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Backbar Shifts Reflect Continued Pressures on the Tobacco Consumer

Convenience retailers remain cautious as several factors weigh on the category.
The tobacco backbar in a convenience store

NEW YORK — Another quarter, but the same story: adult tobacco consumers continue to face pressures from inflation, lower discretionary income and tightening regulations.

According to the Goldman Sachs second quarter "Nicotine Nuggets" survey, those pressures are driving a decrease cigarette usage and an increase in downtrading. The survey represents approximately 60,000 retail locations across the United States, or roughly 40 percent of all tobacco outlets.

"The outlook remains broadly cautious as retailers and wholesalers expressed continued concerns about consumers shifting away from cigarettes or completely exiting the category given higher prices, accelerated downtrading, regulatory tightening and continued uncertainty around e-cigarettes," said Bonnie Herzog, senior financial analyst at Goldman Sachs.

Notably, the second quarter survey found that cigarette volume declines continued at higher rates than the historical average — but still in-line with the first quarter — reflecting sustained pressure on the consumer from broader inflation and frequent manufacturer price hikes. As a result, adult tobacco consumers reduced their tobacco purchase frequency, switched to affordable noncombustible options and made fewer trips to the store, Herzog said.

[Read more: Declining Cigarette Volumes Draw Some Concerns Among Tobacco Retailers]

Other key takeaways for "Nicotine Nuggets" include:

  • Manufacturer pricing power is lower today vs. 2022 according to approximately 58 percent of respondents, down from 66 percent in the first quarter survey.
  • Philip Morris USA's (PM USA) Marlboro market share compressed on a sequential basis in the second quarter with respondents bullish about the performance of Marlboro Special Select. PM USA is an operating company of The Altria Group.
  • Survey respondents indicated mid-tier value is being driven by investments behind Marlboro Black as Altria works to keep consumers within the Marlboro brand franchise.
  • Smokeless nicotine offerings remain strong, led by modern oral nicotine brands ZYN and on!, supported by increased promotional activity.
  • E-cigarette volumes improved reflecting increased promotional activity behind key players like VUSE & JUUL, but also increased demand for disposable e-cigarettes, much of which is nonreported and a growing concern for the Food and Drug Administration and the tobacco category.
  • The combination of Altria and NJOY should accelerate NJOY ACE share gains, according to 65 percent of respondents, given Altria's distribution strength with many expecting an aggressive promotional strategy from Altria to build trial/awareness, much like its strategy with on!.
  • Promotional activity is picking up but not to the same degree across nicotine categories — higher promotions for nicotine pouches and premium cigarettes, while broadly unchanged for discount cigarettes (value/tier 4), traditional smokeless and e-cigarettes.
  • A federal ban on menthol cigarettes would be hugely negative and risk driving smokers to the black market and many just back to nonmenthol cigarettes, illicit disposable e-cigarettes or do-it-yourself activity.
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