As the battle against Big Tobacco continues to wage, c-store retailers are bracing against pending Food and Drug Administration (FDA) regulations, an onslaught of state and local legislation and rising inflation, all the while working to adjust their backbars to comply with the latest mandates and still maximize sales.

As potential restrictions from FDA on nicotine levels, menthol and characterizing flavors in cigars, as well as pending premarket tobacco product applications (PMTAs) and proposed local flavor bans, weigh heavily on c-store retailers, tobacco category managers are considering what they may have to replace on the shelf and how to fill the gaps.

“We are expecting a full flavor ban sometime in 2024 in our state, and by county level it could be sooner. We are definitely strategizing now to find options that can fill the backbar and ensure our customer has a good selection of available choices,” said Jon Manuyag, director of marketing for Plaid Pantry, which operates 106 stores in Portland, Ore., with three of those stores in Seattle and Vancouver, British Columbia.

“We are also looking at other categories outside of tobacco to fill up the tobacco backbar space,” he added.

Tracking Flavor Bands

On the federal level, the industry is anxiously awaiting decisions from the FDA on the future of menthol, as well as characterizing flavors in cigars.

“The FDA has announced that it intends to finalize regulations by August of 2023 that would prohibit menthol cigarettes, menthol roll-your-own (RYO) tobacco, menthol heat-not-burn products and all flavored cigars,” said Thomas Briant, executive director of the National Association of Tobacco Outlets.

“The effective date of these regulations will be announced when the final regulations are published. This means that the regulations would not go into effect in August of 2023, but at some later date,” he continued.

State and city bans on menthol and flavored tobacco in general, however, may impact c-stores sooner.

At press time, new flavored tobacco ban proposals have been introduced in Pennsylvania, Indiana, Maine, Maryland, Minnesota, Nevada, New Hampshire, New Mexico, New York, Ohio, Oregon, Texas, Vermont and Washington, according to Briant. They’ve been defeated in Nevada, New Mexico and Washington. Louisiana is considering a ban on vape flavors other than tobacco.

Massachusetts has been dealing with a flavor ban on all tobacco products since 2020, and California enacted a flavor ban at the end of 2022. Recently, California proposed a bill to prohibit tobacco sales to those born in 2007 and later, but it’s been dropped in favor of pursuing more aggressive enforcement of the flavored tobacco ban.

Nevada’s proposed flavor ban bill also would have prohibited anyone born after Dec. 31, 2002, from purchasing cigarettes. The bill failed to progress. But each bill emboldens other states to attempt similar legislation of their own.

C-store chains such as Yatco Energy, whose sites are primarily located in Massachusetts, have seen drastic changes with the onset of the flavor ban.

Yatco has 13 company-operated sites, with one location in Connecticut, one in Rhode Island and the remainder in Massachusetts, as well as six franchisees.

“(The flavor ban) has cut into our cigar business quite a bit here. We’re still seeing positive growth in the lower single digits, but we’re seeing double-digit — in the teens — growth in our Rhode Island and Connecticut stores,” said Ed Oliveira, senior category manager, Yatco.

“And I think part of the reason for that really is because of the flavor ban over the last two, two and a half years here in Massachusetts.”

The cigar planograms for Yatco’s Massachusetts stores have had to be different from those of its Rhode Island and Connecticut sites.

The ban not only affects cigars at Yatco, but it impacts moist snuff and vape, as well.

“The flavor ban in Massachusetts has hurt our sales in moist snuff. At best we’re flat right now … but if you look two years ago before the flavor ban, from the numbers I pulled, we were actually up 6-8% depending on the year. That’s all evaporated,” explained Oliveira.

Yatco’s Rhode Island and Connecticut stores see a healthier moist snuff business, partially due to the flavor ban, and partially because the excise tax in Massachusetts for moist snuff is over 200%.

The inability to sell menthol in Massachusetts has particularly affected the cigarette business at Yatco stores in the state. “We’re down double, 20-plus percentage points in cigarette pack sales over the past few years,” said Oliveira.

Oliveira noted that Yatco’s Connecticut and Rhode Island stores that still allow menthol are showing an increase in pack sales, with one store up 27%. Much of that percentage increase is due to menthol cigarette sales, and customers crossing state lines to stock up on the product is likely contributing to increases.

When flavor bans went into effect in California, manufacturers moved to introduce non-menthol varieties to replace former menthol products, but the California Attorney General’s office sent Notices of Determination to the manufacturers, alleging such products would be misunderstood as flavored due to packaging style, color, etc. R.J. Reynolds Tobacco Co. has filed a lawsuit against the state officials in an effort to continue selling its new non-menthol Camel and Newport styles.

