Despite changes in tobacco regulations, convenience stores continue to cash in on this popular consumer product.
By Anne Baye Ericksen, Contributing Editor
For convenience stores, tobacco products remain the top sales driver despite significant alterations and protective measures tacked on to national, state and local regulations. While cigarettes have almost always been the target of regulators, cigars and other tobacco products are now in regulators’ sights.
Over the past few years, cigars have incurred excise taxes at both federal and state levels. According to IBISWorld, that trend is expected to gain momentum for at least the next four years. Of course, industry associations continue to lobby against such legislation. For example, last month, the Cigar Association of America announced it managed to persuade Pennsylvania lawmakers to exempt cigars from a new proposed tobacco tax. If signed by the governor, the latest law would tax cigarettes, smokeless and pipe tobacco and vapor products, but omit cigars.
Some U.S. municipalities have passed ordinances against flavored cigar products. As of this year, convenience stores in both Boston and Minneapolis, for example, are banned from selling flavored cigars and other flavored tobacco products.
“Folks like their flavors. Ironically, though, one of the stronger flavors today is unflavored,” said Lou Maiellano, president of TAZ Marketing and Consulting Group. “We’re seeing incredible growth in the unflavored cigar segment, up as much as 68%. That’s followed by sweet and tropical flavors. In the past, you were looking at strawberry or grape.”
The most far-reaching regulation to impact the cigar industry to date, however, is the final deeming ruling handed down by the U.S. Food and Drug Administration (FDA) in May, which takes effect in early August. In essence, cigars, e-cigarettes and pipe tobacco now fall within the purview of the 2009 Tobacco Control Act. The industry had hoped the FDA would exempt premium cigars, but to no avail.
This designation carries a variety of additional regulations, such as banning free samples and enforcing minimum age restrictions. The mandatory FDA approval for any product introduced after February 2007, however, is generating the most concern among manufacturers and retailers. Manufacturers must meet stringent restrictions, including scientific review of ingredients and production operations in order to sell their tobacco products.
Because the application process and associated costs are so prohibitive, many analysts predict smaller producers will close shop, reducing product selection.
“By [the FDA’s] own appraisal, their new regulations would wipe out somewhere between 10-50% of these products as it will not be cost effective to put many of the products through review,” said Scott Drenkard of the Tax Foundation, in a recent Daily Caller article.
Despite the potential impact each of the aforementioned circumstances could inflict on the cigar category, including cigarillos, minis and blunts, the category continues to pack robust sales. “To all those who thought the cigar business was dying, well, it’s not dying,” Maiellano said. “Resiliency in this business is what keeps it moving. In fact, recent performance indicates strong unit and dollars growth for cigars.”
For the four weeks ending June 12, unit sales of cigars in U.S. convenience stores jumped 11.8% compared with the same period last year according to IRI, a Chicago-based market research firm. On a year-to-year basis, unit sales are up nearly 10%, and dollar sales recorded an increase of 5.6% over 2015.
Unlike other categories that routinely experience new product introductions, such as snacks or beverages, cigar offerings remain rather consistent. Instead of new product introductions, cigar producers focus more on fine-tuning existing products.
“In my opinion, there have been fewer brand introductions, but definitely more limited-release flavor productions,” said Jeremy Weiner, marketing and purchasing director for Smoker Friendly, which operates 89 stores in five states, including Gasamat convenience stores.
Packaging changes have delivered positive results as well. Perhaps the most significant development for c-stores has been the addition of foil pouches.
“The majority of cigar products sold in c-stores are not high end, but nonetheless, foil pouches dominated the category growth in the last year, up by 22%. Foil packaging also enables c-stores to add premium cigars to inventories,” said Maiellano. “There are great opportunities to dabble in the premium cigar business because people like to spoil themselves. People like to treat themselves.”
In fact, research by IBISWorld forecasted continued growth in per capita disposable income at an annual rate of 2.4%. Greater spending power typically means people are more willing to pay for premium indulgences.
Although the FDA deeming rules officially go into effect this month, analysts don’t expect the full impact to be felt just yet, especially in the retail environment. The agency has allocated a two-year period for manufacturers to submit applications for approval and another 12 months for review. In the meantime, the products remain available for sale. Maiellano suggested that c-store operators take advantage of this period by mixing up product selection, even dedicating shelf space to showcase promotional items, other tobacco product offerings and premium cigars.
“Stores don’t change their sets up enough. I always recommend to retailers that they have a small section for specials, a flex section, where they can take on products new to their offerings without affecting their planograms. That way when a new offering comes out, or they want to enhance their offerings, they have a spot for it without having to making wholesale changes to the entire set,” said Maiellano. “This allows retailers to have a 90-day program, and if the product doesn’t sell, then move it out.”