Next month marks one year since the Food and Drug Administration (FDA) released a statement detailing possible changes to tobacco regulations, including the intent to issue an advance notice of proposed rulemaking (ANPRM) to ban menthol in combustible tobacco products. Four months later, it released another ANPRM to lower maximum nicotine levels in cigarettes to minimize their addictive nature.
Since then, most headlines coming out the FDA have involved e-cigarettes and vaping devices, leaving the c-store industry wondering what will transpire with combustible cigarettes, which account for a large percentage of convenience store profits.
Not only do nearly 90% of all cigarette purchases transpire in c-stores, but cigarettes and other tobacco products (OTPs) earn approximately 20% of gross margins for all inside sales, per Wells Fargo Securities. Plus, CNBC reported that menthol drives more than half of all cigarette sales. If the government moves ahead with a national menthol ban, how will tobacco category managers respond?
“We would have to cut the backbar down in size and figure out what to merchandise there. Cigars would take the biggest SKU cut, but we would also need to reduce the size of the smokeless, cigarettes and e-cigarette sections,” said Reilly Robinson Musser, vice president of marketing and merchandising for Robinson Oil Corp. Based in Santa Clara, Calif., the company owns and operates 34 Rotten Robbie convenience stores.
While definitive action hasn’t happened on the national level yet, local governments keep contemplating flavored tobacco bans that oftentimes include menthol cigarettes.
“Ordinances at this level of government clearly create an uneven playing field,” said David Bishop, managing partner for the marketing firm Balvor LLC. “In Chicago, for instance, you could have two stores across the street from one another where one is permitted to sell flavored tobacco products and the other is prohibited simply because one is located within 500 feet of a school. Or in Minneapolis, all convenience stores are impacted as that ordinance only permitted the sale of flavored tobacco products in adult-only stores.”
For retailers in neighboring towns, however, these regulations have resulted in increased business.
“We do have stores that border other cities and unincorporated counties with flavor bans, and we definitely sell more flavors in those locations,” said Musser.
Although his 11 SIGNAL Food Stores in Missouri haven’t fallen under such restrictions, Scrivener Oil Co. Vice President Sean
Bumgarner holds a positive outlook for cigarette sales if a local, state or federal ban is enacted.
“I don’t think the menthol smoker will quit smoking. They may just switch to a non-menthol cigarette,” he explained.
The Cost of Doing Business
Bans aren’t the only development influencing the category’s performance. Cities and states continue to raise taxes and minimum purchasing age. Also, manufacturers pushed up prices twice this year—first an 11-cent bump in February, then another six cents in June. This followed an established pattern of compensating for falling dollar and unit sales. For example, Nielsen data for the four weeks ending Aug. 10 showed dollar sales for cigarettes in all channels fell by 2.6% and volume dipped more than 7%, while pricing for the same period rose by 4.9%. Analysts and retailers suspect manufacturers will raise prices at least once more this year, perhaps as much as seven cents and as soon as this month.
Even with uncertainty circling around future FDA decisions, cigarettes still provide profits and outperform OTPs. However, a shift toward vaping and a promising potential for reduced risk products, such as the recently approved iQOS, could help c-stores retain overall tobacco sales. When asked what factors most affect cigarette sales in his stores, instead of citing taxes or regulations, Bumgarner responded, “Juul and vaping.”