The looming menthol ban has been hanging over our heads for many years now, but as it becomes closer to a reality many retailers have shared their anxiety over what the future of the cigarette category will look like.
The worries over the ban certainly impact some retailers more than others, and there’s a direct correlation to the amount of menthol sales a retailer enjoys and how concerned they are with the ban.
Some manufacturers are urging retailers to write their congressman, the National Association of Convenience Stores (NACS) has requested a 60-day extension on the Food and Drug Administration (FDA) comment period, and some folks are hitting the Doomsday button if they are servicing a highly mentholated market. All good reasons to worry as most would agree.
But what if I told you to relax, to not worry, and that all the sales you have today will still be there after the ban with potentially even better margins than before?
The tobacco category has weathered similar “transitions,” as I call them, in the past. These previous transitions serve as a good reminder of the industry’s resilience and counterbalance the doom and gloom being hyped by certain segments of the industry and the media.
In my almost 40 years in the nicotine industry, we have seen many product categories rise to significance in the c-store world, and many that have become irrelevant to the daily business.
Almost 25 years ago, the Master Settlement Agreement (MSA) that imposed the framework around cigarette liability was touted as the end of the cigarette business as we know it, but does anyone in the retail trade even have enough knowledge of it today where they could explain the MSA and what impact it has had on their business? What about the Food and Drug Administration (FDA) regulation of tobacco? Has anyone seen a net loss in their sales and profits because of it?
Loose cigarette tobacco was taxed beyond what the average consumer could afford, but pipe tobacco took its place within six months. Little cigars were taxed federally like cigarettes, and yet heavier filtered cigars are still being sold for 99 cents in some markets. With all the taxes imposed and price increases, I just saw a pack of cigarettes for $3.24 this past week in Indiana. And who can forget the ban of e-liquids and the manufacturer elimination of flavored Juul products?
A Market Shift
As 2022 unfolds, the industry is looking at a ban of menthol cigarettes and flavored cigars as the two most notable skies that are falling. Menthol is a product characteristic of a cigarette, no different than a king-sized or 100mm smoke, or a thin cigarette compared to a wide cigarette. Plenty of people prefer menthol cigarettes; however, eliminating menthol will not eliminate the desire for a smoker to purchase an alternative cigarette.
Almost every smoker will take a cigarette that’s a different style than their own if they run out of their preference and don’t have an option to go somewhere else, and we all know people that will do that. Why is menthol any different? It’s not.
Flavored cigars will most likely go by the wayside too. The biggest question is whether “sweet” is a flavor or not, but that becomes a share of market issue with one company being the big sweet winner or loser, depending on the outcome. Flavored cigars were a boon to the cigar business and still command a large share of the market today. But did you know the biggest boon to the cigar business was individually bar coding single sticks, which allowed chains to capture and promote the single cigar market?
Consumers will easily change products as virtually every flavored cigar is available in a regular or sweet style. Many retailers have complained over the years to me about the proliferation of hundreds of flavored SKUs in the category, with many of them collecting dust and manufacturers not honoring the return of slow sellers. Is the sky falling or is this a benefit to managing your nicotine assortment?
The elimination of flavored cigars and menthol cigarettes will bring about a significant reduction of items a store will need to carry. This will not result in lost sales overall for the category. Retailers should see increased turns as fewer dead items sit on the shelf. They will no longer be faced with the flavor of the month that some manufacturers use to support their own company sales objectives.
Also, expect a shift in cigarette market share due to the elimination of menthol, and while that becomes an intra-industry battle for market share as those switches take place, it may also mean the elimination of everyday low price (EDLP) programs as leverage abates. This can translate into more low-priced assortment for cigarettes, which most often bring higher margins and penny profits as more competition is created for sales in your stores.
The history of the category is truly one of resilience, and there’s many more examples of it than I have recounted here. Most of the noise asking you to “fight and write” are from manufacturers that feel like they’re vulnerable based on their own portfolio to unfavorable shifts in their market share, or industry pundits enlisted to support the industry under the guise of objectivity.
So, if you haven’t been in this category for a long time, reach out to someone you know that has, and I’m certain they will tell you to not worry. The category won’t be going away. In fact, it may get stronger with fewer products to criticize, but that produce a higher turn rate and more profits.
Steve Sandman has worked in the tobacco industry for nearly 40 years, most recently as president of Republic Tobacco. His extensive experience includes product management. He can be reached at (812) 569-1388.