Cigarette sales last year behaved exactly as analysts predicted: volumes dropped month after month and manufacturers boosted prices each month to compensate. This strategy helped minimize losses for the category.
However, indications suggest the approach may be showing signs of weakening in 2018. According to IRI, cigarette sales in convenience stores fell by 0.5% for the 52 weeks ending Dec. 31, 2017, despite a pricing offset of at least 4% last year.
SHRINKING BASE
The decline might be attributed to smokers vowing to quit as a new year’s resolution, but more likely, most of that loss is a result of an ever-shrinking customer base.
“Cigarette sales are trending downward nationwide and Stinker is seeing customer behavior that is consistent with the trend,” said Dan Lyons, general manager at a division of Stinker Stores Inc., which operates more than 60 fuel retailers and c-stores. “The decline is partially driven by traditional tobacco users seeking alternatives, such as vapor, electronic cigarettes, moist tobacco and other smoke-free alternatives.”
By all accounts, manufacturers have embraced this trend, too. While regular and menthol cigarettes currently combine for more than 78% of all tobacco products produced in the U.S. last year, per IBISWorld, Philip Morris USA and parent Altria Group, and British American Tobacco (BAT) have invested increasingly in electronic nicotine delivery systems.
“Growth in the industry has primarily been in response to increased demand for the electronic cigarette and other electronic nicotine delivery devices,” said John Madigan, analyst for IBISWorld.
Madigan also suggested traditional cigarettes could face another competitor as more states legalize recreational marijuana.
“Once a federal decision is reached on marijuana use, if approved and legalized, major tobacco companies could look to move into this emerging market in force,” he explained. “They are already positioning financial resources and production capacity toward a new population of smokers.”
That said, Philip Morris tried to ignite interest in traditional cigarettes by introducing Marlboro Ice as well as B&H Menthol. The retail response has been lackluster. In fact, data indicates the brand as a whole incurred substantial losses. Nielsen research, reported by Wells Fargo Securities, shows volume sales for Marlboro fell by 7.4% during the first four weeks of this year.
Still, not all the news about the category is negative. It appears the strong economy and aggressive marketing efforts aimed at Millennials have uplifted a few BAT brands. According to Nielsen, sales of Newport for the first four weeks of 2018 jumped 2.8%, including volume growth of 0.9%. Sales for the 12 weeks registered at 4.1% growth. Natural American Spirit reported volume increases of 2.5%.
Premium brands outsell low-priced labels when the economy is strong, said Lyons—a possibility for 2018.