“It’s a shame they’re going after (menthol). You know what, if you’re selling cigarettes, why do they have to outlaw menthol? That doesn’t make sense. No. They allow you to sell marijuana. Now the cities are allowing marijuana. So, if you’re allowing marijuana, why not allow them to sell cigarettes anymore?” said Faiz Simon, president of Island Lane Capital, who operates Simon Xpress in Warren, Mich., as well as 14 other sites under a different banner name.

Oliveira expressed a similar sentiment, as cannabis is legal in Massachusetts.

As long as a city or state has a menthol ban in place, customers can choose to cross its border to find menthol cigarettes elsewhere, which Oliveira believes is the case, not only with cigarettes, but with menthol vapes, as well, which are included in Massachusetts’ menthol ban.

Babir Sultan, president of FavTrip, which operates three branded sites and nine leased sites in Missouri, as well as one in Kansas, also expressed frustration with local bans that send customers across city lines.

Last year, Kansas City, Mo., tried to establish a menthol ban that did not end up passing, Sultan explained.

“But I can’t imagine; what if it did?” he said. “Within 10 miles you could enter another city that would sell (menthol). … We do have stores in multiple cities, and some could benefit and some could really be hurt that are caught on the wrong side.”

A local menthol ban is still a concern for Sultan, as it could be attempted again. He noted, however, that a nationwide ban could relieve the pressure from a business in a market with a local ban, as it will make the overall tobacco market “fair game.”

Oliveira agreed that the playing field would be more equal, but he noted that should a nationwide flavor ban of any sort be enacted, customers will succeed in finding these products elsewhere.

Harkening back to the Prohibition era, Oliveira said that “if they can’t go to another state, they’ll get it from another country or through a black market type of scenario.”

For now, experimenting with alternative products prior to a potential ban can possibly help save sales down the road.

Convenience store retailers would also be wise to start building relationships with their representatives now, before flavor legislation reaches their operating area.

“Start strategizing now for flavor ban discussions in your county or state. Being proactive now will only help you fight the potential loss in revenue and profits that these flavor bans will impact,” Manuyag advised c-store retailers.

In-Store Insights

At store level, retailers are seeing varying trends across the core tobacco segments.

Don Burke, senior vice president of data management and analytics firm Management Science Associates (MSA), pointed to an overall decline in the total nicotine category, which he noted is significantly higher than in recent years.

“One of the factors influencing this decline are the low unemployment rates causing more consumers to be facing restrictions on the use of tobacco in the workplace. Other factors include the continued high inflation rate and gasoline prices that are restricting consumers’ disposable income,” he said.

While MSA data shows cigar sales are declining, Burke noted they’re faring slightly better than the total nicotine category, partially due to less pre-price promotion in the cigarillo category than in previous years.

However, at Simon’s stores, cigars are outperforming all other categories.

“People are smoking more cigars than before. I’ve been seeing that,” said Simon.

Vape sales are also increasing at his sites; however, not every store is seeing the same success. At Plaid Pantry vape sales are down by 5%.

“Part of that is due to no more promotional activity for JUUL in the Oregon market,” said Manuyag.

Altria recently settled at least 6,000 JUUL-related cases for $235 million. The lawsuits had alleged that JUUL’s flavors and marketing campaigns had targeted teens.

E-cigarettes have been and will continue to be one of the most watched categories as FDA decides on the remaining PMTAs. In May, 10 companies received marketing denial orders for an approximate combined 6,500 flavored e-cigarette and e-liquid products.

C-store retailers should note that of the 26 million PMTAs FDA received since spring 2020, FDA has acted on over 99%. Retailers should continue to watch for new marketing authorization decisions.

For Yatco, JUUL and Vuse carry the majority of its vape business, although Massachusetts’ flavor ban limits the amount of products from the brands that the stores in the state can sell. These stores still perform well with vape, but business is much stronger at Yatco’s Connecticut and Rhode Island sites.

Also, as aforementioned, due to the flavor ban, sales of moist snuff for the chain are flat. Simon is seeing similar sales trends for moist snuff at his stores.

Burke noted that the smokeless category overall is seeing single-digit declines, but the one price tier showing some growth is the deep-discount segment.

This suggests that emphasizing the lower-priced items, especially when facing increasingly price-conscious consumers, may be a noteworthy strategy for the foreseeable future.

