Has The Northerner bit off more than it can snus?

The price of Swedish snus at the major eStores has always varied to one degree or another but never to the extent seen today.  Factors such as the PACT Act, The Tobacco Control Act, and wild swings in currency values are the major contributors.  When The Northerner opened a US warehouse and purchased the GetSnus.com domain from Swedish Match whose lawyers felt the liability outweighed the advantages, Sweden-based Northerner suddenly had a physical presence within the United States, for better and especially for worse.

I was invited to meet with Frank Svandal; owner of Northerner.com, in Gothenburg last June.  SnusCentral.com was looking at the viability of opening a US warehouse at the time.   Among a range of topics, he gave his thoughts on moving Northerner from being retail driven to distributor driven.  He envisioned the revenue shift from direct retail snus sales to selling to American eStores and brick and mortar stores as a distributor.  I admit to being intruiged but the timing kept nagging at me.

After taking with Northerner and others, our due diligence led us to one inescapable conclusion.  While opening a US facility would, at that time, be a profitable move, it simply wasn’t worth the risk with the PACT and Kennedy/Waxman legislation gaining steam in the US Congress.

In fairness to Frank and others we talked to in Sweden, I think only an American could understand what the visceral hatred for all things tobacco and complete sell-out to Big Pharmaceutical by FDA could mean in real terms.   Add to that cash-starved State Governments looking to collect taxes on anything and everything,  and the downside possibilities appeared endless.  We decided to table opening a US distribution facility until PACT and Kennedy/Waxman (now the Tobacco Control Act) had played out.

After dying a political death as the clock ran out on 2009, I was frankly shocked at how quickly these Democrat-sponsored bills passed into law in 2010; in the case of the Senate, literally in the middle of the night.  President Obama, still smoking himself, wasted no time in signing both bills into law.

Now that the PACT Act and Kennedy/Waxman are both the law of the land, even at our most pessimistic, we saw we had underestimated the effect FDA and BATF would have on all tobacco products (except cigars).  FDA certainly isn’t making it any easier by literally making up the rules as they go along.  The State governments were left with little guidance and notification resulting in a patchwork of licensing requirements, bond requirements, and outright retail eSnus bans.  Tobacco industry and retailer lawsuits against provisions of both bill are working their way through the court system.

Many US eStores, especially those whose main products are cigars and pipe tobacco,  have either stopped selling snus and smokeless tobacco completely while many others like SnuffShop.com and ClubSnus.com have been driven out of business completely.

Ironically, the first nail in the ClubSnus coffin was delivered by Northerner.  Preparing for becoming US distributors of Swedish/Scandinavian snus,  Northerner had obtained exclusive US wholesale distribution rights from V2 Tobacco and Gotlandssnus/Jakobsson’s for their products.

When Club Snus published an article by Chad Jones of Snubie.com lambasting the SnusOn Forum,  Northerner invoked their agreement with V2 Tobacco.  Club Snus could now only purchase V2 products through Northerner.  When Club Snus approached Northerner for V2 product, the answer was no; they were not interested in selling to Club Snus.  Add that to the enormous cost in time and money to be licensed to sell virtual snus in the US after July 1st, 2010, and Club Snus folded.  They were not alone.

BuySnus.com, SnusCentral.com, and the other off-shore internet snus/snuff stores were also impacted but because they had no physical US presence, to a lesser extent.  All snus and snuff eStores including their customers were penalized by the Obama-imposed ban on delivering tobacco products (except cigars) by the US Postal Service.  Despite an ongoing lawsuit in Federal Court brought by Seneca Smoke Shop, the ban on USPS shipping has been upheld so far.

Lowest Retail Snus Prices – and the Highest Retail Snus Prices

Comprehensive competitive studies regularly commissioned by SnusCENTRAL.org of Swedish and Scandinavian Snus retail prices confirmed that in the overwhelming majority of cases, the Snus eStore at SnusCentral.com consistently has the lowest prices of the major snus store etailers and was among the top rated for Customer Service. Not surprisingly, that is what we had hoped the results would be since that is the SnusCentral.com  mission.

A very unexpected retail price comparison report did raise eyebrows, however.  What shocked us was just how high Northerner.com and GetSnus.com consumer prices had risen  compared to all the rest of the non-Northerner owned snus eStores.

