Longtime residents on the tobacco back bar, premium and domestic cigars, along with flavored cigarillos, have always fared well for convenience stores. But no one could have predicted just how much this other tobacco product (OTP) segment would prosper under COVID-19 restrictions. For nearly two years, cigars have produced notable profits, and it’s a trend c-store owners and operators hope has no end in sight.
Year-over-year comparisons from market research company NielsenIQ show cigars gained 5.1% in dollar sales for the 52 weeks ending Aug. 28, 2021. Albeit a slower pace than the same period in 2020, this posting indicates an ongoing resiliency. Indeed, for some businesses, this past quarter offered even more promising results.
“Domestic cigars climbed 11% in Q3 this year compared with the same period last year. Premium cigars were trending about a 9% increase over prior years, which is really good because … now that more people are back to work, there isn’t as much flexibility,” said Jeremy Weiner, category director for cigars and premium products at Smoker Friendly. Headquartered in Boulder, Colo., the company operates more than 181 retail sites in eight states.
Even though cigarillos garner greater sales in the c-store channel, premium and domestic cigars are generating enough consumer interest for some businesses to warrant greater promotional investment. Hy-Vee, a West Des Moines, Iowa-based grocery and convenience store chain, is so keen on the future of cigars that its recent grocery store redesign highlights a walk-in humidor. The new layout is featured at four locations, including Grimes, Iowa, where a Hy-Vee Fast & Fresh c-store sits in the parking lot.
“We see the cigar category sales as complementary to the spirits category, especially with growing segments like whiskey and cognac. Having a wide variety of cigars and accessories makes our Wine & Spirits departments a destination for cigar connoisseurs, as well as those new to the experience,” said Chris Carrow, vice president of Hy-Vee Wine & Spirits.
Quarter-after-quarter gains are even more impressive when compensating for the prolonged supply chain disruptions that began with the COVID-19 lockdowns and remain a problem today.
“We used to have eight-foot cigar sets, but they had to be condensed to six-foot sets because there’s less variety of products (even though) manufacturers are sending to stores what they have,” explained Weiner. “Without the supply there, we can’t grow the amount of space.”
Instead, he’s chosen to fill the gaps with cannabidiol (CBD) and hemp products in the states where cannabis has been legalized.
Interestingly, research suggests hemp smoking products interest cigar customers. A Nielsen Global Connect survey released earlier this year concluded one in four cigarette and/or cigar smokers admitted to consuming a hemp or CBD product.
What’s more, nearly 30% of cigarette and cigar users were open to trying a smokeable hemp product.
“If anything, I think hemp has helped,” said Weiner. “I think there is dual use. Consumers mix cannabis with cigars.”
While this and other current market forces bode well for future cigar sales, the Tobacco Tax Equity Act of 2021 could stymie momentum. The legislation seeks to raise the federal excise tax on OTPs to the same level as cigarettes, which would also be increased. Because cigarette taxes are based on weight and not wholesale prices — which is how most OTPs currently are taxed — analysts predict OTPs could incur a retail price hike up to 2,000% when combined with state taxes.
“(The National Association of Convenience Stores [NACS]) opposes the exorbitant and excessive tax increases on tobacco and nicotine products that are currently being considered in Congress. We believe an increase to the federal excise tax of this magnitude will not dissuade users as the bill’s sponsors intend, but instead push them to the illicit market. This undermines the efforts made by convenience store retailers who have invested millions in age verification training, technology and other compliance protocols,” noted Anna Ready Blom, NACS director, government relations.
At the time of this printing, Congress was still hammering out the details. Many in the industry hope legislators will consider the current version as too burdensome for c-stores and tobacco retailers and recalculate the tax math.