By Joseph Finora

Whether your customers are of the Roll-Your-Own (RYO) or Make-Your-Own (MYO) variety, economics were probably a key driver in their decision. However, once smokers get into the do-it-yourself habit, the power of the blend can take over. And while most RYO/MYO companies are privately held and do not disclose earnings or are a part of larger concerns which do not break out results by business unit, most signs are pointing in the right direction for this otherwise fragmented industry segment.

"More smokers try MYO/RYO as packaged-cigarette prices rise," says Daniel Miller, Director of Brand Equity at Santa Fe Natural Tobacco Company, Inc., in Santa Fe, N.M. "RYO customers are looking for better quality, to control what they're smoking and get variety," says Miller who adds that RYO/MYO smokers like the 100% additive-free Santa Fe products. Santa Fe manufactures Natural American Spirit cigarettes plus 100% organic tobacco in roll-your-own pouches. Santa Fe Natural RYO products come in four styles: Royal Blue, Blue, Maroon, and Native American Pow Wow blend, a ceremonial blend of 100% additive-free tobacco and pure herbs and botanicals - sage, red willow, bearberry and Yerba Buena (spearmint).

"Our customers are very vocal," says Miller, a ten-year marketing veteran when asked how the Santa Fe brand grew. "It was largely word-of-mouth and point-of-purchase retail display merchandising that grew the brand." The company also provides samples and recently has been sponsoring events such as music and film festivals.

While some view RYO/MYO as a cottage industry, in 2002, giant R.J. Reynolds Tobacco Holdings, Inc., now Reynolds American Inc., acquired Santa Fe Natural for $340 million in cash. Sales for Santa Fe have been steadily climbing. "I don't know if RYO/MYO will ever enjoy the volume it does in Europe but we've had steady growth here," says Miller.

Taking it a step further, when Reynolds American was formed in 2004 by the merger of R.J. Reynolds Tobacco Holdings with the U.S. operations of Brown & Williamson Tobacco Corp. (B&W), it brought Lane Limited under its corporate umbrella.

Lane leads the RYO category with the Bugler brand with 24.5 percent of domestic RYO sales volume. It was launched in the U.S. in 1932. Midnight Special, a value brand that has undergone rapid growth over recent years, has 7.6 percent of retail volume. Kite, launched in 1934, is the leading menthol RYO in the United States, with 5.2 percent of retail sales volume according to company statistics. Four other RYO brands, Samson, Roll Rich, Jester and Gauloises (marketed on behalf of the European tobacco company Altadis) account for a further 1.4 percent, giving Lane 38.8 percent of total U.S. RYO sales volume. Both Lane and Santa Fe enjoy loyal national and international followings.

And while profits are pointing north, things are happening down south for RYO. "The long-term forecast for RYO is positive," says Dean Rouse of Farmers Gold in Pink Hill, N.C. "As long as the price of finished cigarettes continues to rise so will demand for cost-wise tobacco products. Our industry will continue to have increasing sales and market-share gains."

And while customers keep coming back, new companies are getting into the act. Wyoming's upstart Wind River Tobacco Company offers American Bison, an addictive-free, natural line plus Teton Tobacco, which comes in several varieties including a shrink-wrapped starter kit featuring 200 tubes, an injector (made by another company), hard case and brochure. Introducing the line through trade shows, point-of-purchase displays and a retailer-focused sales force is putting the fledgling brand into consumers' hands.

"We educate the retailer who educates the customer," says Stacy Saunders, Wind River's sales and marketing manager. "RYO customers can get premium tobacco, a bigger selection and save money." What's not to like? Wind River, which plans to launch a new, all-natural, flue-cured tobacco line in late 2004, also produces Nashville cigarettes.

While many agree that high prices are initially what motivates smokers to try rolling or making their own cigarettes, the business is evolving. In the near future, these same companies may be catering to a customer who is interested in quality, as much as saving money. And then there's the satisfaction of having made a professional quality cigarette that's good enough to be enjoyed with friends. RYO/MYO converts, however, are generally existing smokers looking to save money or try something new - the main reasons why the phenomenon has had a steady base in Europe, where tobacco taxes have almost always been astronomical. Competition can come from cheap cigarettes and various low-to-zero-tax merchants - factors currently hurting the European RYO/MYO business. Nor can anyone say how government regulation will impact this business. Focusing on providing quality blends and building reliable brands, however, as well as economic advantages, may help keep the industry growing at a healthy pace.

