Based in Copenhagen, Denmark, Scandinavian Tobacco Group (STG) is a leading manufacturer of cigars and smoking tobacco. The Company is the market leader in handmade cigars in the US, in machine-rolled cigars in the US and Europe, and in pipe tobacco in Europe. As a first & foremost cigar company, STG has the vision to become the undisputed, global leader in cigars. Nevertheless, on the Next Generation Products side, STG has made good inroads into the highly-competitive Sweden and fast-growing UK nicotine pouch markets with its XQS brand. We met with Niels Frederiksen, CEO of Scandinavian Tobacco Group to hear more about the STG’s plans, the cigar category and XQS brand.
Link to Scandinavian Tobacco Group: Interview – Part I
Tobacco Insider: Thank you, Niels. Now, if we stay a bit on the Mac Baren acquisition, that was the big event of last year. The equation in Mac Baren acquisition is kr.150 million of integration cost and kr.125 million of one-time investments to deliver kr.150 million annual ongoing synergies. In this type of equation, the cost side is always more certain. You know, what is planned is going to be spent. But the benefits are almost always less certain. What are the main contributors of the Mac Baren synergies and to what extent do you feel confident about the kr.150 million annual synergies to be realized?
Niels Frederiksen: I think this acquisition is a very good example of how valuable a good transaction is. There are certain synergies that are maybe easy to identify and to take out. For instance, cost synergies; so, we don’t need two salesforces in Germany or in Denmark and so on. The other part, which is more difficult to see and which will also take a little more time for us to be able to show investors is that when we add two portfolios together, we actually make quite a serious effort in rationalizing the portfolio to make sure that we don’t have two brands or two blends that do exactly the same for the consumer. We try to optimize and rationalize the portfolio to have a portfolio that’s basically more cost efficient and still offer the consumers the choice that they’re expecting. That is a process that will take all of 2025 to implement and we are, of course, watching what consumers do. Do they switch to our products? Do they switch to a competitor product and so on. But we’re still very confident because our market share is so high, especially in pipe tobacco, that we will retain most of the consumers.
Yes, we do have to invest in extending our pipe tobacco and smoking tobacco factories to make room for the volume from Mac Baren. But, the other part which is important is that but we also use this to basically drive cost efficiency – which has value not only for the Mac Baren assortment, but also for our own products. This is why people sometimes ask us: “why don’t you make more restructuring programs or more efficiency programs?” I keep saying whenever we buy something, we actually restructure for higher efficiency. That’s part of the way we do the business and that’s also what we expect for Mac Baren.
The main thing we paid for when we bought Mac Baren, was the pipe tobacco and smoking tobacco business. But Mac Baren also has a nicotine pouch business which has been quite successful and also quite entrepreneurial in how they built the business. Most of all, they had actually built a small factory. All our nicotine pouch business up until now have been outsourced to third parties because we basically said we’ll not build our own factory until we’ve proven our ability to compete in this segment. But now we have a small factory, and it means that we can strengthen our technical product knowledge, our product development knowledge and we can start to think about more easily, you know, what proportion we will make ourselves going forward and what proportion we will continue to have third-parties make for us. I think we’ve added some flexibility in this area that is also going to be quite valuable for our nicotine pouch business.
When I look at the Mac Baren transaction, it’s one of the transactions I’m the happiest about because it’s done a lot of good things and it’s also a transaction we talked about for 35 years until it finally materialized. That is also an achievement in itself.
Tobacco Insider: 35 years. So, it was a marathon, not a sprint.
Niels Frederiksen: It was a very long marathon.
Tobacco Insider: Niels, obviously, XQS nicotine pouches is the rising star of STG’s portfolio. The product’s performance is spectacular – with great progress achieved in Sweden, which is a highly competitive market, and in the UK, which is a very fast growing market. First of all, what’s your take on the category’s prospects in terms of growth? And, then, what’s your ambitions in this dynamic category?
Niels Frederiksen: It’s a good question. But it is also a difficult one to answer. I’ll say that our initial ambition with nicotine pouches is really to build a meaningful business for STG. It’s a business that at least reaches a billion Danish kroner. If the business doesn’t get to a billion Danish kroner, then it’s not big enough for us to give it the attention it deserves, which is the first ambition that we talk about. The degree to which we can do this or not, I’ll let other people to speculate on it. We try to keep doing the right things and, as you point out, XQS in Sweden has been a tremendous success and is past the 10% market share there now. The brand has really strong properties when we do the brand equity research, and this was almost the most important thing for us to test in Sweden. Could we buy a brand that was doing well in a small part of the trade channels? Scale it up, you know, give it more support and do well. Right now, that’s looking positive, as you said, in a competitive market. We are very pleased about that.
The second thing that we need to be able to do is to expand the geography into new countries. And here you can say our initial focus has been very much Scandinavia and the UK – which maybe is the most important test for us. We are a niche player in the UK, but we have added more sales reps to be able to cover the independent trade. And I think 12 months from now, we will have a better feel for whether we can take a product like XQS to the UK and become a reasonably significant player. And again, it’s important to remember that we don’t see ourselves as head-to-head competing with Velo or ZYN. Our ambition in this category is to be the larger among the smaller players.
