California’s statewide voter referendum banning retail sales of flavored tobacco just passed by 76%. All flavored tobacco is banned, significantly menthol cigarettes and flavored cigars. Projected nationally, that’s about $27 billion.
The California ban was not unexpected. It requires removal of flavored tobacco products by Jan. 15, 2023. It’s doubtful that anything can be done to reverse course. The statute law defining the ban was passed in 2020, but held up until now by petition and a voter referendum. It precedes the onward march toward enforcement of pending Food and Drug Administration (FDA) flavored tobacco bans nationwide in early 2024.
The removal of flavors will reduce convenience store shelf facings by about 40% before resets and replacements with non-flavored alternatives. Today’s average convenience store has between 32 and 48 facings of menthol cigarettes, and another 18 to 30 facings of flavored cigars. In California alone, with more than 12,000 c-stores, that adds up to about 800,000 shelf facings ready to disappear, not including e-vapor and smokeless flavors.
On the other hand, what the California ban offers is a gigantic tobacco test market for the future of retail shelf management as well as for pilot studies of future tobacco and nicotine-free alternatives, both smoking and smokeless.
Best estimates by researchers and distributors look like a 30% net shrinkage in the c-store tobacco products section from the current gross 35% sales contribution by tobacco products. To defend tobacco’s share of ACV retail revenue, a process of removal, replacement, intrusion and reset will likely include a notable increase in approved oral nicotine and nicotine-free products to partially offset those estimates.
Consumer usage research shows a 60-70% conversion to regular cigarettes by menthol cigarette smokers with the rest quitting, smuggling or moving to oral nicotine. Health Canada reported a 25% drop in cigarette usage and frequency when it banned menthol. The Centers for Disease Control and Prevention (CDC)’s hopeful estimate is that the pending FDA ban will reduce cigarette smoking among 18-35-year-olds by 20% (not including relapses).
In preparation for the FDA flavor ban, recommended changes to shelf sets are focused on alternative forms of oral nicotine, ranging from heated tobacco to non-tobacco substitutes. Major tobacco companies are already focused on a future of nicotine delivery that will redefine the c-store front counter. Few, if any, are considering nicotine-free alternatives.
The current assumptions for the future are that nicotine is going to be the new ball game. However, oral nicotine and heated tobacco still won’t be flavored. Addicted central nervous systems will be happy, but for smokers looking for a cooling, relaxing menthol break, maybe not so much.
The newly restricted California market presents an opportunity to measure and project what percentage of sales can be sustained after the flavor ban, and what a nicotine and non-nicotine balance might be, adjusted to higher tobacco-consuming areas of the country.
The FDA, CDC, and University researchers say it’s all about the nicotine. The FDA has opted for tobaccoless nicotine, choosing addiction over carcinogens. Oral nicotine marketers are buying into the premises because it’s easier than litigating with the FDA over what they are certain to lose in the end.
Menthol smokers and flavored cigar smokers may have something to say about the cooling and pleasurable menthol sensation. Some 34% of cigarettes are menthol, and 51% of the $4.7 billion cigar category is flavored. Smokers like menthol. Smokers like vanilla. They like rum, cherry and clove. Yeah, nicotine keeps them at it, but it’s also the menthol because, you know (exhale)… menthol.
11 million menthol smokers forked up $22 billion at the cash register. Flavored cigars add another $2.3 billion. When you get past nicotine and the fact that 62% say they want to quit but don’t, you have to ask how many would try a nicotine-free menthol if the taste and soothing menthol neuro-effect were right? Some of them might even tell their friends about it.
Contrast the scale of the pending FDA ban with the breadth of flavored tobacco choices and the number of current smokers. It defies logic that a reasonable percentage of those who enjoy flavored tobacco would not try a nicotine-free product. Oral nicotine will be available, but where is the moment? Where is the enjoyment?
If 5% of current menthol smokers find the taste they love in a smooth nicotine-free alternative, that’s $1.1 billion at current prices. Chump change for the majors, but a nice piece of business for anyone that can step up and get the taste right. And did I mention there’s no excise tax?
As the future tobacco section is being laid out and sustainable revenue streams are being projected, everything is not going to be about nicotine. California is going to tell a lot about the power of flavors. Smokers are going to tell us what they miss.
John Geoghegan has spent the last 30 years in the tobacco business including as vice president of strategic planning at General Cigar Co., U.S. manager for DjEEP Lighters, head of marketing for Kretek International Inc. and manager of LaMirada Cigar Co. He began his career 57 years ago at Procter & Gamble. Geoghegan is a graduate of the University of Cincinnati. He lives in Laguna Niguel, Calif.