Outside of pump prices, few convenience store categories are subjected to external factors as extensively and frequently as tobacco, and now synthetic nicotine, too. Sure, supply chain shortfalls affect other in-store mainstays, but these sectors aren’t submitted to bans that limit product options, the possibility of excise tax hikes or advertising restrictions.
Despite all the legislative oversight, the tobacco and nicotine category manages to rank as one of the most profitable for c-stores — cigarettes alone accounted for nearly 28% of 2020 in-store sales per the National Association of Convenience Stores (NACS) 2021 State of the Industry Report. Even through the pandemic’s ups and downs, sales pushed through with other tobacco products (OTPs) coming out as the biggest winners.
Now, halfway through 2022, the focus turns toward how record-setting inflation and fuel prices affect consumer behavior on top of new regulatory proposals. Here, we review those and other factors influencing each tobacco and nicotine product subcategory and what’s ahead that could impact sales performance.
Cigarettes: Menthol News — Finally
On April 28, 2022, the Food and Drug Administration (FDA) officially announced it is pursuing a ban of menthol cigarettes. Per protocols, the public has 60 days to submit comments regarding the impact the measure would have on businesses and consumers. A NACS representative told CStore Decisions last month that it was preparing to launch a letter-writing campaign by members.
After the comment period, the Office of Management and Budget will conduct a review for multiple factors, including any unintended consequences. The FDA then has a compulsory one- to two-year delay while concerns are addressed. Of course, this timeframe does not calculate for any possible legal challenges by manufacturers or other interested parties, which most industry watchers fully anticipate. Given all that, it will be years before a ban of menthol cigarettes, which represent approximately one-third of all product sales, can be implemented.
“Even if a cigarette menthol ban were to be implemented in several years, we would expect a minimal negative impact on the total nicotine pool, if smoker conversion to [reduced-risk products (RRPs)] accelerates, and we would expect those companies with the strongest RRP portfolios to take greater share,” said Bonnie Herzog, managing director for Goldman Sachs, in a public statement.
More current concerns are tied to inflation and rising fuel prices. In its Q1 “Nicotine Nuggets” report, Goldman Sachs stated cigarette volume dropped by 3.3% year over year. IRI data found cigarette dollar sales fell 2% for the 52 weeks ending April 17, 2022. More concerning is the recent 5.8% loss for the four weeks prior to April 17.
“With inflation at an all-time high, customer wallets will continue to be challenged with rising gas prices (reducing trip frequency), and much higher price points on cigarettes. So far this year we have seen two increases, and it’s still only the first half of the year,” said Jon Manuyag, director of marketing for Beaverton, Ore.-based Plaid Pantry, which owns and operates 107 stores in the Pacific Northwest.
Unsurprisingly, he noted that lower-tier brands appear to be experiencing a pickup.
“I am seeing more shifting to the value cigarette categories as those retails are still $2–$3 cheaper than the premium cigarette offerings. Also, within premium cigarettes more customers are purchasing multi-packs due to additional savings being passed to the customers through loyalty programs,” Manuyag explained.
“While economic pressure can have a small effect on overall tobacco volumes, the more likely impact to the category will be on the product mix in our stores,” said Adam Long, senior category manager at The Rutter’s Cos. Headquartered in York, Pa., the family-managed group of companies operates 79 c-store locations in Pennsylvania, Maryland and West Virginia. “Consumers will be more likely than ever to search out more affordable tobacco options and trade down across the price tiers and/or split usage among a couple of brands — opting for premium brands when deeper promotions are in market and discount brands when such promotions aren’t as widely available.”
Cigars: Potential Set Shrinkage
Although some c-stores still suffer cigar supply chain kinks, the disruptions have straightened out greatly over the past year. But now the OTP subcategory faces possible flavor bans.
“It will be a huge deal. Flavors make up the majority of Swisher Sweets and Swedish Match cigarillos. If we are restricted to true tobacco flavors, then we will have to shrink our sets,” said Jeremy Weiner, category director for The Cigarette Store Corp. dba Smoker Friendly, which operates more than 180 outlets in eight states, including Smoker Friendly outlets, Smoker Friendly/Gasamat co-branded sites and 15 Tobacco Depots in Florida.
Also making headlines recently was the announcement that cigarette manufacturer Philip Morris International (PMI) agreed to acquire Swedish Match for $16 billion. The Swedish Match board has recommended that shareholders accept the deal. The acceptance period for the offer opens on June 23, 2022, and ends Sept. 30, 2022, and would require 90% of shareholders to accept. The possible consolidation follows an earlier reporting that Swedish Match, which also produces snus and the nicotine pouch ZYN, was seeking to spin off its cigar business.
At the store level, the biggest news for cigars is that sales seem to be returning to pre-pandemic status as more people return to the workplace. While commuters are more likely to drop into c-stores on their way to and from the office, or to fill their tanks more frequently, they also are back to spending more time in buildings where tobacco use is restricted, which can depress sales. IRI data for cigars indicated a minimal 52-week dollar sales falloff at less than 1%, but the more recent four-week measurement showed a loss of 2.3%.
While premium cigar customers may accept future price increases, if inflation hangs on, lower-cost cigarillos could be the bigger beneficiary. In addition to being sold at lower costs and two or more per package, manufacturers regularly release special flavors, creating marketing opportunities, at least for now.
“We will keep in tune with what’s happening in the industry to make the best selections for our stores. In the meantime, we are taking advantage of limited-time availability,” said Weiner.