Here are 12 random examples from the study as of October 25th 2010.  You can visit the different snus eStores yourself if your favorite brand is not among those below.  All prices shown are regular consumer prices for fresh snus.  No sale items, off-brand, or  house-brand products are included:

Since there was not this significant a difference in same-store comparison prices a year ago, the report concluded that the Northerner’s current expansion model must be a costly one resulting in much higher retail snus prices to maintain cash flow.  Knowing Swedish Match, Northerner paid a pretty penny for the GetSnus.com name.   Opening and operating a US warehouse to fulfill GetSnus.com and a fledgling US wholesale distribution entity which stocks very limited products for sale because of FDA and PACT must also be a huge drain on Northerner’s bank account..

In an attempt to further dominate internet snus sales, The Northerner had effectively usurped and taken control of the previously non-partisan SnusOn.com Forum.  They also increased their number of “straw sites”; websites owned and run by Northerner but operating under different names.  They even obtained the SnusCentral.net domain name (bad form by them; our bad for letting it happen) and have redirected it to their Snus.com staw site.  The hard and soft costs of all these actions is not known outside of Northerner, but the existence of these costs can not be denied.

Without PACT and the Tobacco Control Act, this strategy may have been a risky but viable business plan if executed properly.  Apparently for Northerner, it is now a race against time and dwindling financial resources.

In an attempt to off-set their high consumer snus prices, Northerner.com and Getsnus.com have instituted a “buy from us; earn points for free snus and snus gear” program. The SnusOn forum began a participation incentive based on receiving points for posts made.

Before June of 2010, this may have been a clever marketing scheme.  After June 22nd, 2010, these types of programs were made illegal under the Tobacco Control Act.  In the law’s advertising and incentive restrictions, allowing US consumers to receive free snus/tobacco products and especially receive any manufacturer-labeled shirts, hats, and other snus gear in exchange for points earned by US consumers on their websites is strictly forbidden.

Perhaps Northerner is continuing these programs for US residents out of financial necessity.  They may be gambling that with the focus on cigarettes, by the time FDA and BATF starts drilling down on these violations, Northerner will be financially whole enough to withdraw them for Americans and especially on US-based GetSnus.com.  If caught, they risk huge fines and criminal charges so this is a risky and desperate course of action.

In Real Estate, the mantra is location, location, location and location. In general commerce, the mantra is timing, due diligence, financing, and a realistic business plan.   When the US Government and Tobacco are also in the equation, all four also have to be considered in worse case scenarios.

Is Northerner building a snus empire or did they miscalculate and built a house of cards in a wind tunnel instead?  Was this move ill-timed…either 2 years too late or 2 years too early?  Will snus penetration in the US smokeless tobacco market suddenly explode to the extent necessary for Northerner to break even and make the profit needed to survive?  Bigger, richer and smarter companies than they don’t think so.

Aside from Reynolds and Philip Morris, the major American tobacco companies are still sitting on their hands concerning snus.  Swedish Match, the largest Swedish snus manufacturer in the world, has yet to launch a genuine major snus campaign in the USA.  Their response as to why is “wait until next year.”  Swedish Match has been saying that since 2008 and with FDA now in charge, has even more of a reason to proceed cautiously.

Snus is now a blip on the growing US smokeless tobacco market.  Congressman Frank Pallone (D-NJ) just this week publicly called for the Rangers and San Francisco team management to prohibit smokeless tobacco use by players during the 2010 World Series.  Pallone claims it sets a bad example ‘for the children’ and is ‘the right thing to do’.

Cigarette sales were down about 4% last year but smokeless tobacco sales to include snus were up 12%.  FDA has noticed this just as much as the tobacco industry.   The first trial ballons on lowering nicotine levels in tobacco products to near-zero have already been launched.

Time will tell how Northerner’s high-risk gamble will shake out with the financial resources they have left, but I don’t think it will take much time to see the outcome.  One way or the other, the snus world will know the answer in 2011; early 2012 at the latest.  I wish Frank the best of luck as do I all reduced harm tobacco consumers, eTailers, and retailers in the US.  I honestly hope 2011 proves me wrong.  But as the world knows, I am seldom wrong in these matters.

My unfortunate take on this,

LARRY WATERS

Swedish Snus Ambassador to the United States
Reporting for SnusCENTRAL.org