How Are Cigarettes Faring?

Even though cigarettes are facing increasing taxes and regulations, the cigarette category remains a key component in c-stores’ bottom lines.

By Lisa White, Contributing Editor

The cigarette category continues to face volume struggles based on several factors, including health risks, social pressures, purchase age law increases, public smoking laws, migration to alternative tobacco products and higher retail costs.

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And although cigarettes remain a stalwart category in the convenience channel, the impact of these many hurdles is evident.
Nielsen All Channel Data indicates cigarette industry volume decelerated in the four-week period ending July 14, declining 4.2%, as competition from e-cigs and vapor has intensified, according to Wells Fargo Securities analyst Bonnie Herzog. Overall, industry cigarette sales declined 1.7% led by weaker volume but partially offset by cigarette pricing, which climbed 2.3% in this period. For 2018, the cigarette industry volume is expected to continue declining 3-4%.

“The category continues to lose volume,” said Lou Maiellano, president of TAZ Marketing & Consulting Group, Sevierville, Tenn., which specializes in the tobacco industry. “All the regulations and health concerns are having a negative impact due to the stigma of smoking, while the vapor category is growing.”

Although a number of states have proposed raising cigarette taxes, only Kentucky and Oklahoma have pulled the trigger by 50 cents and $1 respectively.

“Most of the states have adjourned their sessions for the year, so it doesn’t look like they’ll raise taxes for cigarettes at this point,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO).

NATO is constantly monitoring the cigarette environment and opposing local ordinances, while concurring with experts that the incidences of cigarette smuggling across adjacent state borders into regions with lower tax rates is on the rise.

Another blow to the category happened in July this year, when San Francisco passed a ban prohibiting the sale of flavored tobacco products, including menthol cigarettes.

In addition to Minneapolis and St. Paul, Minnesota cities Duluth, St. Louis Park and Robbinsdale have recently restricted sales of menthol cigarette sales, along with mint and wintergreen smokeless tobacco products, to tobacco-only outlets or liquor stores.

“We compiled an economic impact study on this and concluded the average c-store would lose up to $259,000 in annual sales in tobacco, cigarettes and ancillary products if these restrictive [flavor] ordinances passed,” said Briant. “As a result, stores would be closing since they couldn’t make up this revenue. This can devastate retailers who have their life savings invested in their stores.”

He added that the revenue decline would be substantial for states, although it’s less of a loss for cities since they can’t quantify the impact.

There has also been an uptick of cities and towns raising the legal age to purchase tobacco products to 21.

“There are currently 330 cities and towns across the country that have age 21 as the minimum to buy tobacco versus six states, which include California; Hawaii, Maine, Massachusetts; New Jersey and Oregon,” said Briant.

Although the purchasing age requirement is 21, for most of these areas the minimum age for possessing or using tobacco products is 18.

Travis Hanke, category manager at Salt Lake City-based Maverik Inc., which operates approximately 316 stores, said state tax increases have not directly impacted sales at its locations in 2018, because of geography, but year to date, the cigarette category volume is down 5% in c-stores overall.

“There were over 20 states that had a state tax increase discussed or proposed, and those measures failed,” said Hanke. “States continue to look at taxing this category, both as a smoking deterrent and as addressing budget opportunities.”

The menthol ban, however, has not impacted Maverik because of geography.

“The manufacturers and retailers have to work closer than ever to maneuver through a category with evolving FDA regulations in order to maintain compliance,” said Hanke. “Recently, there have been several changes around product labeling, packaging and advertising [to accommodate these rules].”

At Maverik stores, Marlboro continues to dominate the category with over a 40% share. Newport, Camel and Pall Mall are a distant second, third and fourth respectively. Both American Spirits and Eagle continue to show solid growth over the same period last year.

“Newport has shown noticeable growth in non-traditional menthol markets now that it has cycled the anniversary of being re-merchandised within the R.J. Reynolds Tobacco Co. (RJR) share of space following the Lorillard transaction,” said Hanke.

At The Growler Guys’ 14 stores throughout Oregon, Washington State, Idaho and Wisconsin, both national and the generic/lower tier cigarette brand sales are slowly decreasing about 3% annually, while smokeless is growing about 10%.

“The taxes and prices keep going up, but this doesn’t seem to deter smokers,” said Kent Couch, co-owner of The Growler Guys. “What does deter them is the government’s advertisements encouraging them to quit.”

Couch said he hasn’t seen much impact in his Oregon convenience stores’ cigarette sales since the purchasing age was raised from 18 to 21 this year.

“The liquor and tobacco control folks also reported c-store violations increased 2% for sting regulations [with the age minimum raised],” said Couch.

There have also been more contractual agreements between tobacco manufacturers and retailers that have led to a more competitive marketplace.

For example, when RJR and Altria began narrowing their marketing dollars about seven years ago, The Growler Guys decided to get on board with the new contract so as not to lose market share.

“They dictate the minimum margins and promotions, but it has worked well for us,” said Couch. “Still, there are other retailers who chose to drop off because they didn’t want the tobacco companies to dictate this.”

And because supermarkets like Safeway and Albertsons don’t market their tobacco or display it in the open, c-stores have been able to grow in a negative market. As c-stores and other retailers quit marketing, it has been our gain,” said Couch. “Now we’re competing with those playing the game with RJR and Altria; even losing 3% is better than the national average, which is about 8% or so.”

In addition to these manufacturer agreements, c-stores have attempted to make up for the decrease in cigarette revenues by focusing more on foodservice.

“I hang on to the fact that, as an independent c-store, we can ride these waves [of a turbulent cigarette market],” said Couch.
This is significant, given that cigarettes currently comprise 34% of The Growler Guys’ annual store sales, and the chain promotes by price.