"It's all about the blend," states Franklin Rouse, an eighth-generation tobacconist and president of Rouseco, Inc., located in the tobacco stronghold of Kinston, NC. Noting growing consumer demand for his Golden Harvest family of blended tobacco, Rouse says, "They may have initially tried it to save money but they stay because of the blend." Rouseco distributes through a wholesaler network to retail outlets and keeps an industry presence through steady trade advertising. "People can see and taste the quality," he says. "That's what ultimately keeps them coming back."

Barton Laws, vice president at Cincinnati-based American Western Cigars, parent company of House of Windsor, has been in the RYO business for 11 years and observes that it has gone from strictly a "mail-order item with very little attention paid to it," to something that's now receiving growing consumer notice.

A Rising Tide
"Rising excise taxes in 1998 created an overnight boom for the business," says Laws, who agrees that economics initially motivate a customer but then the attractiveness of the blend takes over. "Smokers want to save money but smoke quality," Laws says. He does add, however, that frequently, after consumers have had a chance to absorb manufactured cigarette price increases they may return to buying the brands they smoked before the latest price hike.

"Price is the motivating factor for the traditional pack smoker to switch to RYO or MYO," says Kevin Dunn, executive director of trade marketing at Robert Burton & Asc., Ltd., in Fairfield, N.J.

"Consumers tend to be very brand loyal," Dunn continues. "Their initial trial shouldn't be unpleasant. Retailers and manufacturers need to provide enough product knowledge and demonstration to achieve a comfort level and satisfaction that their decision to switch was the right one."

Utilizing traditional means, H.J. Bailey Co., of Neptune, N.J. grows demand for its products with direct-mail flyers, faxes, website and e-mail marketing. Its tell-a-friend efforts have been marginally successful, but discounts help make new sales a reality, especially for new products, according to Larry Diamond, a company buyer. H.J. Bailey also relies on a self-made 5,000-name mailing list and uses brokers in other states to make retailer calls.

"RYO usage was predominantly a factor of fixed income well into the 1990's, skewing to older consumers," says Mary Beth Glynn, marketing director at Republic Tobacco L.P., in Glenview, Ill. "Otherwise, it was more of a retro-practice among college-age smokers that continues with premium tobacco. Research shows that about 75 percent of the market is aged 40 or over. While income is still a factor, usage is not confined to lower-, fixed-income sectors. In the U.S., usage is increasing in higher cigarette-tax states and locales."

"The only demographic trends we notice," says Stephen Gillis, marketing director at HBI Tobacco in Phoenix, Az., "are in the states with ridiculously high tobacco taxes. These are the areas where RYO/MYO will save the consumer significant amounts of money and where we have noticed a sales increase. When taxes increase on manufactured cigarettes it seems to help us. More and more people realize the amount of money they could save by switching to RYO."

Rudiger "Roger" Stuhlmuller, director of sales and marketing at Gizeh of North America, Brea, Calif., agrees. "Every time there's a tax increase our business goes up." If difficult economic times get smokers to try RYO/MYO, the question then is, what will make them stay customers?

The Joy of Rolling
"Either you're looking for a better cigarette, which both RYO and MYO offers," notes Stuhlmuller, "or you're looking for the tremendous cost savings, or both. Most RYO smokers roll because they enjoy the pleasure of rolling their own cigarette. MYO smokers make their own because it saves them a great deal of money. Many also have turned to RYO and MYO because they enjoy the simple pleasure of a handmade cigarette. Word-of-mouth plus knowledgeable smoke shop and outlet owners and employees are our best marketing."

Darren Thibodeau of Kretek International, Inc., in Moorpark, Calif. has broken the market into two main camps. "There are really two segments," he says. "Value-priced and premium. In value-priced RYO, older and less affluent smokers are the best customers. But fourth-tier cigarettes have made great headway into this segment because the prices are close. As for premium RYO, sales seem to be slowly increasing as the younger, affluent smoker looks for higher-quality products. Many Europeans are continuing to smoke premium RYO. Sales are increasing in this market and price is not an issue."

What type of marketing best promotes these products? "Price," Thibodeau says without hesitation. "Buy-one-get-one-free, etc. Products priced well below the leaders are taking market share. MYO products are increasing as well because of the amount of new RYO large bags that are available. This has been the trend over the past five to six years." Bugler and Top are making headway in the value segment, notes Thibodeau, while Bali Shag and Samson are aimed at the premium marketplace. In-store demonstrations can also help sales by showing smokers how simple making a cigarette can be.

Paper Profits
Within the last year Robert Burton has introduced several new papers. For RYO fans, it launched Joker Pure Hemp 1 1/2 and E-Z Wider Pure Hemp 1 1/2, which are made from natural hemp fibers. Also added was Joker Orange King Size - a very thin, strong and slow-burning paper. These produce less ash residue and paper taste and have been developed from customer trends and consumer feedback.

