Alternative Smokeless Products Stand Out on the Backbar

NATIONAL REPORT — Are you onboard for a smokefree and smokeless future? The tobacco companies are setting the pace and potentially, your backbar space.

In November 2022, Philip Morris International completed its acquisition of Swedish Match, providing the opportunity to significantly accelerate its smokefree transformation and product portfolio with leadership positions in modern oral nicotine (ZYN).

Meanwhile, Altria Group Inc. has stated its vision of "Moving Beyond Smoking." The company aims to responsibly lead the transition of adult smokers to a smokefree future with increased smokefree product research, development and regulatory preparation. Altria believes taking action to transition millions to potentially less harmful choices is a substantial opportunity for adult tobacco consumers, its businesses and society.

The overall smokeless tobacco segment, including modern oral nicotine, is predicted to grow about 6 percent for 2023, according to Goldman Sachs Global Investment Research. But that is just a small part of the picture. Convenience store operators would be wise to observe some key smokeless signals that are currently rising.

[Read more: Increased Consumer Pressures Reflect in Backbar Sales]

For example, the traditional smokeless segment is expected to decline between 3 percent and 5 percent in 2023, according to data from Management Science Associates Inc. (MSA), a Pittsburgh-based company focused on analytics and informatics.

"Overall, this reflects that most consumers have returned to the work environment, following the pandemic, where it is not as easy to consume the product, along with the effects of some cannibalization from the nicotine pouch/modern oral category," noted Don Burke, senior vice president of MSA.

He cites the "bright spot" in traditional smokeless as the deep discount segment, which MSA shows to be growing at nearly 2 percent this year.

"This trend reflects the continuing impact of economic pressures on the tobacco consumer: increased inflation, high gasoline prices, and the elimination of the government financial incentives that were in place during the pandemic," Burke added.

The smokeless tobacco alternatives segment, on the other hand, is showing impressive sales growth. "In fact, the rate of growth of the alternative smokeless category is currently stronger than it was for the nicotine pouch (modern oral) category at a similar stage in the development of both products," Burke told Convenience Store News. "While the alternative smokeless category is still far smaller than the traditional category, it is certainly a product category that retailers should be stocking and continuing to monitor."

During a recent National Association of Tobacco Outlets webinar entitled "Current Trends and What's Ahead in Tobacco & Nicotine," Goldman Sachs managing director and senior consumer analyst Bonnie Herzog explained that the modern oral tobacco category is still quite small — representing less than 30 percent of the total oral tobacco category — but it is growing rapidly.

"I do expect that slice of the pie to continue to expand in the next five to 10-plus years, especially with Philip Morris entering with Swedish Match and ZYN, and everything Altria is doing with on! And we keep having more innovation on that front," Herzog said.

The Smokeless Consumer

The smokeless alternatives consumer appears to be different than the traditional smokeless tobacco user.

"I think why this category is attractive [is] it appeals to a younger, maybe more affluent, better educated consumer and also the margin profile is much more attractive," Herzog noted. "This is where I'm hearing that more retailers are allocating space to this category because it's simply driving volume, sales and, certainly, profitability."

Along the same lines, Alex Morrison, senior business analyst for Wilton, Conn.-based Cadent Consulting Group, pointed out that the benefits of the modern oral category have been promoted to a younger demographic (especially males 21-44) as potentially lower health risks, lower price points, less social stigma, no offensive odors and convenience. 

"It has also been heavily popularized on social media, including TikTok," he said.

Whereas tobacco suppliers and retailers have traditionally been satisfied with marketing tactics that include pricing, promotion, visibility and availability, the alternative segment of smokeless is lending itself to a more digitally focused strategy.

"The more progressive and highest-performing retailers in our universe have been impressed with our ability to leverage consumer insights from our direct-to-adult-consumer online database and our ability to leverage digital capabilities well beyond those of more traditional products and brands," said Matthew Hanson, chief financial officer/chief growth officer of Black Buffalo, a modern oral nicotine product that mimics moist smokeless tobacco, but without the tobacco leaf. It is available in long cut and pouches.

Hanson advises c-store retailers to: "Do your homework and seek products that match up first with your adult consumers, not your planograms. We have seen the very highest-producing retailers focus on traditional as well as digital activation, including in-store screens, email campaigns, SMS programs, loyalty programs and apps to drive growth in the category."

What's to Come

Once more alternative smokeless products make it through the U.S. Food and Drug Administration's (FDA) premarket tobacco product application (PMTA) process — which is required by law for a tobacco product to be authorized for sale in the United States — more retailers are expected to come onboard.

But for now, "regulatory uncertainty will keep a large portion of retailers more conservative until resolved," according to Hanson.

Herzog agrees that for smokeless and other nicotine innovation (such as heat-not-burn) to truly move forward, much will depend on how fast the FDA is reviewing PMTAs.

As more retailers begin to carry a larger assortment of alternative smokeless products and consumers become educated and repeat their purchases, the segment is expected to continue achieving strong sales growth over the next several years.

"This does not spell gloom for the traditional [smokeless] category that will continue to appeal to the dedicated tobacco consumer," Burke maintained. "While today, the traditional category is slowly declining, the alternative products being introduced will invigorate consumer attention to the entire category."

Thus, he urges retailers to stock items from both sides of the smokeless segment to meet existing consumer demand, as well as new, emerging demand.

Herzog said there is the potential for "things to get quite interesting, exciting."