In contrast, modern oral nicotine products are expected to grow at a double-digit rate in 2023, according to Burke.

This is certainly the case for Yatco, whose sales year over year are up by 100% for the category. At Plaid Pantry, modern oral is driving the other tobacco product category, with ZYN, On!, Rogue and VELO heading the charge. ZYN also holds over 70% of the market share of this category for Yatco.

Plaid Pantry is also seeing unit increases for RYO tobacco, as customers are looking to buy bulk tobacco and papers. Burke, however, noted there is a greater increase with pipe tobacco compared to RYO, as it offers a price advantage due to taxation levels.

One emerging category in the tobacco market retailers should keep an eye on is modified risk.

22nd Century Group is one company to have rolled out reduced-nicotine tobacco products. Its VLN King and VLN Menthol King have 95% less nicotine than traditional cigarettes and are so far the only very low nicotine cigarettes authorized by the FDA.

The FDA is currently considering maximum nicotine levels in cigarettes and possibly other combustible products, with proposed regulations arriving potentially by this fall. Such a move would drastically reshape the whole category.

At the moment, Manuyag has VLN on his radar and FavTrip plans to further explore possibilities with the nicotine-free category.

The Price of Inflation

As inflation pushes prices higher, the tobacco category has been feeling the pinch.

In the four weeks ending April 23 alone, the price per unit of cigarettes has increased by 4.8%, according to Circana data.

The same data shows price per unit increases for the 52 weeks ending April 23 for each tobacco category. For electronic smoking devices, the jump is as large as 13.8%.

This has likely contributed to unit sales decreasing 8.2% for electronic smoking devices and 7.5% for cigarettes over the past year.

Major manufacturers are also continuing to increase cigarette prices, which is “likely pushing more consumers to the black and gray markets for the purchase of their tobacco items,” said Burke.

Plaid Pantry has seen success offering discounts when customers buy multiple packs of cigarettes. Although, this could potentially lead to reduced trip frequency with these customers, Manuyag said.

At Yatco, premium cigarette brands are declining in sales, whereas lower-tier brands like Montego and Eagle 20’s are growing in double digits in many stores.

“The low-end brands are growing for us, and American Spirit, ironically enough. American Spirit, even though it’s a premium line, is the only non-generic … cigarette brand that’s growing for us,” said Oliveira.

FavTrip is also offering low-tier brands to customers to combat high cigarette prices.

“Now it’s almost every quarter or less there’s always a notification of a price increase, especially with the top-tier big brands. …” said Sultan. “But we have some implementation in our back software that kind of raises the prices for us right now, because it got so frequent that we could be losing money and thinking we’re selling a bunch just to realize a few months later that we’re selling below cost.”

Despite inflation concerns and higher prices per unit, cigarettes continue to hold their place as the top-selling tobacco category for convenience stores. Circana data for the 52 weeks ending April 23 shows cigarette dollar sales topped $54 billion. For the four weeks ending April 23, the cigarette segment brought in $4.12 billion and was the only tobacco category to reach the billions in dollar sales, with unit sales outpacing other categories, as well.

Looking Ahead

Cannabidiol (CBD) remains a possible opportunity for the convenience store industry.

Plaid Pantry has experimented with CBD beverages and ingestibles, but the category is still an unknown with many consumers.

“This could be an opportunity in the future, but (not) until the major CBD combustible brands can get their products with the major convenience distributors. Then retailers would be more confident to sell if it’s being carried by their large distributor partner,” said Manuyag.

FavTrip and Yatco also offer CBD, which is seeing double-digit growth for Yatco’s three states, although the sales are coming off a small base.

In Massachusetts, however, Oliveira noted that CBD is “less of a player here,” which he believes is a result of legal marijuana in the state.

In addition to CBD, c-store retailers are recognizing the importance of investigating products and brands they don’t normally carry as legislation continues and inflation rises.

Simon is continuing to open his sites to new items as the year progresses.

“There’s always new things that come in, so we’re ready to know what new stuff comes in and we’ll try it,” he said.

As retailers look ahead in 2023, Burke noted one of the keys to success for c-store tobacco sales is having options.

“The tobacco retailer should keep in mind that the top-selling items in many tobacco categories are the premium brands, so keeping an adequate stock of these items is critical to maintaining a strong tobacco business,” Burke said. “In addition, to capitalize on the growing deep-discount price segments in many tobacco categories, an adequate selection of items in the deep-discount price tier will enhance the possibility of growing this important c-store category.”