Lorillard Isn’t Backing Away From Menthol or E-Cigarettes

August 27, 2013, 7:35 p.m. ET

Lorillard Isn’t Backing Away From Menthol or E-Cigarettes

MIKE ESTERL

Murray Kessler, the CEO of Lorillard, America’s third-largest tobacco company, discusses what’s ahead in alternative tobacco products and managing regulatory risk.

Big Tobacco has always faced strong regulatory scrutiny, but no tobacco maker is more exposed right now than Lorillard Inc. LO -0.71% The Food and Drug Administration said last month that menthol-flavored cigarettes likely pose more public health risk than regular cigarettes, a potential precursor to tighter restrictions on minty smokes. The federal agency also plans to propose regulations for battery-powered electronic cigarettes that turn nicotine-laced liquid into a vapor. That makes things tricky for Lorillard, which brings in about 90% of sales from its Newport menthol cigarettes and which paid $135 million last year to acquire blu, a top-selling e-cigarette brand.In addition to making an early bet on e-cigarettes, Murray Kessler, the chairman and chief executive of Lorillard, expanded distribution of menthol cigarettes west of the Mississippi, helping the nation’s third-largest tobacco manufacturer by sales outgrow rivals.

Lorillard isn’t backing away from either category, betting any restrictions would be modest—and that it could block them in the courts if they aren’t. But the company has also begun selling nonmenthol versions of Newport to diversify.

Mr. Kessler, 54 years old, who took Lorillard’s reins in 2010 after heading smokeless tobacco giant UST Inc., sat down at the company’s Greensboro, N.C., offices to discuss the possibility of stronger regulations and why e-cigarettes shouldn’t look like the real thing. Edited excerpts:

WSJ: How concerned are you about the threat of a ban or stiff restrictions on menthol?

Mr. Kessler: The science does not support differential regulation between menthol cigarettes and nonmenthol cigarettes. They’re both bad for you. There is not a higher risk of disease.

It would be a shame if they went down a path and proposed regulations that weren’t based on science and we ended up spending the next 10 years in court. I think it’s a very low likelihood.

WSJ: The government has banned all other flavored cigarettes. Why should menthol be treated differently?

Mr. Kessler: You’re talking about 31%-32% of the market; you’re talking about a $30 billon market. Counterfeiting and smuggling would create an entire new crime industry in the U.S. This would be chaos, the likes of which you haven’t seen since Prohibition.

WSJ: What about data that show a much higher percentage of youth smoke menthol and suggest it’s a gateway?

Mr. Kessler: States with the highest menthol shares in the U.S. by far have the lowest youth usage by far. African Americans that smoke tend to prefer the flavor of menthol but youth usage is lower in African Americans and they start later. I don’t believe the data say it’s any more than a flavor preference.

WSJ: How much tougher do you see the FDA being under Mitch Zeller, its new tobacco chief, who comes with a reputation as a strong industry critic?

Mr. Kessler: I prefer the environment we’re operating under right now because in the past three years there was pleasant conversation but there was no transparency. [Mr. Zeller] met with me right away and he spent plenty of time with me. The topic happened to be electronic cigarettes.

I don’t agree with every one of his points of view. That’s OK. At least let us know where you’re coming from and give us a chance for input.

WSJ: What do you expect to transpire on e-cigarette regulations and how could that affect Lorillard?

Mr. Kessler: It’s a small percentage of Lorillard overall, so we’re talking more about opportunity than affecting the existing company. If you look at the comments that director Zeller has made, that nicotine isn’t necessarily the problem as combustion is, then you would think the regulatory scheme that comes out would be constructive.

We want to capture the behavior smokers like so they can make a viable switch. With an electronic cigarette, you have the potential for massive harm reduction.

WSJ: Right now e-cigarettes can be advertised on TV, unlike regular cigarettes. What do you say to critics who say that’s glorifying smoking again, or normalizing it?

Mr. Kessler: I’m de-normalizing smoking, I’m normalizing vaping. I’m making it so five people are sitting around eating dinner and vaping, and someone smokes and they’re like, “You’re kidding, you still do that?” I realize the cigarette market is 100 times bigger at this point but that’s the vision.

WSJ: E-cigarettes by rivals like NJOY look like a regular cigarette and have the same color. Your e-cigarettes are typically black and look more like a pen than a cigarette. Why are you going in the other direction?

Mr. Kessler: When you’re vaping on a product that looks like a traditional cigarette at a bar, you’re still putting that cigarette smoker into a confrontation because at first glance a waiter or bartender is going to come up and say, “Put that out.” And then you’re going to have to explain it’s an electronic cigarette and it’s uncomfortable. We make a white and a black [e-cigarette]. When we put them side by side in a store, the black outsells the white eight to one.