Small Cigarette Firms Jockey for Position

When Steven Bailey wants a smoke he doesn’t reach for a Marlboro or a Camel, he pulls out a Bailey’s--a cigarette made by his family company, S&M; Brands Inc.

Bailey isn’t alone. In the shadow of cigarette behemoths like Philip Morris and R.J. Reynolds, small companies are fighting for a share of America’s $45.7-billion-a-year cigarette market.

There are about a dozen so-called “microsmoke” companies in the United States, said Gabriel Avram, a Winston-Salem, N.C., lawyer who follows the industry.

Each of the tobacco minnows has picked a market niche. Star Tobacco & Pharmaceutical Inc. of Petersburg is aiming at the smoker with health concerns, and is testing a new method to remove some cancer-causing compounds from cigarettes.

S&M; is hoping to hook budget-conscious smokers wanting a premium quality cigarettes. Bailey’s are priced at $8.70 a carton, well below the premium brand price of about $14.75.

Others, like Alternative Cigarettes Inc. of Buffalo, N.Y., and the Santa Fe Natural Tobacco Co. Inc. of Santa Fe, N.M., try to lure buyers interested in natural products by advertising that their cigarettes have no additives.

“The more people hear about the additives that have been put in over the last few years, the more they want to try” the smaller brands, said Kenny Peregory, who owns three Virginia Factory Cigarette Outlet stores that cater to niche-market smokers.

The market the little guys have chosen isn’t an easy one, said Jack Kasprzak, a tobacco analyst with Scott & Stringfellow in Richmond. “Your competitors are not just big companies but gargantuan multinational companies that have been around a long time,” he said. “It’s very similar to what a small soda company would face competing against Coca-Cola.”

A fifth-generation tobacco grower from Keysville in Virginia’s Southside tobacco belt, Steven Bailey and his father, Malcolm, decided to start their own cigarette company in 1994.

“It’s something my father always wanted to do,” Steven Bailey said. “It seemed an abrupt end to drop off the tobacco at the market. He wanted to start with the tobacco seed and end up with the finished product.”

Bailey, 27, experimented with tobacco leaves and made his own samples in a small cigarette rolling machine.

When he came up with a blend that pleased him, Bailey and his father contacted a contractor who made the cigarettes for them until last year.

In 1996, the Baileys set up their own cigarette factory that has 21 employees who produce 100 million cigarettes a year. That sounds like a lot, but Americans smoked 487 billion cigarettes last year.

“In industry terms it is extremely small,” Bailey said. “But it is a large accomplishment in a business as cutthroat as the cigarette industry.”

Just making the cigarettes isn’t enough. They have to be advertised, transported to stores and placed on shelves where customers can see them.

Bailey said there was no reaction from the giant tobacco companies at first. But “as our market started to grow, they became very hostile to us. It’s a constant fight to keep the product in front of the consumer.”

Peregory has noticed the reaction of the big tobacco companies because of his decision to give lots of space to smaller brands in addition to market-dominating brands like Marlboros.

“They don’t like what I’m doing,” he said. He said he has been cut off from coupon programs and fees that big tobacco companies usually pay retailers.

Bryan Stockdale, vice president of trade marketing for R.J. Reynolds, said his company has a range of incentive programs for dealers depending on which brands a retailer carries and how prominently Reynolds’ products are displayed.

“The retailer is the one that makes the choice,” he said.

Santa Fe has taken a slightly different approach to selling its cigarettes, said Robin Sommers, president and chief executive officer.

Instead of spending huge sums on advertising, Santa Fe is targeting retailers.

“It’s the only way we have found a channel to the market because the major marketers control the traditional distributor channels,” Sommers said.

While the small companies fight for shelf space, a big threat looms on the horizon: the proposed tobacco settlement being considered by Congress.

The settlement would impose advertising restrictions that would make it even more difficult for a small brand to break into the market, Sommers said.

Fearing an advertising clamp down, S&M; Brands, which had revenues of $4 million this year, is spending heavily promoting Bailey’s.