If the market continues to grow, you can still be a profitable and attractive player even though you’re not the market leader. We think that nicotine pouches have that potential to grow. We are letting the current evidence decide our long-term ambition. So right now, we are still in what I call the proof-of-concept period where we’re testing the concept, we’re testing our ability to expand into new geographies. But we also doing it in a relatively small geography. Everyone wants to go to the US and everyone is looking what happens in Europe. We also looking at those things and potentially these are the things that can change the size of the business over time. But initially we are trying to just prove that we are owner of a good nicotine pouch business and then we will let that evidence determine the longer-term ambition.
Tobacco Insider: Staying on the nicotine pouches and longer term ambitions, following two acquisitions, XQS nicotine pouches and Mac Barren, Scandinavian Tobacco ended up with a rich portfolio of 4 nicotine pouch brands: XQS, the internally developed STRÖM, Ace and Gritt. We know that STRÖM is recently discontinued. Looking forward and also considering that the larger companies have consolidated their nicotine pouch portfolio under one brand, do you see any benefits in having multiple brands in the portfolio in terms of product and price positioning. Or, would you consider consolidating them under one brand?
Niels Frederiksen: We are also of the view that that right now there has to be a lead brand in nicotine pouches and XQS is our lead brand. Ace and Gritt have certain market positions in some markets where we will continue to support them. We will then have to decide whether those brands have potential on its own or whether they should be migrated into XQS. But when we think about – let’s call it our brand strategy for nicotine pouches – we are also subscribing to the idea that one brand needs to lead the development. And then the other brands may or may not exist for tactical reasons. I think it’s still too early to say whether we would have them around three years from now, but we are certainly primarily occupied with growing XQS.
Tobacco Insider: Thank you, Niels. Next, I’ll ask a few questions that will take us to U.S., which is obviously the key market for both cigars and nicotine pouches and thereby for Scandinavian Tobacco. First, nicotine pouches. Could it be possible that we see XQS in the U.S. market in the next three to five years. The presence in the U.S. market requires Scandinavian Tobacco to go through the PMTA process of U.S. FDA and obtain a marketing authorization. How confident do you feel in terms of capabilities of STG to successfully go through this process?
Niels Frederiksen: I think it’s important to say that everyone would like to be active in the U.S. market on nicotine pouches. But it is a difficult market to access, and we don’t have a solution today. So, if you ask me if we could launch something in the US today? The answer is no. But of course, like many other companies, we are looking for options to be able to do so – not necessarily because we will do so considering the associated significant cost, but to have the optionality. However, I can’t really go into details about this.
I think it’s important to remember that we have quite a successful relationship with ZYN in in e-commerce. We know the category in the U.S. quite well and we understand some of the consumer aspects. We also don’t have national distribution capability in mass market, but we have a fairly wide distribution of, for example, our smoking tobacco or pipe tobacco. We certainly have U.S. on the radar, but we’re not in a hurry. I think it’s also a market where it’s very easy to lose money. We are certainly looking at it and trying to understand what it will take to get there.
Tobacco Insider: OK, let’s stay in the U.S. and let’s stay with the growth drivers, but switch gears. One of the growth drivers outside nicotine pouches is the exclusive retail stores: cigar stores in the U.S. There are 13 of them now. Exclusive retail is a costly undertaking in terms of owning and operating those stores. And there is also the fact that U.S. cigar business is declining after the COVID peak. When we put together these two facts, do you still see this as a Growth Enabler – a key initiative that’s sustainable and profitable in the long term? Having said that, obviously, the reported margins of over 25% is above the overall STG average, but how does this core initiative look like going forward?
Niels Frederiksen: I love our retail stores. It’s, first of all, the most obvious place you can go and engage with consumers, and you can see what drives handmade consumption and so on. The stores are just a fun place to be and I can understand why they are successful. But, as you said, it consumes capital and capital is always something we discuss where to use.
What we’ve been doing over the past 1.5 years is trying to become even sharper on selecting the right locations because if we can raise the likelihood of being able to predict what a certain store can deliver, then it also makes it easier for us to allocate the capital. We have deliberately not expressed a certain ambition on the number of stores; there maybe be room for 30 stores, but there could also be room for more. We just don’t know. One of the reasons we like the retail stores is that, as I said in the beginning, every new smoker starts at retail by somebody bringing them into a retail store. If the retail environment is modern, contemporary, inviting for people of both genders, then it’s good for the industry. I see it as a promising business with potential, but it will only get capital if it continues to perform well.
Tobacco Insider: Thank you, Niels. We talk a lot about the organic growth, let’s move a bit to the inorganic growth side. STG made two major acquisitions in the last two years: XQS nicotine pouches and Mac Barren. The former one is in the domain of new nicotine products. The latter one is mostly in the domain of traditional tobacco products. So a few questions here: what are the drivers of your inorganic growth strategy in terms of acquisitions? Can we expect more going forward and what’s your criteria in screening the market? Also, the cigar business of Philip Morris International is on sale. Could it be a possibility that in the future we see a business combination between Scandinavian Tobacco and “Swedish Match Cigars Incorporated” [although that company doesn’t exist today, PMI will probably carve out a company as such]?
