Cigarette manufacturing profit margins are just about to get squeezed again in the developing Fire-safe cigarette debacle.
To start; fire-safe paper – aka LIP paper – costs 6-9 times as much as regular cigarette paper. This means in the range of $60 – $90 per bobbin. This assumes you can find a source.
Next comes the testing required to demonstrate compliance with regulations – Laboratory testing can run $8,000 and if your product doesn’t pass – the exercise needs to be repeated.
Last, and this one will become a major issue for the smaller independents, is annual registration and compliance fees levied by each State.
These fees vary considerably. Some are levied by brand others by SKU and are $250 – $3,000 per brand / SKU – depending on the State. For now this cost is around $500,000 if you have 4-5 brands and register them in those states requiring FSC cigarettes.
You can expect these fees to increase and become more consistent between States. This will increase to several million dollars a year in registration fees.
The fees will increase the fixed cost of compliance and registration. Operating margins will be hit and for smaller operations this may be beyond their means – ultimately contributing to their demise or consolidation.
Fair? What do you think? What about competition?