New Year = New Regulations

cigarettes at convenience stores

C-stores face more restrictions and taxes on cigarettes in 2018.

By Anne Baye Ericksen, Contributing Editor

As of Jan. 1, smokers in Aspen, Colo., are paying $3 more per pack of cigarettes than they did last month. Also, Oregonians must now be 21 in order to purchase any type of tobacco products in the state. That’s two different communities and two different regulatory policies, but it all adds up to one thing in 2018: The cigarette category faces more pressure than ever before.

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The most heavily regulated categories in c-stores, cigarettes and other tobacco products (OTP) incurred a slew of new restrictions and taxes in 2017, and 2018 looks to be no different. While anti-smoking advocates hail these regulations as a victory in the battle to discourage new generations of smokers, for c-stores it serves as another burden on a category that’s already under fire.

“Cigarette volumes are declining at a rate of 3%, which is consistent with past trends,” observed Todd Badgley, president of Moto Convenience Stores. The Belleville, Ill.-based convenience chain operates nearly 80 store sites in six states in the Midwest.

Wells Fargo Securities reported cigarette dollar sales in all retail channels dropped by 0.3% for the four weeks ending Dec. 2, and dollar sales in c-stores were down by 0.1%.

However, dollar sales were supported by an increase in pricing of more than 5% while volume continued its downward trend. Unit sales in the convenience store channel fell by 4.9% for the same four weeks. Also, analysts predict cigarettes dollar sales for all of 2017 will end up with a loss of at least 3.5%.

C-store owners and category managers point to expanding regulations as a significant contributing factor for decelerating cigarette sales as well as lighter foot traffic for some locations. When local authorities levy taxes, flavor bans or age restrictions, it increases the likelihood of customers driving to another community without those prohibitions to buy their cigarettes along with other basket items. Such losses quickly cut into a business’ profits because tobacco still accounts for a substantial percentage of total sales.

According to Nielsen Homescan data, tobacco generated 38% of all c-store sales in 2016, totaling nearly $53 billion.

“We need to figure out how to replace those items because we’ll be losing in the tobacco category,” said Lance Klatt, executive director of the Minnesota Service Station and Convenience Store Association.

“[City council members] don’t know how much stores can lose in sales on ancillary products, such as milk, candy and gasoline. We feel like our industry is being discriminated against and city councils don’t like our small businesses,”he added.

Tax increases on cigarettes have always been a thorn for smokers and retailers, and last year was no exception.

“During 2017, only a couple of states actually enacted higher cigarette taxes. Those include Connecticut with a 45-cents per pack cigarette tax increase and Delaware with a 50-cents per pack cigarette tax increase,” said Thomas Briant, executive director of the National Association of Tobacco Outlets. “A bill to raise the New York State cigarette tax is pending, but has not passed the state legislature.”

Both Oklahoma and Rhode Island advanced cigarette tax increases, too. In 2018, though, New York City smokers will be paying the most. As of June 1, a single pack will cost $13.

“We haven’t had a state-level excise tax increase since 2010, but we’re still the highest in the country at $4.35 a pack,” said Jim Calvin, president of the New York Association of Convenience Stores (NYACS). “An additional $1.50 in New York City plus an average 8% sales tax on top of that combines to create massive tax evasion and loss of tobacco and ancillary sales to licensed, tax-collecting retailers.

“The non-partisan Tax Foundation just reported that New York state continues to lead the nation in cigarette smuggling with 56.8% of cigarettes consumed in the state derived from ‘smuggled sources,’” Calvin continued. “A big chunk of that is in the New York metropolitan area where finding smokers yearning for cheaper, untaxed contraband product is as easy as walking down the street.”

Whereas some legislative bodies and city councils may have backed off issuing new cigarette tax hikes, a growing number have proposed and passed bans on flavored tobacco products, including menthol. It’s a trend that’s been developing for some time.

“Since 2012, approximately 160 local governments have enacted some form of flavor ban, either prohibiting the sale of flavored cigar products to, more recently, banning the sale of all flavored products, including menthol cigarettes and mint and wintergreen smokeless tobacco products,” said Briant.

Several cities in Minnesota have taken this step. Plymouth, Shoreview and St. Louis Park, all suburbs of the Twin Cities, have enacted flavor bans. Plus, officials in both Minneapolis and St. Paul voted in favor of flavor bans, including restrictions on menthol sales, for their respective cities.

The Minneapolis regulation becomes law Aug. 1, and St. Paul’s goes live on Oct. 1, each with an exemption for businesses that receive at least 90% of their income from tobacco sales.

“In 2018, Duluth is looking at a flavor ban,” said Klatt.

Some retailers fear such bans that include menthol cigarettes.

“We have experienced a ban on menthol cigarettes and flavored cigars. Although neither is good for business, a menthol ban on cigarettes is worse than a ban on cigar flavors,” said Badgley.

“On a state level, an OTP flavoring ban bill has been introduced each of the last eight years, but NYACS and its allies have succeeded in blocking it to date,” said Calvin. “For now, c-stores view OTP flavoring as a bigger threat [than cigarette and cigar flavor bans] because it’s a growing category.”

Also last year, several cities and three states raised the legal age to purchase tobacco products. New Jersey, Maine, and Oregon joined California and Hawaii in issuing a statewide minimum of 21. Numerous cities joined the 21 club, too.

According to NACS, more than 270 communities across 18 states have raised the minimum purchase age to 21. Like flavor bans, this restriction disproportionately affects stores in communities that border cities that still have an 18 or 19 years old minimum age limit.

While it may be too early to predict what legislative developments will occur this year, Briant urges convenience store owners and managers to become active industry representatives in their local communities.

This includes inviting city council members or legislators to tour stores and witness the extent to which operators and employees go to prevent unauthorized cigarette and OTP sales.

“Retailers should make a New Year’s resolution to develop a relationship with their local and state lawmakers, to educate them about the impact of potential tax increases or restrictions before such actions are proposed so lawmakers are knowledgeable about the potential impact,” he said.