Market development

Market for Other tobacco products

Other tobacco products, which include cigars and chewing tobacco for the US market, had another outstanding year in both local sales and operating profit, led by double digit volume growth for its US mass market cigars to a record level.

Swedish Match is the leader in the natural leaf segment1) for machine made cigars and maintains a strong presence within the homogenized tobacco leaf segment2). Swedish Match also holds the number one position for ­chewing tobacco.


1) Natural leaf cigars: cigars which have binders and wrappers made of parts of selected tobacco leaves cut specifically to form the binders and/or wrappers. The main distinctions between natural leaf cigars and hand rolled cigars are that they contain short filler tobacco versus long filler tobacco and that machines are utilized in the latter steps of the manufacturing process.
2) Homogenized tobacco leaf (HTL) cigars: Cigars which have binders and wrappers made of tobacco leaves that have been ground, mixed with water, homogenized and rolled into sheets to ensure a consistency of look, feel, and quality.

Cigars

Swedish Match maintains a strong ­presence with cigars in the US with such well known mass market brands as Game, White Owl, and Garcia y Vega.

Market and highlights

It is estimated by Swedish Match that the market for US mass market cigars grew by approximately 5 percent in ­volume terms in 2016 and amounted to more than 6.5 billion cigars excluding little cigars1) (a segment in which Swedish Match does not participate). Swedish Match’s cigar volumes reached a new record level, increasing by 17 percent. During 2016, the market remained highly competitive with extensive activity for lower priced and promotional products. Swedish Match estimates that the Company’s share of market was approximately 22 percent in 2016. Swedish Match participates in both the homogenized tobacco leaf (HTL) segment, which is the largest segment, and the natural leaf segment, a smaller but growing segment in which Swedish Match holds the leading market ­position.

During 2016, Swedish Match expanded distribution for a number of new cigar products under brands such as Game, ­Garcia y Vega, and White Owl. The volume growth for Game and ­Garcia y Vega natural leaf cigars was particularly strong, and were a major contributing factor for Swedish Match’s solid volume growth. The Company’s natural leaf cigars offer exceptional quality at an attractive price point. After several years of volume declines in the HTL segment, Swedish Match grew ­volumes in 2016 with its White Owl and Jackpot brands. Night Owl, which is aimed at the pipe tobacco cigar segment, was introduced on a limited scale.

1) Little cigars are typically filter tipped and packaged in packs of 20 (similar to cigarette packaging).

Chewing tobacco

Swedish Match is the largest player in the US chewing tobacco category, with the market’s number one selling brand, Red Man.

Market and highlights

The US market for chewing tobacco is in a long term state of volume decline. It is estimated that the market declined by approximately 5 percent in 2016. However, the decline was more pronounced in the premium segment where Swedish Match has a leading position. In this segment, the decline was in excess of 9 percent. In the value segment, which also declined, there was growth for the big bag category.

For Swedish Match, the chewing tobacco business is an important and profitable part of the Other tobacco products portfolio with solid cash flow generation. Swedish Match’s chewing tobacco shipments (excluding contract manufacturing volumes) declined slightly faster than the market, which experienced a somewhat more rapid decline than in recent years. Chewing tobacco volumes were also negatively impacted from significant tax increases in some states, including Pennsylvania.

The Group’s Red Man brand is by far the largest chewing tobacco brand in the US, accounting for more than one third of all volumes sold on that market. Swedish Match brands account for approximately 39 percent volume share of the market.1)

With declining chewing tobacco consumption in the US market, Swedish Match works to reduce costs and maintain operating efficiency while also addressing pricing in order to ensure good profitability. An example of an efficiency measure is the ­contract manufacturing agreement with National Tobacco, whereby Swedish Match produces the chewing tobacco range of this competitor in the Owensboro, Kentucky, US facility.

Swedish Match’s strong market share allows this business to remain highly cash generative. Also, as the market declines, Swedish Match is well positioned to maintain its share position over time in each of the pricing segments and packaging ­formats. Swedish Match also sells chew bags, which are available in certain markets ­outside of the US.

1) Source: Swedish Match and industry estimates, full year, 2016.