Cracking Down on Menthol

The c-store industry reacts to the  latest proposed cigarette ban.

Anne Baye Ericksen, Contributing Editor

Just before Thanksgiving, the U.S. Food and Drug Administration (FDA) dished on proposed mandates regarding menthol cigarettes that will be hard for many retailers in the convenience store industry to digest.

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In a public statement issued on Nov. 15, FDA Commissioner Scott Gottlieb, announced the agency will “advance a Notice of Proposed Rulemaking that would seek to ban menthol in combustible tobacco products, including cigarettes and cigars.”

Although the declaration didn’t spell out immediate enforcement directives, it did stir up a strong wave among c-store stakeholders.

“There’s been a thriving U.S. market for menthol cigarettes for generations,” said Jim Calvin, president of the New York Association of Convenience Stores. “Does the FDA think it can just wave a wand and make it disappear?”

In the most recent statement, Gottlieb also directed the FDA’s Center for Tobacco Products (CTP) to reevaluate its compliance policy regarding flavored ENDS.

“I believe these menthol-flavored products represent one of the most common and pernicious routes by which kids initiate on combustible cigarettes,” he wrote in the November statement. “The menthol serves to mask some of the unattractive features of smoking that might otherwise discourage a child from smoking.”

The FDA statement claimed 54% of smokers between the ages of 12 and 17 use menthol cigarettes compared with less than one-third of smokers age 35 or older.

However, nearly two-thirds of the convenience store operators queried by Wells Fargo Securities for its November Tobacco Talk survey disagree with the assertion that menthol is a gateway to a worse smoking habit.

“This ban would take the ability to choose away from our adult customers,” said Reilly Musser, vice president of marketing and merchandising for Robinson Oil Corp. The Santa Clara, Calif.-based company owns and operates 34 Rotten Robbie c-stores throughout the northern region of the Golden State.

For many retailers, this proposal could further weaken cigarette sales, which have been declining steadily. According to Wells Fargo Securities, sales volume in c-stores dropped an average 3.5% in the month of October. For large c-store chains, volume fell as much as 8%.

Eliminating this portion of the category could result in a considerable financial fallout. Not only do c-stores represent an overwhelming majority of cigarette purchases, tobacco accounted for approximately 28% of inside c-store sales, per the National Association of Convenience Stores (NACS) 2018 State of the Industry Report.

“Menthol represents about 25-30% of our cigarette business,” said Todd Badgley, president of FKG Oil Co., headquartered in Belleville, Ill. The company runs 79 Moto and MotoMart retail sites in six states, including Minnesota. “We are a victim of the menthol ban in Minneapolis [that went into effect last August] and all categories are suffering. Cigarette and other tobacco categories will take the biggest hit, but other categories also will feel the effects.”

There’s also concern the proposed regulation could drive more customers to the black market.

“Menthol cigarettes would still be available, they just wouldn’t be sold by licensed, tax-collecting, age-verifying retailers,” said Calvin. “Unscrupulous manufacturers would rush in to fill the void with black-market product.”

According to the National Research Council, as much as 21% of all tobacco purchases in the U.S. transpire within the illicit marketplace. That’s estimated to cost state and local authorities between $2.95 and $6.92 billion annually.

What’s more, the ban would not apply to duty-free sales, so menthol cigarettes still could be purchased through these venues as well as via illegal imports that avoid detection. The FDA has acknowledged these less-regulated channels will continue to sell high-nicotine products.

Despite apprehensions about the impact of a menthol cigarette ban, Musser hasn’t instituted any changes in how they handle the category. Instead, she focuses on the impact of state and local ordinances.

“In California, you already have to be 21 to buy any tobacco or nicotine products,” Musser said. “Also, we currently have the following tobacco regulations that affect our stores: a flavor ban at one store; a 10-pack only at two stores; a five-pack only at two stores; and a $7 minimum at two stores,” she explained.

Indeed, analysts suggest the wait-and-see approach is best for now.

“We are in the early innings of what we expect will be a long, divisive (and likely litigious)  battle to arrive at an enforceable FDA strategy,” said Bonnie Herzog, a senior analyst for Wells Fargo.

The FDA must first draft the regulation, obtain review and approval by the White House Office of Management and Budget (OMB) before it can open the proposal to comments. After that, there’s a system to amend the regulation based on the input from the public and industry. Finally it goes before the OMB again before approval and implementation.

“This means the process to propose and adopt a regulation restricting the use of menthol in cigarettes could take several years,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “NATO will wait for the official proposed rule to be issued by the FDA and then participate in the public comment process. Retailers should also consider being involved and submitting comments to the agency on any rule limiting or banning the use of menthol in cigarettes.”

Plus, Big Tobacco companies aren’t expected to remain quiet on the subject.

“If the FDA proceeds to adopt a rule restricting the use of menthol in cigarettes, there could be industry members that commence litigation against the agency in an effort to overturn the rule,” Briant said.

Still, some manufacturers might be hedging their bets in terms of future revenue streams. For example, Altria Group said last month it has agreed to buy a 45% stake in leading cannabinoid company Cronos Group for about $1.8 billion, a sign of the new world in which the tobacco company must compete.