MST, Modern Oral: Sharing Shelf Space
Moist smokeless tobacco (MST), including chew and snus, continues to compete with modern oral nicotine items, and the winner depends on the criteria. Per IRI, chewing tobacco out-earned spitless products by more than $5.6 billion in the U.S. convenience store channel for the 52 weeks ending April 17.
“Moist remains the category leader, however, nicotine pouches continue tremendous growth as we see consumers from combustibles and moist migrate over either as a dual-use option or completely,” said Tim Greene,category director of tobacco and general manager for The Cigarette Store Corp. dba Smoker Friendly.
Indeed, if you gauge year-over-year percentage change, then spitless items, like nicotine pouches, come out the dominant winner. IRI logged year-over-year change in dollar sales growth for spitless at nearly 37% and unit sale increases at more than 44% for a 12-month period, whereas chewing tobacco/snuff landed with 1.5% and 8.1% losses, respectively.
In addition to challenging traditional smokeless tobacco products, modern oral nicotine brands, including pouches, gum and toothpicks find favor with females. According to Goldman Sachs, women represent an estimated 5% of all nicotine users, but account for approximately one-fourth of nicotine pouch consumers. Analysts suspect the discreetness of pouches offers a big draw for women.
All these factors add up to an extraordinarily optimistic market forecast. Not only do analysts project nicotine pouch retail sales to top $4 billion by 2025, they anticipate greater than 30% compound annual growth rate (CAGR) over the next three years. In fact, Goldman Sachs places the ZYN brand CAGR at 17%. It should be noted, however, this estimate was reported prior to the news of PMI’s potential purchase of Swedish Match.
On! pouches nearly doubled its retail share during Q4 last year. Goldman Sachs stated consumer trials and repurchases of the pouches are up by an estimated 5% and 3%, respectively, which boost future market expectations.
But now that Congress amended the definition of tobacco products to include “containing nicotine from any source,” the synthetic nicotine landscape could undergo a major shift. Products with an accepted pre-market tobacco application (PMTA) can remain on sale until July 13 while the FDA reviews their market status. Eligibility beyond that depends on the regulatory body’s final ruling. But category managers can hope modern oral nicotine will follow the lead of vape.
Vape: Changing Expectations
For years, vape and e-cigarettes have been the most visible regulatory target with flavor bans and FDA market denial orders (MDOs) forcing c-stores to reconfigure inventories. In April, the FDA issued the latest round of MDOs for myblu items produced by Fontem US. It still hasn’t released decisions on other big-name products, like JUUL, that turned in PMTAs seeking to gain market authorization. Since the September 2021 deadline, the FDA has issued more than 1 million MDOs on flavored vape and e-cigarette products.
Still, the OTP subcategory continues to surpass expectations.
“Regardless of the flavor bans and other issues impacting the category, we see that vape is still a stronger item for us, even though there is more variety of pouches sold in our set,” added Nathan Arnold, director of marketing for Englefield Inc. The family-owned company runs 119 Duchess c-stores throughout Ohio and West Virginia.
Price increases of more than $1 plus an increase of nearly 4% in unit sales equals a jump of 13.1% in dollar sales for the 52 weeks ending April 17, per IRI. Although the market research firm recorded a dip in unit sales over the four weeks leading up to April 17, a price bump of $1.52 bolstered dollar sales by 4.8%.
Even among the positive news, Arnold admitted flavor bans have stirred up circumstances for vape.
“While many of our customers have changed behavior and started purchasing allowable items, it still has squeezed this category,” he said. “If one of the bigger brands is not approved, it will affect our set dramatically.”
Modified Risk: Opportunities
Albeit a small fraction within the tobacco/nicotine category, modified and reduced risk products continue to pique consumer, and therefore category manager interest. In 2019, General Snus products were the first smokeless items to be granted the label of modified risk. Late last year, 22nd Century Group’s VLN King and VLN Menthol King combustible cigarettes also secured the distinction of modified risk for containing 95% less nicotine than traditional cigarettes.
When IQOS, a heat-not-burn tobacco device, and companion Marlboro HeatSticks were released in the U.S. three years ago, the industry had high hopes smokers and other customers would embrace the technology. However, PMI pulled the product last fall on orders from the U.S. International Trade Commission due to patent infringements.
Cannabis: Awaiting Legislation
An additional point of interest for c-stores is the burgeoning field of cannabis-derived products. Over the past few years, Cannabidiol (CBD) has both captured the public’s acceptance and grown in application, from capsules to infused beverages and more. Forbes reported the U.S. market could exceed $20 billion by 2025.
But other cannabis products are making inroads, too, as more voters endorse legalizing recreational adult use. Currently, 18 states, Washington, D.C. and Guam have passed laws legalizing cannabis.
“Smokeable hemp offerings continue to see positive results as consumers become more familiar with the category,” said Greene.
This product segment could offer even more opportunity for the convenience store industry if Congress moves ahead with federal decriminalization of cannabis.
“The main frustration that still looms in that experience is the inability of dispensaries to use debit and credit cards in most cases due to the lack of traditional banking services. The SAFE Banking Act has passed the U.S. House of Representatives six times already in recent years, but has stalled in the Senate,” said Bethany Moore, director of communications for the National Cannabis Industry Association. “We’re optimistic that the more comprehensive cannabis reform bill, called the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which has passed the House twice now, and the Cannabis Administration and Opportunity Act (CAOA) being introduced by the Senate, will continue to gain traction and bipartisan support, and ultimately make it all the way to the president’s desk for signature.”
Although external factors such as inflation and prices at the pump will still influence the tobacco and nicotine category’s performance, it appears the category is resilient. A diversity of products with a close relationship to cannabis-related options promotes polyusage as well as appealing to a broader population that, for the moment, seems to be adapting to expanding regulations.