Niels Frederiksen: Let me say that we have been doing transactions in one form or shape since our inception. It’s in our DNA and it is what has almost quadrupled the size of the company since 2011. We are also primarily occupied with consolidating the categories we are active in. We like synergy cases, but we – of course – also like to buy stronger brands – so that we can have stronger brand portfolios. We like to build scale and we like to strengthen our geographical footprint. That is where the bulk of our focus goes. XQS was actually the first time we made a transaction that was about growth and we wanted to test whether we could take a smaller brand that was successful and scale it up, and extend geographically. I think that those transactions are not at the top of our list because it is more risky for us. We like the traditional transactions better where we basically strengthen our core businesses and deliver synergies. That is how we think about transactions and our main focus is cigars. But we made a transaction for pipe tobacco last year that really solidified our market leadership.
About your question on Philip Morris or Swedish Match machine-rolled cigars; I don’t really have any comments to that. But I will say that no matter who buys it, it is a difficult transaction. It is still to be seen whether they can successfully divest it or not.
Tobacco Insider: Especially considering that the speculated a billion-dollar price tag is perceived to be a bit high in the light of a declining market. Let’s stay with PMI because another topic that’s related to PMI is the discontinuation of ZYN distribution – which negatively affected your results in 2024 to the tune of 3% of the revenue. Now, the question over there is whether the ZYN distribution is over for good? Or, is this something temporary related to the supply shortage? Also, how your ambition with your own nicotine pouch brands affected this relationship?
Niels Frederiksen: We had a very successful relationship first with Swedish Match and subsequently with Philip Morris. This was never intended to be as fast a growing business as it ended up being. It was about us trying to understand the e-commerce business for Next Generation Products a bit better. For Swedish Match and Philip Morris, it was around obtaining consumer insights in an effective way.
It was a good relationship. I think both parties were happy about it and then, for different reasons, Philip Morris took the decision – on the back of the subpoena they received in the middle of last year – to stop or pause the business in the U.S. But we were able to gain valuable product and consumer insights throughout the period.
Tobacco Insider: Thank you, Niels, for the explanations. I think our readers will feel much more confident about their understanding of the Scandinavian Tobacco’s business and plans. Before we wrap it up, what are the three things you would like investors to keep in mind about Scandinavian Tobacco’s plans and future?
Niels Frederiksen: We are a niche player in the Tobacco Industry; hence, we are much smaller than other listed tobacco companies. And I sometimes feel that people forget that we are actually very strong in the categories where we operate. We have many strong brands. We have many strong market positions and growth opportunities. That’s just a valuable starting point. Why? You can never underestimate a high market share and strong consumer preference. So that’s one thing.
The other thing is that we remain to be a very profitable and cash generative business. And no one, I believe, is better positioned to consolidate the cigar industry than we are. And the final point is: I’m often being asked, ”What is it that we should be thinking about the Scandinavian Tobacco group that we’re not thinking of?”. And I keep saying, one of them is that there are more growth opportunities out there. But many of the growth opportunities are not that easy to get your hands on, and that’s also why we keep trying to build a stronger platform. We are rolling out SAP globally, we try to build our skills, we try to build our scale so that the confidence of the company can go up in our willingness to go out after these opportunities. Because I still think there are many good opportunities out there.
Tobacco Insider: Perfect! Thank you very much, Niels, for your time and for your explanations. Greatly appreciated!
Niels Frederiksen: Thank you for having me.
Chief Executive Officer (CEO), Scandinavian Tobacco Group: Niels Frederiksen
Niels Frederiksen has held various positions in the Scandinavian Tobacco Group since 1999, including Senior Vice President and Executive Vice President, and became the Group CEO in March 2015. Niels is passionate about the tobacco industry and is an avid cigar enthusiast.
Company Profile: Scandinavian Tobacco Group
Based in Copenhagen, Denmark, Scandinavian Tobacco Group (STG) is a leading manufacturer of cigars and smoking tobacco. As a first & foremost cigar company, STG has the vision of being the undisputed, global leader in cigars. STG’s portfolio contains about 200 leading brands, including the cigar brands Macanudo, La Gloria Cubana, Panter, Signature and La Paz, pipe tobacco brands Captain Black, Erinmore, Borkum Riff and W.Ø. Larsen, and fine-cut tobacco brands Bugler, Break, Escort, Bali Shag and Tiedemanns.
Scandiviavian Tobacco Group employs 10,000 people worldwide and sells its products in around 100 markets. STG has sales offices in North America and Europe. In the US, STG has a market-leading position in handmade cigars and, owns General Cigar and Cigars International. Scandinavian Tobacco Group is a publicly listed company on the Nasdaq Copenhagen.
