Swedish tobacco specialty snus sets sights on U.S. market

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(Reuters) - For Scandinavians snus is as Swedish as IKEA or ABBA, a popular and now elegantly-packaged smokeless tobacco that has transformed its image from a farmers' staple to a habit of slick executives and Stockholm hipsters.

But the future for main manufacturer Swedish Match may hinge on efforts to convince U.S. authorities these small pouches, banned on health grounds in the rest of the European Union, are less harmful than most other tobacco products.

The strategy, closely watched by the tobacco industry eyeing alternatives to traditional cigarettes, may be key for an iconic 99-year-old Swedish company seeing its dominance challenged in its domestic market, where some 285 million cans were consumed last year in a country of 10 million people.

"It could potentially be an important catalyst," Swedish Match CEO Lars Dahlgren told Reuters, referring to an application with the U.S. Federal Drugs Administration (FDA) to reclassify one of its premium products as a lower health risk for consumers than cigarettes.

"We consider it a milestone. It is an essential part of our strategy."

Swedish Match is pushing for the "modified risk" status created by a 2009 U.S. law, the first application to be considered for such a designation.

Snus differs from snuff, a dry powder often sniffed through the nose. Snus is popular in Norway and Sweden and has grown from almost nothing to some 50 million cans sold in the United States last year. However, it has been banned in the European Union due to concerns over mouth cancer.

Wedged under the upper lip for a nicotine hit, it is part of Swedish culture. When Sweden joined the EU in 1995, it was granted exemption from an EU snuff ban. Voters may never have accepted membership if any snus ban had extended to Sweden.

The U.S. push is part of a move by the company to promote products like snus -- and possibly e-cigarettes -- under a banner of "harm reduction", having sold its own cigarette business 15 years ago.

With profits sliding at home over the last two years because of cheap foreign competition, the U.S. market has become more important as the EU shows no signs of lifting its ban.

"We've been waiting for growth there for a long time but this may be the catalyst to give them the edge," said Erik Bloomquist, a Berenberg Bank analyst. "The problem is that it could take two to three years and that could blunt the impact."

SWEDISH SQUEEZE

While smoking is frowned upon, at business lunches Swedish executives will often have a can of premium snus by their plate and will pop one under the lip during meetings. In bars, young hipsters drink and sample snus at the same time.

"First of all you can do it anywhere," said 24-year-old Ebba Stahre, a Stockholm-based singer. She started using snus at the age of 15, although it is banned at schools and not legally available to under-18s.

"You don't have to go outside to do it. It's socially acceptable," she said.

With a 71 percent market share in Sweden, its traditional home base is being squeezed by foreign competitors like Japan Tobacco and Imperial Tobacco. Only three years ago it had 85 percent of the market.

"I think that snus has a big potential in the U.S. market even without the FDA," Dahlgren said, adding he was looking at a three to five year period to gain market traction, backed by a cigar business offering it infrastructure and access.

With sales of 12.6 billion crowns ($1.7 billion) in 2013, snus accounts for about 60 percent of Swedish Match profits thanks to margins of around 45 percent.

Swedish Match trades at 13.5 times 2015 forecast earnings before interest, tax, depreciation and amortization (EBITDA) on an enterprise value basis.

That compares with an average multiple of 11.2 for seven of the largest international tobacco groups, including Philip Morris International, British American Tobacco and Imperial Tobacco.

The premium reflects speculation that the company could be an acquisition target for the likes of Imperial Tobacco and has a lower litigation risk than competitors.

Swedish Match has sent a 100,000 page report to the FDA to support its request for "modified risk" status for one of its best known snus brands.

It argues snus not only presents less risk of tobacco-related diseases like lung and oral cancer but that many smokers have swapped cigarettes for snus. The Nordic country has some of the lowest rates of tobacco-related diseases in Europe.

"The conversations with the FDA are far better than with the EU," said Sweden Match chief scientist Lars-Erik Rutqvist, who formerly worked in epidemiological cancer research at Stockholm's Karolinska Institute. "In the EU it was all political. In the FDA is has been about science."

A ruling is due within a year. If the decision goes against Swedish Match, the company says it is still set to push sales in the U.S. market, but analysts say it may cut back on marketing expenses that have eaten into profits.

Swedish Match has around a 10 percent U.S. market share for smokeless products, some 4 million cans. A Handelsbanken Capital Markets research note said if just one percent of American men used snus, the U.S. market would be double that of Sweden.

But with snus the company faces intense competition from the likes of Altria Group, with its Marlboro Snus brand, and there is scepticism that consumers will accept any new kinds of products. Americans have a stronger tradition of taking a form of snuff which is placed under the lower lip and spat out.

COST OR QUALITY?

With a new center-left government in Sweden raising taxes on snus to help pay for increased welfare, looking abroad is becoming more important

At a factory in the Swedish city of Gothenburg, dominated by the sweet smell of fresh tobacco, officials highlighted how they filter out impurities. Even moisture from imported fresh tobacco is steamed out and then reinjected with cleaner Swedish water.

"We want to be different, to keep up high standards," said Jerry Bogestrand, head of product development.

But he added that cost, not quality, may increasingly be the main selling point. "The most important issue is its price in the market, and second is quality. The younger generation is far more price conscious," said Bogestrand.

Some analysts argue Swedish Match should exit the U.S. to focus on ensuring it does not lose more of the Scandinavian market. Others argue it needs new products like e-cigarettes, a market worth some $2.2 billion.

E-cigarettes, battery powered inhalers that heat nicotine in liquid form to emit vapor rather than smoke, have led some to argue authorities should accept smokeless products to help people wean themselves off conventional cigarettes.

The company sells e-cigarettes through the brand in Russia, although it is more cautious about the Scandinavian market.

"It's early days for the whole category but cigarettes have helped putting harm reduction on the agenda of regulators. E-cigarettes are potentially a product that could fit in with Swedish Match's portfolio," said Dahlgren.

(Additional reporting by Helena Soderpalm, Robin Vetter, Anna Ringstrom and Johannes Hellstrom; Editing by Keith Weir)