Altria, Philip Morris International and British American Tobacco (BAT) earned their moniker as Big Tobacco by producing the most popular cigarette brands for decades.
Indeed, Altria’s Marlboro has held tight to its reign as the top-selling brand for years, even as the smoking population shrinks. Per Statista in November 2020, Marlboro was the most smoked brand in the U.S. (choice for nearly 12% of respondents), outpacing the No. 2 spot-holder Newport, produced by R.J. Reynolds Tobacco, a subsidiary of BAT, which garnered 5.37%.
Such well-known brands are considered premium, and carry premium price tags. Of course, convenience store category managers reward premium cigarette brands with prime real estate on tobacco back bars where customers can easily identify them.
Still, there’s plenty of room for lower-tier brands in the convenience store channel. In fact, market research indicates third- and fourth-tier cigarettes offer competition for second tier. Statista reports generic or store-brand cigarettes — considered third and/or fourth tier — were chosen by 5.22% of respondents to the most smoked survey.
Typically, price after taxes determines cigarette tiers. The federal government collects $1.010 tax on all packs, regardless of brand, manufacturer or whether cigarettes are produced domestically or imported. Then states add on their own taxes. As of September 2020, state excise taxes ranged from as low as $0.170 per pack in Missouri to as high as $4.35 per pack in Connecticut and New York, according to the Centers for Disease Control and Prevention.
While taxes serve as a baseline, final retail prices truly differentiate the tier system. Lower-tier categories, typically made up of small regional manufacturers or imported from countries such as Korea and China, do little to no advertising or coupon deals. Rather their products simply sell for less, and in some cases, much less. Second-tier brands may have a bit more name recognition and charge a bit more, but still offer savings compared with premium packs. Note: Big Tobacco companies also sell lower-tier cigarettes under various brand names.
Oftentimes, economic conditions calculate the profitability of lower-tier cigarette sales. When the overall economy dips, people trim budgets and reach for lower tiers to satisfy their smoking needs. As financial conditions improve, research indicates they feel more comfortable paying more for premium packs.
However, some manufacturers and c-store owners and operators assert that advantage is erased when states enact minimum price-per-pack legislation. Discount cigarette company Liggett Vector Brands Inc. filed a lawsuit against Colorado for the minimum price component of Proposition EE, which passed in fall 2020. It claims the law unfairly benefits premium brands by nullifying pricing differences for lower-tier offerings. As of May, the case remains undecided.
While there’s little likelihood sales of lower-tier cigarette brands will completely overtake sales of premiums brands in the c-store channel, their presence will always appeal to the frugally minded consumer, and that should be enough to permanently secure their place in tobacco back bars.