* Cultivating the 'trying to quit smoking' market
* Snus U.S. volume up 28 pct in 2007-08, cigarettes falling
* Public health experts split on snus health effects-activist

By Emily Stephenson

CHICAGO (Reuters) - The growth of a new smokeless
tobacco product in the United States is nothing to spit at, but
cigarette companies still rely on their standard method for
increasing profits -- raising prices.

The two largest U.S. tobacco companies -- Altria Group Inc
and Reynolds American Inc -- have been expanding
distribution of snus, a type of smokeless, spitless moist snuff
tobacco popular in Scandinavian countries, as they look for
products to sell to smokers trying to quit cigarettes.

Snus has been a moderate hit since Swedish Match AB
brought it to the United States 10 years ago, but
pushing new products has not driven profits enough to shift
tobacco companies' focus away from cigarettes.

Cigarette makers still count on raising prices to earn
profits.

"(Tobacco companies) definitely see smokeless as a longterm
piece of the business," said Morningstar analyst Phil Gorham.
"But don't be fooled ... even though it's a growth category and
cigarettes are in decline, it's still a small part of the
overall business."

Cigarette consumption in the United States shrinks more
than 2 percent each year, according to Euromonitor
International data, but companies such as Marlboro cigarette
maker Altria, Camel maker Reynolds and Newport maker Lorillard
Inc use price hikes to compensate.

That was harder to do in the last year as Reynolds used
promotions to try to grab market share, said Gorham, who
follows tobacco companies at Morningstar.

Gorham expects a 3 to 4 percent price increase from all
three major players this fall.

The price gap between premium brands such as Marlboro and
Camel is smaller than in past years, said Stifel Nicolaus
analyst Chris Growe. Because of that, he predicted increases of
at least 5 cents a pack for premium brands later in the year.

Still, focusing on cigarette prices does not prevent
tobacco companies from trying to increase sales volume overall,
which has led to the appearance of snus (rhymes with "loose")
in convenience stores and gas stations.

Swedish-style snus grew 122 percent by volume in the United
States in 2007-08 and 28 percent in 2008-09, up from a small
base, according to Euromonitor data.

Stockholm-based Swedish Match reported U.S. consumption of
General brand snus was four times higher in 2009 than in 2008.

The overall smokeless tobacco category is growing by 6 to 7
percent a year, said Gorham, but compared with cigarettes,
smokeless is tiny, and snus is even smaller.

Smokeless in total represents about 2 percent of tobacco
companies' revenue; snus makes up about 0.5 percent of moist
snuff sales in the United States, according to Euromonitor
data.

KEEP THEM HANGIN' ON

Gorham said the role of smokeless products, and snus in
particular, has been to allow cigarette makers to hang on to
customers who want to quit smoking.

Companies tie snus to leading cigarette brands, pitching it
as a cheaper, safer alternative to smoking and offering coupons
for snus on cigarette packs.

Altria's Marlboro and Reynolds American's Camel brands have
snus variants, and a partnership between Swedish Match and
Philip Morris International Inc is being tested in South
Africa. Some analysts expect Lorillard to enter the market
soon.

"That really targets the smoker that wants to quit and move
on to something else," Gorham said. "I don't think the purpose
is really to attract a new kind of customer, it's just to
prolong the period of time over which they can keep taking cash
from smokers who are trying to quit."

Snus' penetration in the tobacco market is still limited.
There is not much evidence of nonsmokers picking up snus, and
tobacco companies have trouble selling to women and consumers
with no history of smokeless use, said Euromonitor analyst Don
Hedley.

Snus is banned in most of the European Union due to World
Health Organization fears that smokeless tobacco causes oral
cancer.

"It's a big barrier because, apart from the U.S., where
there is a smokeless tradition, EU countries, with high
cigarette prices, smoking bans and high health consciousness,
would have the best potential," Hedley said in an email.

Congress passed a law in 2009 that handed new regulatory
powers to the U.S. Food and Drug Administration over the
marketing and production of tobacco products. The new law adds
uncertainty to tobacco companies that are wondering what types
of new products they may be allowed to launch in the future.

The agency has tightened rules for cigarette advertising
and is studying menthol cigarettes, prompting Lorillard to
announce a nonmenthol version of its popular Newport brand.

Public health experts have split over whether to promote
smokeless products, battery-powered electronic cigarettes --
which allow the user to inhale nicotine in a vaporized solution
-- and other noncigarette products as a step to quitting
smoking, said John Banzhaf, executive director of Washington,
D.C., nonprofit Action on Smoking and Health.

"Do we lightly regulate and in effect encourage these other
products to allow people to switch from smoking and remain
forever on e-cigarettes or snus or whatever?" Banzhaf said.

"If the philosophy in the FDA is that the public health can
be served by encouraging the development of snus and other
products, they can write regulations that do exactly that," he
said.

Altria shares were down 1.3 percent at $22.55 on the New
York Stock Exchange Thursday afternoon. Reynolds shares were
down 1.1 percent at $56.04, Lorillard was down 0.5 percent at
$77.61 and Philip Morris was down 0.9 percent at $51.05.
(Reporting by Emily Stephenson, editing by Matthew Lewis)