"More price-conscious consumers are demanding more bang for their buck," says Gillis. HBI Tobacco makes Elements, Zen, and Rollies rolling papers and accessories, including tube injectors and shooters. HBI is also offering flavored and printed rolling papers. "This gives a vast amount of choice to roll your own and makes a statement," notes Gillis.

"Once people have experienced RYO/MYO they also are able to see the amount of options they have," notes Gillis. "From flavored papers, tobacco wraps, and pre-rolled blunts to more traditional rice or hemp papers, the options are endless. To make the transition even easier there is a plethora of rollers, shooters, and other accessories that make rolling your own a joy."

Equipment: Reliability Is #1
The MYO folks are seeking functional equipment and are generally finding it in the makes and models that have served them well over the years and have established reputations with retailers and end users.

"Accessories for MYO/RYO are booming, particularly filter tubes and injectors," says Glynn. "As more consumers move from higher-priced, tailor-made cigarettes, MYO/RYO manufacturers are providing size, variety and taste options." Republic offers TOP injectors in king and 100mm sizes, as well as tubes plus full-flavor and light varieties.

Cigarette-making machines (a/k/a injectors) are becoming more and more sophisticated, with models ranging from $5 to over $75 retail. Some 50 different models are on the market. It takes about 30 seconds to make a cigarette with a tube and some models produce two at once. Two dollars will buy 200 tubes and a six-ounce bag of mid-range tobacco, enough for about 200 sticks (one carton). Total cost is about $8. Five-pound bags of mid-grade tobacco, about the size of a pillow case, can retail for about $125. Not counting the one-time purchase of the machine, a carton of cigarettes can be made for about $10 in the time it takes to watch a 30-minute television program.

"While there were just a couple brands of filter tubes a few years ago," says Glynn, "now it is not uncommon to see five or six different brands at smoke shops. Beyond price, consumers are finding that RYO/MYO gives them total control of the quality, size, packing, and type of cigarettes they make."

"Electronic machines are on many people's wish lists to increase personal production but I'm not optimistic that it'll happen," says H.J. Bailey's Diamond. "Other mechanical developments are lifetime warranties and more durable machines. Cigarette companies may complain individuals are becoming producers if they crank out cigarettes with automation and the government may agree."

"With the proper point-of-sale and a little education both retailers and consumers have come to realize that the Rizla cigarette-size tube is in line with factory-made cigarettes, delivering similar draw and taste," says Barton's Dunn. The introductory phase of one of their launches includes a starter kit, packing a 200-count box of tubes, a cigarette pack to store finished cigarettes and a free injector machine as an incentive to make ease the transition."

"There are a few companies working on electric tube injectors but no actual launch dates have been set," says Gizeh's Stuhlmuller. "I caution everyone about electric injectors as a quick way to open the door for more government control and taxation."

Rolling the Future
While RYO/MYO's future seems bright, there are obstacles. Brands like Republic's TOP Cigarette Tobaccos and accessories, DRUM Premium European Style Tobacco and its new Gambler discount bags, are MSA-protected, unlike many of the newer contenders which may suffer as MSA regulations become more strictly enforced -- returning a larger market share to established brands.

"While the RYO business continues to evolve," notes Dean Rouse, "the biggest change is the entrance of non-tobacco people seeking to capitalize on current demand for RYO products. Every day it seems like another garage-type operation is started with many of them non-compliant."

Rouse charges that some new start-ups have produced misleading advertisements but expects the life spans of these businesses to be very limited once states' attorneys general catch up with them.

"The biggest obstacle is the lack of enforcement by MSA states and their failure to properly regulate and work with the compliant tobacco companies," says Dean Rouse, who adds the government delays and other issues are hindering the growth of compliant RYO companies. "The states and National Association of Attorneys General lack the knowledge and manpower to properly enforce the Master Tobacco Settlement."

But despite the controversy, the price- and quality-conscious consumer should remain satisfied with RYO/MYO products.

"Our consumers are those looking for savings without sacrificing quality and seeking alternatives to factory-made cigarettes," says Dunn. "As 80 percent of smokers in this country prefer filtered to non-filtered cigarettes, tubes would appear to be the logical alternative. This process is relatively new in the United States and based on feedback from Europe, the tube market is exploding. We anticipate this trend will spread to the US." "The RYO/MYO surface has barely been scratched," says Stuhlmuller. "Once Americans catch on to what Europeans have been doing this industry will flourish. I have yet to talk to either an RYO or MYO smoker who won't agree that what they produce tastes better and saves them lots of money."