Vector Group Ltd., a Delaware corporation, is a holding company and is principally
engaged in:
the manufacture and sale of cigarettes in the United States through our Liggett
Group LLC (“Liggett”) and Vector Tobacco Inc. (“Vector Tobacco”)
subsidiaries,
the sale of electronic cigarettes (“e-cigarettes”) in the United
States through our Zoom E-Cigs LLC (“Zoom”) subsidiary, and
the real estate business through our New Valley LLC subsidiary, which is seeking
to acquire or invest in additional real estate properties or projects. New Valley
owns 70.59% of Douglas Elliman Realty, LLC (“Douglas Elliman Realty”),
which operates the largest residential brokerage company in the New York metropolitan
area.
Financial information relating to our business segments can be found in Note
19 to our consolidated financial statements. Our significant business segments
for the year ended December 31, 2015 were Tobacco, E-Cigarettes, and Real Estate.
The Tobacco segment consists of the manufacture and sale of cigarettes. The
E-Cigarettes segment includes the operations of the Companys e-cigarette business.
The Real Estate segment includes the Company’s investment in New Valley
LLC, which includes Douglas Elliman, Escena, Sagaponack and investments in real
estate ventures.
Liggett and Vector Tobacco
Capitalize on our tobacco subsidiaries’ cost advantage in the U.S. cigarette
market due to the favorable treatment that they receive under the Master Settlement
Agreement (“MSA”);
Focus marketing and selling efforts on the discount segment, continue to build
volume and margin in core discount brands (EAGLE 20’s, PYRAMID, GRAND
PRIX, LIGGETT SELECT and EVE) and utilize core brand equity to selectively build
distribution;
Continue product development to provide the best quality products relative to
other discount products in the marketplace;
Increase efficiency by developing and adopting an organizational structure to
maximize profit potential;
Selectively expand the portfolio of private and control label partner brands
utilizing a pricing strategy that offers long-term list price stability for
customers;
Identify, develop and launch relevant new tobacco products to the market in
the future; and
Pursue strategic acquisitions of smaller tobacco manufacturers.
New Valley
Continue to grow Douglas Elliman Realty’s operations by utilizing its
strong brand name recognition and pursuing strategic and financial opportunities;
Continue to leverage our expertise as direct investors by actively pursuing
real estate investments in the United States and abroad which we believe will
generate above-market returns;
Acquire operating companies through mergers, asset purchases, stock acquisitions
or other means; and
Invest our excess funds opportunistically in situations that we believe can
maximize stockholder value.
Tobacco Operations
General. Liggett is the operating successor to Liggett & Myers Tobacco Company,
which was founded in 1873. Vector Tobacco is a discount cigarette manufacturer
selling product in the deep discount category. In this report, certain references
to “Liggett” refer to our tobacco operations, including the business
of Liggett and Vector Tobacco, unless otherwise specified.
Tobacco’s cigarettes pursuant to a contract manufacturing agreement.
At the present time, Liggett and Vector Tobacco have no foreign operations.
According to data from Management Science Associates, Inc., Liggett’s
domestic shipments of approximately 8.7 billion cigarettes during 2015 accounted
for 3.3% of the total cigarettes shipped in the United States during such year.
Liggett’s market share decreased 0.1% in 2015 from 3.4% in 2014. Market
share in 2013 was 3.3%. Historically, Liggett produced premium cigarettes as
well as discount cigarettes (which include among others, control label, private
label, branded discount and generic cigarettes). Premium cigarettes are generally
marketed under well-recognized brand names at higher retail prices to adult
smokers with a strong preference for branded products, whereas discount cigarettes
are marketed at lower retail prices to adult smokers who are more cost conscious.
In recent years, the discounting of premium cigarettes has become far more significant
in the marketplace. This has led to some brands that were traditionally considered
premium brands becoming more appropriately categorized as branded discount,
following list price reductions. Liggett’s EVE brand falls into that category.
All of Liggett’s unit sales volume in 2015, 2014 and 2013 was in the discount
segment, which Liggett’s management believes has been the primary growth
segment in the industry for more than a decade.
Liggett produces cigarettes in 117 combinations of length, style and packaging.
Liggett’s current brand portfolio includes:
EAGLE 20’s — a brand positioned in the deep discount segment for
long-term growth re-launched as a national brand in 2013,
PYRAMID — the industry’s first deep discount product with a brand
identity relaunched in the second quarter of 2009,
GRAND PRIX — re-launched as a national brand in 2005,
LIGGETT SELECT — a discount category brand originally launched in 1999,
EVE — a 120 millimeter cigarette in the branded discount category, and
USA and various Partner Brands and private label brands.
Under the MSA reached in November 1998 with 46 states and various territories,
the three largest cigarette manufacturers must make settlement payments to the
states and territories based on how many cigarettes they sell annually. Liggett,
however, is not required to make any payments unless its market share exceeds
approximately 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco
has no payment obligation unless its market share exceeds approximately 0.28%
of the U.S. cigarette market. We believe our tobacco subsidiaries have a sustainable
cost advantage over their competitors as a result of the settlement.
Liggett’s and Vector Tobacco’s payments under the MSA are based
on each respective company’s incremental market share above the minimum
threshold applicable to each respective company. Thus, if Liggett’s total
market share is 3%, its MSA payment is based on 1.35%, which is the difference
between Liggett’s total market share of 3% and its approximate applicable
grandfathered share of 1.65%. We anticipate that both Liggett’s and Vector
Tobacco’s payment exemptions will be fully utilized in the foreseeable
future.
The source of industry data in this report is Management Science Associates,
Inc., an independent third-party database management organization that collects
wholesale and retail shipment data from various cigarette manufacturers and
distributors and provides analysis of market share, unit sales volume and premium
versus discount mix for individual companies and the industry as a whole. Management
Science Associates’ information relating to unit sales volume and market
share of certain of the smaller, primarily deep discount, cigarette manufacturers
is based on estimates developed by Management Science Associates.
Business Strategy. Liggett’s business strategy is to capitalize upon its
cost advantage in the United States cigarette market resulting from the favorable
treatment our tobacco subsidiaries receive under settlement agreements with
the states and the MSA. Liggett’s long-term business strategy is to continue
to focus its marketing and selling efforts on the discount segment of the market,
to continue to build volume and margin in its core discount brands (EAGLE 20’s,
PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and to utilize its core brand equity
to selectively build distribution. Liggett intends to continue its product development
to provide the best quality products relative to other discount products in
the market place. Liggett will continue to seek increases in efficiency by developing
and adapting its organizational structure to maximize profit potential.
Our subsidiary, Zoom, entered the emerging United States e-cigarette market
in limited retail distribution outlets in January 2014 with a cautious plan
to minimize expense. In January of 2014, we announced the national rollout of
our Zoom e-cigarette brand. Uncertainties regarding e-cigarettes are significantly
greater today than they were a year ago and, at this point, the trend lines
do not predict a bright future. In fact, we have seen significant changes in
the e-cigarette market over the past year with disposable e-cigarettes in rapid
decline, rechargeable e-cigarettes appearing to be in decline and open system
vapor products, that feature refillable tanks and use low-cost flavored liquids,
demonstrating mixed results with limited category volume growth but rapidly
declining prices. Additionally, we believe uncertainties related to the regulation
of e-cigarettes, including open system vapor products, exist. Given this backdrop,
our primary focus on the e-cigarette product is to limit risk while staying
prepared to pursue opportunities if they occur.
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