Editor’s note: This article was first published in November 2011. In 2012 US federal law (the MAP-21 transport act) classed operators of roll-your-own machines as tobacco manufacturers, which largely closed this loophole, so the business model described may no longer be viable.
There are some legal loopholes around the sale of cigarettes. Four American entrepreneurs have taken advantage of this legal grey area to open the first shop that sells tobacco at a much lower price, mainly because it isn’t so heavily taxed. The shop doesn’t sell cigarettes at all, but paper tubes and bags of natural tobacco. What is this business idea about, and what makes it profitable?
When you buy a pack of cigarettes, the price varies from country to country, and it’s worth knowing that it’s higher or lower depending on the tax levied in that particular country. One way to make it cheaper is not to buy the manufactured product. This shop in New York City doesn’t sell packs of cigarettes. Instead, customers make their own using more than 20 machines that fill the cigarettes and as many again that seal them once they’re filled.
According to the four entrepreneurs, the average price of a pack of cigarettes in the United States is 14 dollars. A customer who walks into their shop not only gets a much cheaper pack (3.99 dollars), but also a more natural product, since it doesn’t contain as many additives as conventional cigarettes usually do.
This business idea has already stirred up controversy in the United States, because it’s obviously a way of avoiding part of the tax. The entrepreneurs insist that they don’t sell cigarettes: they offer a service so that customers can make their own. Even so, they do sell the customer the bag of tobacco and the paper “tubes”. The cigarettes work out cheaper for the customer because a bag of tobacco is taxed less heavily than a pack of cigarettes.
It takes a customer about 5 minutes to make a pack, and the savings are considerable. So far it has been a profitable business, to the point that the entrepreneurs are looking for investors to keep expanding across the country, and they may turn their business model into a franchise.
The idea could certainly be taken further. You could deal directly with small tobacco growers and buy from them, so that the only tax paid would be on the commercial transaction within the same country.
It’s a matter of checking how permissive your country’s laws are to see how far this business would be viable, because as a business it has all the ingredients for success: you have ready-made customers (smokers), you have a crisis that forces people to look for cheaper products, and you have a product that is healthier and less harmful than your competitors’. So if the law allows it, you have a great business. What do you think of this idea? You can visit the Island Smokes website.
Featured image: Elf Bread, CC BY-SA 4.0, via Wikimedia Commons.
