Balancing the OTP Category

Will smokeless tobacco be able to capitalize on reduced-risk classification?

By Anne Baye Ericksen, Contributing Editor

Last year, convenience store owners and operators along with other tobacco retailers were forced to empty out several slots of their smokeless tobacco racks because of a nationwide recall issued by the U.S. Smokeless Tobacco Co. (USST), an operating company of Altria Group.

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The mandate ordered numerous products from top-selling brands Copenhagen, Skoal, Cope and Husky to be pulled. Not surprisingly, the result was a substantial drop in sales growth for the second and third quarters of 2017. In fact, the economic measure fell below 1% after posting steady improvement for the previous eight quarters.

“Outs hurt the category a bit early in the year. But sales were up a bit in units and cans once the USST issues were behind us,” said Tim Cote, vice president of marketing for Plaid Pantry. The Beaverton, Ore.-based retailer operates more than 100 locations in the Pacific Northwest.

The impact was felt in the Midwest, also.

“Smokeless is a big part of the business; it’s huge today compared to 10 years ago. Fortunately, in my store, the category stayed strong throughout [the recall],” said John Archer, owner of Shell Food Mart in Hinsdale, Ill. “People chose other options and kept buying. But since then, it’s definitely rebounded.”

Indeed, analytics indicate the other tobacco product (OTP) subcategory has regained a strong momentum. By the end of 2017, volume growth was up to 1.5%, and this year started strong, too. Nielsen data reported by Wells Fargo Securities totaled dollar sales of smokeless tobacco in all retail channels at nearly $6 billion for the 52 weeks ending Feb. 24, 2018. Dollar sales gained 3.9% for the 12 weeks ending Feb. 24.

Wells Fargo Securities Senior Analyst Bonnie Herzog cites brand loyalty as a primary driver for the positive performance. “Notably, dollar sales of [Altria’s] Copenhagen (+9.1%) strongly outpaced [British American Tobacco’s] Grizzly (+1.2%) as Copenhagen volume benefits from [Altria’s] portfolio approach, up 3.9% while Grizzly volume decelerated by 6%.”

Stoker’s from the National Atlantic Trading Co. was another brand to post positive year-over-year unit sales (3.3%) for the four weeks ending in late February. It also enjoyed an 8.5% boost in dollar sales, which can be attributed to a 5% price increase along with solid volume gains.

Despite the USST recall affecting so many of its leading products, the company continues to command both dollar and unit share leadership. According to Nielsen, it holds more than 56% of dollar share and 52% of unit share, whereas BAT trailed with 35.4% dollar and 33.4 unit share.

When it comes to drawing distinctions between moist chew and snus, it appears there’s a healthy mix, based on anecdotal observations. For Archer, moist chews routinely outperform snus.

“For a long time, snus was really slow. But I have to tell you, some (brands of) snus, like Camel Snus, are selling a lot more than they ever did. Camel Snus has gained a foothold and is making inroads over the last year,” said Archer. “Marlboro never did well and Skoal snus is still slow.”

Select snus is going well, particularly General Snus from Swedish Match, added Cote.

Alongside sales picking up, the other big news hitting this OTP subcategory was the announcement that the two largest producers would seek government approval to sell select items as reduced-risk products.

Late last year R.J. Reynolds Tobacco Co., owned by BAT, confirmed it will seek a modified-risk status from the U.S. Food and Drug Administration (FDA) for six styles of Camel Snus: Frost, Frost Large, Mellow, Mint, Robust and Winterchill.
USST also intends to submit a Modified Risk Tobacco Product (MRTP) application to the FDA for its Copenhagen Snuff within the first quarter of this year.

A few years ago, Swedish Match North America Inc., submitted an MRTP for a few of its General brand products, however, officials rejected that request.

If USST or BAT products are granted the modified-risk status, these items could be marketed as posing less risk for individuals who quit smoking, and use these snus or snuff in place of traditional combustible cigarettes. However, analysts caution that FDA review and evaluation could take a year or longer.

Meanwhile, c-store operators and tobacco category managers have yet to determine whether this type of development will impact sales.

“I don’t think the consumer will be overly impressed with the tag of modified risk, unless modified risk meant modified taxes,” said Cote.

“I think some customers will pay attention, but it will all come down to satisfaction,” said Archer. “If a product is less deadly, but less satisfying, I think customers will still go with the product that’s more satisfying.”

Archer isn’t convinced smokers will choose smokeless tobacco as a total replacement for cigarettes.

“There are a lot of people who do both,” Archer said. “When they can’t smoke at work or in public, they will use chew or snus.”

However, Big Tobacco seems to want to capitalize on the FDA’s new campaign to lower nicotine levels in tobacco products. For example USST’s plans to file a Pre-market Tobacco Product Application for its Verve Discs and Chews sometime in 2018. Originally introduced in 2012, Verve is a tobacco-less nicotine product that can be sucked or chewed. The company has been testing the product in 50 stores in Virginia, retailing for $3 for a pack of 16 discs.

Chewing tobacco and snus have come under scrutiny by local and state lawmakers, and even Major League Baseball. Minor and major baseball venues throughout the country have prohibited patrons, coaches and athletes from using any smokeless tobacco product on their premises. Cities have enacted, or are contemplating enacting, regulations banning flavored tobacco products, including mint and menthol in many cases.

Although Plaid Pantry hasn’t incurred these types of restrictions, Cote understands the negative impact they could have on convenience stores.

“If mint-type items were banned, the category would definitely see volume losses, at least in the short term,” Cote said.