Remember when you first saw an electric car? Perhaps, if you are a little older, it was one of the original Taylor-Dunn’s, which more closely resembled a golf cart and mirrored the performance of one.
Or maybe it was the Chrysler TEVan, an ungainly 1990’s vehicle that was based on the Town & Country minivan and featured a nickel-cadmium battery pack.
If those things seem a long way from a tony Tesla Model X, it’s because they are.
The point is that not only does change require a precedent, it’s that things do change. What is required is someone with a simultaneous sense of history and sense of opportunity.
Setti Coscarella is a former executive with Philip Morris who is trying to change the way the world looks at smoking. Coscarella is one of those people. He believes his company, TAAT Lifestyle & Wellness (TAAT LIfestyle and Wellness Stock Quote, Chart, News CSE:TAAT) can change the way the world looks a smoking the way Elon Musk changed the way we look at electric vehicles.
Cantech Letter talked to him about patches, gums, lozenges, and Beyond Tobacco™.
Setti, can you tell us how TAAT came together?
TAAT™ was developed by our founder, Joe Deighan, who built an international vaping empire motivated by his personal experiences in seeking alternatives to smoking tobacco cigarettes. As many smokers come to realize, the novelty of smoking alternatives such as vaping can create an initial intrigue… but if your comfort zone is pulling a cigarette out of a pack, lighting it up, enjoying the tobacco taste and smell, seeing the smoke, flicking the ashes, and so forth, no vaping device can come close to replicating those experiential elements even with the same nicotine content as a regular cigarette. It seems this led to the conclusion that legal-aged smokers want the cigarette, but not necessarily the tobacco. As a result, Joe developed Beyond Tobacco™, a proprietary blend of natural plant biomass that tastes, smells, and smokes similarly to or better than actual tobacco despite containing no tobacco or nicotine. The cigarette-style sticks containing Beyond Tobacco™ are known as TAAT™ and are made in “Original”, “Smooth”, and “Menthol” varieties. Preliminary commercialization efforts for TAAT™ began in mid-2020, and I was brought on as Chief Executive Officer at the end of July 2020 straight out of a strategist role at the Canadian affiliate of Philip Morris International. Under my leadership, we added an ex-PMI executive as our Chief Revenue Officer as well as a couple of former “Big Tobacco” players as advisors, and we got straight to work in forming a business model for TAAT™ to credibly position it as a better choice for legal-aged smokers, and a competitive product in the tobacco industry.
What is your background and how does it fit with the vision of the company?
Initially, I held roles in investment banking and private equity. I also co-founded The Gentlemen’s Expo, a well-known men’s interest event that was held annually in Toronto before being bought out by an expo producer. After that, I joined Philip Morris International as a strategist in their Reduced-Risk Products (“RRP”) category, where I created an internal business unit for RRP in Canada and led initiatives that caused our pipeline of leads to grow fivefold. It likely goes without saying that after spending years introducing alternatives to tobacco cigarettes to market for the world’s largest tobacco company, this fits into the vision for TAAT™ as a product that has been engineered to achieve similar goals for legal-aged smokers, but without any nicotine.
TAAT’s products look and feel like traditional cigarettes. What is the logic behind that decision?
Having led numerous focus groups for PMI, I have spoken to thousands of legal-aged smokers who have a general consensus that smoking can be just as much about the physical and perceptible sensations as it is about consuming nicotine. Many have tried patches, gums, lozenges, or other methods for delivering nicotine and reverted back to cigarettes all because these alternatives could not provide any of those sensations. So if the alternatives can provide nicotine, but smokers still go back to cigarettes anyway, that says a lot about what they really want. Instead of trying to come up with yet another gimmick for delivering nicotine in a non-traditional way, TAAT™ was created to deliver something radical to legal-aged smokers… comfort. Countless iterations of “nicotine in alternative formats” have been brought to market, though the lion’s share of the tobacco market still consists of tobacco cigarettes to this day. Thus, we chose to focus on the format that legal-aged smokers seem to love, as opposed to nicotine which was hardly compelling in the alternative formats anyway.
What is “Beyond Tobacco?” How do you produce it and how much can you produce?
Beyond Tobacco™ is our proprietary formulation of base cigarette material (“BCM”) which looks, smells, tastes, smokes, and even sounds like tobacco, despite containing zero tobacco and zero nicotine. We have a 14-step process for producing Beyond Tobacco™ in our Las Vegas, NV facility, where we convert American-grown biomass into the BCM that characterizes the TAAT™ product. Based on our current production line capacity, we could produce up to 2,400 lb / 1,088 kg of Beyond Tobacco™ per day, which is enough to manufacture approximately 6000 ten-pack cartons of TAAT™.
You have stated that your products are intended for use by legal-aged smokers who aspire to leave nicotine behind. Is this the sole customer base you are going after, or are you planning to cast a wider net than that?
You are correct that the customer base we want to have consists solely of legal-aged tobacco smokers. This is a good opportunity to reiterate that TAAT™ is a better choice for legal-aged smokers who want to keep the experiences they love while leaving nicotine behind. With that being said, our objective is to solve an existing problem, not to create a new one. Yes, this may create a ceiling in terms of how much we can possibly grow, but considering there are hundreds of millions of legal-aged smokers around the world this is by no means a “niche” or “small-time” market of potential TAAT™ users.
