Reynolds Must Alter Its Cigarette Labels

The U.S. Food and Drug Administration (FDA) has ordered Reynolds American Inc.'s (RAI) Santa Fe Natural Tobacco Company Inc. segment to modify the language used in its Natural American Spirit cigarette product labeling, advertising and promotional materials. The ruling follows a warning sent out in August 2015 demanding Reynolds, Imperial Tobacco Group and Sherman's 1400 Broadway NYC Ltd. prove that their "natural" and "additive-free" labeled products were really less harmful in order to keep marketing them that way.
 

Changing Labels Could Alter Profits
The latest FDA ruling could hurt Reynolds' profits as it has heavily marketed the new premium-priced products as natural in order to retain an increasingly health conscious consumer cohort. An overall shift to health and wellness, coupled with government regulation, anti-smoking campaigns, and cigarette taxes, have led traditional cigarette and tobacco giants to to innovate with products "across the harm spectrum." (See also: Tobacco Giants Push New 'Alternative Products'.)
 

The Natural American Spirit brand is the "fastest growing super-premium cigarette brand and is a top 10 best-selling cigarette brand," according to Reynolds' 10-K filing with the Securities and Exchange Commission.
 

In 2016, Reynolds' Santa Fe segment held 2.2% of the U.S. retail cigarette market, generating full-year operating income of $546 million. Since the firm sold off its international rights to the Natural American Spirit brand to Japan Tobacco Inc. (JAPAF) last year, the firm remains more reliant on the U.S. market. Reynolds says removing "natural" and "additive-free" from labels "could have an adverse effect on the sales of such cigarettes and, as a result, on the results of operations, cash flows and financial position" of the company as a whole. The agreement dated Jan.19 and disclosed in a public filing in a class-action lawsuit does not bar Reynolds from using the words "organic," and will not affect the brand name.
 

Plaintiffs: Firm Misled Consumers
Reynolds' critics say the FDA agreement doesn't go far enough to protect consumers. A class-action lawsuit in June 2016 indicates Reynolds misled consumers to believe their products were less harmful, safer and less carcinogenic than other tobacco companies. "Defendants were then able to charge more for Natural American Cigarettes than competitors charge, and consumers were willing to pay the higher prices for the supposedly healthier and safer cigarettes … The cigarettes are not healthier, safer or less carcinogenic," the case states.
 

"Our research shows that a majority of Natural American Spirit smokers incorrectly believe that their cigarettes are safer than other cigarettes," said Robin Koval, CEO and president of anti-smoking nonprofit Truth Initiative. Koval says that the organic claim is the most influential to smokers and that the agreement does little to address the "widespread and highly dangerous misperceptions."