For convenience stores that count on margins from cigar sales, the FDA recently introduced uncertainty into the mix.
By Howard Riell, Associate Editor
The ongoing legislative assault on tobacco products continues, leaving c-store operators with unanswered questions about the future of their tobacco sets, including cigars.
The latest is the U.S. Food and Drug Administration’s (FDA) new deeming regulation on cigars, pipe tobacco and vapor products
The House Appropriations Committee voted in favor of an amendment to the fiscal year 2017 Agriculture Appropriations Bill to change the predicate date from Feb. 15, 2007 to an effective date that now begins 90 days from the May 5 publication date. However, this would also allow thousands of cigar products to avoid the costly and over-burdensome application processes originally dictated by the 2007 predicate date, established in the Tobacco Control Act.
A full vote in the House and Senate may not come until the end of the year.
“What this means,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), “is that Congress may be changing – and I have to underline the word may – whether or not a number of cigar and pipe tobacco and e-cigarette products need to have a pre-market tobacco application filed with the FDA in order to keep those products on the market.”
MULLING THE MARKET
If the change is not enacted then many cigars, pipe tobacco and every e-cigarette product maker must have filed a premarket tobacco application in order to remain on store shelves. If a manufacturer didn’t file, or if an application was not filed with the FDA within 21 months after the deeming regulations go into effect, then those products could no longer be sold legally in the U.S.
The measure still needs full House passage, passage by the Senate and the president’s signature, Briant added.
“So, there is a long way yet to go in this legislative process.” There are, in fact, many steps that this process has yet to take. “And then it’s still not effective. It doesn’t really have the effect of removing products from store shelves for another 21 months. So short-term, nothing changes,” Briant said. “It’s the longer term, with the outcome of the amendment in Congress and whether it becomes law that will determine the impact on the industry.”
There is a lot at stake. According to IRI, convenience store sales of cigars reached nearly $2.7 billion for the 52-week period ending April 17, 2016, a 6.62% hike compared to the same period a year ago.
FLAVORS ON HOLD
NATO also reported that in response to industry comments, the FDA clarified that it isn’t banning flavored tobacco products with this final deeming rule.
However, to address concerns with the growing flavored cigar market and its impact on youth and young adult initiation with tobacco products, the FDA stated in the deeming regulation that it intends in the future to issue a proposed product standard that, if finalized, would eliminate characterizing flavors in all cigars including cigarillos and little cigars.
“Right now it’s important to understand, from a c-store operator’s standpoint, that this could occur if the date does not change,” Briant concluded. “If it does change the predicate date everything pretty much stays the status quo. If it doesn’t get changed then we’ll have to see if there are intervening lawsuits to delay this even further. We have the 21-month period with which to get ready for it—nearly two years—so c-store operators shouldn’t necessarily do anything now. But they need to be aware of the issue as it unfolds and be educated about it.”
While the mills of the gods grind slowly in Washington, D.C., however, c-store retailers continue to sell cigars.
Diana Rivera, district manager for the Gas N Wash Convenience Store in Mokena, Ill., said that for her chain as with so many operators, it’s the cigarillos, priced five for $3 and two for 99 cents, that sell best, fueled by occasional short-term additions of new flavors.
“Those are a big category for us,” Rivera said.
White Owl, Swisher Sweets, Backwoods, Black & Mild and Acid singles have all proven enduringly popular brands for the retailer.
“The two-packs and pre-priced product are really the big movers,” agreed Kathy Gunlock, tobacco category manager for Omaha, Neb.-based Buchanan’s Energy, which operates 86 Bucky’s Convenience Stores in four states. “It’s what people are looking for. We are in the Omaha market, and most of our stores are at two for 99 cents. Even the Acid single cigarillo still has a 99-cent price point.”
Gunlock said sales have picked up among natural leaf cigars as well as with Acid, which is now available in a foil pouch. “More of those are entering the market and making opportunities for some of the more premium customers. I think that the true premium customer is going to the cigar shops that can offer the humidors that we can’t.”
For Rivera, the key to maintaining cigar sales is simple: go with the top-selling brands and keep them fresh and in stock at all times. “Just get your top 10 brands in place.” While the flavors that Swisher Sweets rolls out every month or two invariably sell well, retailers’ inability to do open-stock ordering is a downside in her eyes.
The c-store has also shied away from doing in-house deals on cigars.
“We really don’t do the promotions like that,” said Rivera. “The White Owls and cigarillos like Swisher’s are already pre-priced at two for 99 cents, and I don’t know how much cheaper you can get with that. They have their own promos that they do.”
At a certain point, Gunlock concluded, managing a cigar set gets pretty simple.
“It’s really about knowing what the customer is after, what he’s looking for. You can offer a lot of the premium stuff, but if that’s not what your customer is looking for it’s not really going to help you much,” Gunlock said. “I know a lot of people are reluctant to get into the pre-priced arena, but that’s what is turning.”
The regulations show no signs of abating, and so c-stores move forward honing their sets and serving their customers.
“I look for more things to come down, such as different taxations,” Gunlock said, “for federal taxing to be changing as well as potential regulatory changes on the flavors. We sell a lot of flavor varieties out here, and I am concerned that this could be more regulated.”
Rivera said she looks forward to tougher sledding selling cigars in the months and years to come. “(The government) is just putting too many restrictions on tobacco.” That said, Gunlock is confident that it will remain a viable category.
“You know what, people are still going to buy them,” Gunlock said. “It’s going to slow it up a little bit, but like I said, we sell a lot of the single and five-pack Black & Mild, and two-pack Swisher and White Owls, and Garcia-Vegas, so people are still going to buy them.”
Rivera pointed to consumer behavior back when e-cigarettes hit the market.
“Everyone thought they were going to take off, and they did. People tried them at first and then went back to their cigarettes. People are going to go back to (the lower-priced cigar brands), it’s just that sales may drop off a little bit.”
While c-store operators lock in their contracts, shelf sets and promotional programs, the future of cigars remains up in the air, with no quick resolution in sight. NATO’s Briant said he would not be surprised to see programs and litigation coming from various industry members to prevent the requirement for a pre-market application to go into effect.
“That could delay the issue further,” Briant concluded. “Again, It’s so uncertain. I call this the ‘dance of legislation’: you go left, you go right, you dip, you’re up, you’re down. We don’t know. It’s uncertain.”