Isn’t TAAT really up against it, being a small company in the land of giants?
The short answer to this question is yes. The tobacco industry is dominated by five global corporations; Philip Morris International, Altria Group, British American Tobacco, Imperial, and Japan Tobacco. These firms collectively have hundreds of billions of dollars at stake when it comes to keeping nicotine in demand as a general thing. Furthermore, these firms compete fiercely against one another through methods such as buying visible shelf space in stores, offering incentives to tobacco distributors to not take on new products as a way of obstructing launches, acquiring patents for the sole purpose of impeding competitors, and lobbying for legislation to prevent competitors’ products from being successful. It is an absolutely cutthroat industry, and if “Big Tobacco” firms can get rattled by each other, a smaller firm like ours is arguably even more vulnerable.
The long answer is that it hasn’t stopped us. We knew from the beginning that going after the USD $814 billion global tobacco industry is an ambitious gameplan, which is why veterans of the tobacco industry such as myself and our Chief Revenue Officer Tim Corkum were brought onto the company’s executive leadership, and advisors such as Michael Saxon and Kit Dietz were appointed to the advisory board to help guide us. We have developed our playbook to think exactly like a tobacco company, not just in terms of how to build market share, but also to anticipate their competitive moves so that we can mitigate those risks before they would stand to materialize. We have also worked hard to lay all of the groundwork that can enable us to scale globally… production through a contract manufacturer that also produces cigarettes for global tobacco brands, trademark applications filed in more than a quarter of the world’s countries, and standardized production line layouts for making Beyond Tobacco™ at scale while protecting our trade secrets. Making TAAT™ a viable competitor in this “land of giants” requires a patient and highly disciplined approach to building and protecting market share, as well as making it profitable. While most small firms would not stand a chance in this space, I believe we have built an excellent strategy to overcome any of the hurdles that would ordinarily be faced by early-stage companies in the tobacco industry.
What is your retail strategy?
TAAT™ is positioned as a “tobacco” category product, and as such we are selling it only in stores that are licensed retailers of tobacco cigarettes. Right now, our strategy is to focus on building market share in the state of Ohio. We chose Ohio as our initial market because it’s a sizable market (more than 11.5 million people, seventh most populous U.S. state), but it’s geographically small enough to contain. This is a common strategy used by CPG firms. Additionally, there is a high smoking incidence rate in Ohio which is about 50% higher than the national average (20.5% of adults in Ohio versus 13.7% nationally in the United States). Furthermore, Ohio borders on five states with a combined population of more than 35 million people, which can enable us to expand organically in that region. Based on learnings we pick up from doing business in Ohio, we intend on applying what we have learned to new markets in the United States and potentially internationally.
The key to our retail strategy is aligning where TAAT™ can be bought with the shopping patterns of legal-aged smokers. If they go to a convenience store or gas station to buy a pack of tobacco cigarettes, and our objective is for them to choose TAAT™ as a replacement for those tobacco cigarettes, it becomes a logical priority for us to sell TAAT™ in those places.
What kinds of gross and net margins are you generating and how do you plan to improve them?
I cannot disclose exact numbers at this time, however I can say that we have healthy margins which can be attributed to factors such as cost-efficient in-house production of the Beyond Tobacco™ base material, favourable pricing from our contract cigarette manufacturer who makes and warehouses TAAT™, and lean advertising expenditures. Margins could be improved at a later date by taking measures such as migrating to direct-to-store distribution or selling TAAT™ straight to legal-aged smokers through e-commerce. Furthermore, our margins could also potentially be improved if we benefit from economies of scale from greater volumes of product turnover.
Tell us a bit about the success you are having in the Ohio market. Are you using it as a test market?
As detailed above, we chose Ohio as our initial market in line with standard practice for CPG products, which is to focus on a selected area that best represents the greater population of surrounding areas. More than one out of five Ohio adults smoke tobacco, so it is not surprising that we have had an abundance of interest from legal-aged smokers who have purchased TAAT™ in Ohio. More importantly, many have also gone back to make repeat purchases of TAAT™. We are observing the performance of TAAT™ in Ohio very closely as we seek to develop launch strategies which we could use in new markets.
What do you hope to accomplish in the next year?
In 2021, we hope to gain further traction in Ohio and potentially in other U.S. states. Ideally, we will also have established sales programs with key accounts (e.g., large convenience chains) to strengthen the in-store presence of TAAT™. It is important to note, however, that we do not plan on rushing any of our expansions. Because 2021 will be our first full year of selling the product in the United States, we will have the opportunity to observe sales and demand patterns throughout an entire calendar year, which might help us to shape our strategies for subsequent years. The approach we are taking to executing our launch is just as disciplined as the approach we took to planning it, and we believe that discipline can contribute to long-term growth of TAAT™ as a better choice for legal-aged smokers around the world.
TAAT is an annual sponsor of Cantech Letter