesia between 2008 and 2012 were obtained from the USDA Foreign Agricultural Service’s Global Agricultural Trade System (GATS). GATS includes international agricultural, fish, forest and textile products trade statistics dating from the inception of the Harmonised coding system in 1989 to present, released monthly.
Product development and marketing strategy
Kretek documents indicated that plans for a clove cigar began in 2007, perhaps as early as February 2007, at a meeting in Jakarta, Indonesia.5 The goal was to be “prepared for a seamless transition from Djarum Clove cigarettes to Djarum Clove cigars in the event of FDA ban on clove.”5 The documents suggested that the cigar product's filler was identical to the clove cigarette; only the product's wrapper, which was homogenised tobacco leaf, would distinguish it as a cigar.6 ,7 Moreover, marketing materials (see figure 1) implied that the cigar product's formula remained the same or similar to the clove cigarette, indicating to consumers that it was “the taste you expect”8 and “totally different but still the same.”8
While numerous documents outlined the need for a clove cigar in anticipation of a flavoured cigarette ban,5 ,6 ,8 Kretek also highlighted additional regulatory advantages for their clove cigars.1 First, they recognised that the new warning label requirements and point of sale marketing restrictions for cigarettes would not apply to cigars. Second, given excise tax disparities between cigarette and cigars, Kretek's marketing would attempt to capitalise on their cigars’ lower consumer price and ‘very high’ retail margin relative to cigarettes. Attention was paid to the April 2009's enactment of the State Children's Health Insurance Program (SCHIP), which equalised the federal excise tax on little cigars, but still provided a financial advantage to regular-sized cigars. Consequently, Kretek's clove-filtered cigar weighed more than three pounds per thousand sticks,9 which met the legal cut point for a large cigar.10 While the regulatory advantages of a cigar served as the impetus to the clove cigar, Kretek's marketing approach was to publicly “ignore FDA as a reason why, and to barely touch on SCHIP/taxes”,11 believing it would be necessary “to demonstrate to distributors and trade that there is a market driven reason for filtered clove cigars, rather than just a reaction to FDA.”12
Legal response to FDA ban on flavoured cigarettes
The flavoured cigarette ban went into effect on 22 September 2009, and FDA officials issued a letter to tobacco companies describing the ban and plans for enforcement, including the definition of a cigarette under the ban.13 The Federal Cigarette Labeling and Advertising Act defines a cigarette as any roll of tobacco wrapped in paper or any roll of tobacco wrapped in any substance containing tobacco, which because of its appearance is likely to be offered or purchased by consumers as a cigarette. The FDA letter indicated that the flavoured ban would apply to anything that met the definition of a cigarette, even if it was labelled a cigar, although the letter does not specifically point to flavoured cigars as circumventing the flavoured cigarette ban. On 24 September 2009, Kretek filed a declaratory judgement against the FDA claiming that FDA was intending to exceed its legislative authority.14 In defence of their product and in the context of their lawsuit against FDA, Kretek's John Geoghegan indicated that their clove cigar was submitted to the Tobacco Tax & Trade Bureau (TTB) of the U.S. Department of the Treasury in 2007, and again in 2008, and they were issued an advanced ruling indicating it met the standards for a cigar.9 ,14 In January 2010, Kretek dropped its lawsuit after the FDA indicated that it would only take enforcement actions against tobacco products that met the legal definition of a cigarette, an assertion that Kretek derived from the FDA's revised edition of its General Questions and Answers on the Ban of Cigarettes that Contain Certain Characterizing Flavors issued in December 2009.15
Clove sales/imports in the USA
While Kretek is not the sole company offering clove cigars, its Djarum brand cigars account for the vast market share of clove cigars sold in the USA. As shown in table 1, the total units of Djarum clove cigars sold increased from 444 192 in 2009 to over 6.7 million in 2012, an increase of more than 1400% during this time period.
As shown in table 2, tobacco imports to the USA from Indonesia shifted from clove cigarettes to cigars between 2006 and 2012. Cigar imports increased sharply after 2009, rising to over 626 million sticks by 2012 while imports of clove cigarettes decreased from a high of 532 million sticks in 2008 to zero in 2010. Moreover, the value of tobacco imports from Indonesia, while shifting between two tobacco products, did not change notably over this time period.
The tobacco industry has a history of manipulating tobacco products, and in particular cigars, for regulatory advantage.16–18 In the mid-2000s, cigar manufacturers capitalised on regulatory loopholes for the little cigar by promoting its similarity to cigarettes and cheap price due to low excise taxes and sales of little cigars soared.17 ,18 However, this practice dates back to the early 1970s, when RJ Reynolds designed a little cigar for cigarette smokers that was as close to a cigarette as legally possible to take advantage of television advertising where traditional cigarette ads were banned and a favourable tax structure.18 Both RJ Reynolds and Kretek International shifted priorities well in advance of pending legislation, including voluntarily submitting their new products to TTB for advanced rulings on tax classification as cigars. Djarum clove cigars were purposely designed by Kretek International to replace clove cigarettes for its more than 1 million users, and sales of Djarum clove cigars are growing exponentially. In addition, Indonesia contends they have lost millions in annual revenues from the ban on clove cigarettes, but according to foreign trade statistics, it appears that cigars have replaced that lost revenue.
The following limitations to the data should be noted. We did not have access to all the Kretek International documents released to Committee on Energy and Commerce in response to its request for information concerning the company's introduction of flavoured cigars following the FDA ban on flavoured cigarettes. In total, the Committee received over 7000 pages of documents from Kretek International. However, we were only able to review the documents cited in Waxman's letter to the FDA in March 2011. The Nielsen data reported here are limited to one retail channel, although convenience stores are the largest channel for cigars. Lastly, while data on imports from Indonesia specifically categorise clove cigarettes, the classification for cigars does not specify clove. It is possible that some of the cigars imported from Indonesia are not clove cigars, but it is worth noting that prior to the flavour cigarette ban, Indonesia produced a very small volume of cigars for US consumption.
Cigars are defined as a tobacco product under the FSPTCA. Thus, the law gives FDA the authority to impose additional restrictions on cigar products if it so chooses. Although in February 2013, legislation (H.R 792) was introduced that would exempt traditional large and premium cigars from FDA regulation including machine made cigars and cigars with flavourings. In August 2013, FDA officials reported that they intend to regulate cigars and other tobacco products, but to date the FDA has not said how or when they will regulate these products.19 Cigar products will continue to elude regulation if H.R.792 becomes law or if FDA fails to officially declare cigars under their purview and extend the flavouring ban to other products. Based on our analysis here, Kretek International Inc. was well prepared to exploit the legislative loophole in the FSPTCA and has demonstrated strong growth potential in shifting from clove cigarettes to clove cigars. As a result, any gain to public health by banning clove cigarettes may have been offset by the introduction of legal, replacement cigar products.
What this paper adds
In September 2009, the Food and Drug Administration (FDA) banned the sale of candy-flavoured, fruit-flavoured and clove-flavoured cigarettes. In response to the FDA ban, Kretek International developed and marketed the Djarum clove cigar to replace their popular clove cigarettes.
This paper offers a discussion of Kretek's internal documents detailing the introduction of their clove-flavoured filtered cigar and analyses market scanner and import data to examine clove cigar consumption. Based on our analysis, Kretek International prepared a replacement cigar product well in advance of the FDA legislation on flavoured cigarettes and has demonstrated strong growth potential in shifting from clove cigarettes to clove cigars.
We argue that failing to extend the flavour ban to cigars has created opportunity for new products to replace flavoured cigarettes and may undermine the FDA's goal to reduce youth smoking and protect public health.
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