Burning Questions

As the makeup of the “Big Three” tobacco companies is poised to change, so too is the overall tobacco industry landscape — shaped by the fast-evolving desires of today’s consumers.

Convenience Store News spoke with Mike Auger, executive vice president, trade marketing at R.J. Reynolds Tobacco Co. (RJRT), and Blake Benefiel, director, trade and state relations at Altria Group Distribution Co. (AGDC), to get their views on what the future holds. RJRT is a subsidiary of Reynolds American Inc. (RAI). AGDC is a subsidiary of The Altria Group Inc.

CSNews: How is your company evolving as today’s tobacco consumer changes?

Auger: Driving innovation and redefining enjoyment for adult tobacco consumers are key parts of the “Transforming Tobacco” vision of RAI’s operating companies. That includes offering a variety of products for adult tobacco consumers to consider, from combustible cigarettes, heat-not-burn technology and moist snuff, to modern smoke-free products like snus and vapor.

Benefiel: That’s a good question. Our tobacco companies’ research tells us that 50 percent of adult tobacco consumers are interested in trying innovative tobacco products. Their job is to develop the products adult consumers are looking for. E-vapor products like MarkTen or MarkTen XL [from Nu Mark, Altria’s e-vapor and innovation company] are examples, but changing preferences influence other categories, too. For example, in smokeless tobacco, we’ve introduced pouch products and other easy-to-manage forms.

CSNews: Will there be more of a focus on alternative tobacco products this year?

Auger: At the moment, Zonnic [a nicotine replacement therapy gum] is available nationally and REVO [a cigarette that uses heat-not-burn technology] became available statewide in Wisconsin in February. While I won’t speculate on future expansion, I will say that as adult tobacco consumer preferences evolve, RAI’s operating companies will be working to meet those changing expectations while continuing to innovate.

Benefiel: Nu Mark’s goal is to be a leader in that space in the long term and it believes a portfolio approach is wiser than a single technology bet. MarkTen XL is a good example of Nu Mark strengthening its product portfolio. Its plan is for MarkTen XL to begin shipping into a lead market in the second quarter.

CSNews: Does the rise of alternative tobacco products, notably vapor, spell the end of traditional cigarettes?

Auger: Absolutely not. Traditional cigarettes continue to be very important to RJRT and our c-store partners, now and in the future. Adult smokers tend to visit c-stores at a higher frequency than many other consumers and they often purchase other high-margin items within their market basket along with their tobacco products. We see the growing interest in other tobacco products, vapor, moist snuff and snus as part of the transformation of tobacco. Alternative product innovation will continue to be a strength for RAI’s operating companies, but we believe that cigarettes will continue to be the primary driver of volume and profit in the tobacco category.

Benefiel: Our companies estimate approximately $2 billion in e-vapor consumer spending in 2014. But when compared to the $86 billion in estimated total tobacco spending, it is very small. Ultimately, the category is likely to be shaped by many factors, including adult consumer interest and regulatory and other policy decisions. Adult tobacco consumers are certainly interested in innovative products. Even though awareness of e-vapor products is high, today’s e-vapor products generally are falling short of meeting consumers’ expectations, which leads to relatively low rates of adoption.

CSNews: How do you work with retailers to manage a category that’s so in flux?

Auger: Tobacco products still draw major foot traffic into c-store locations every day. As consumer preferences shift, our trade representatives work closely with our retail partners to understand the trends in their markets and maintain the flexibility to address growth segments within the space allocated to the tobacco category without sacrificing profit drivers like traditional cigarettes.

Benefiel: One of the questions AGDC gets a lot is: How much space should retailers give e-vapor products? We start by telling them that consumer interest in the category is real and growing. We also encourage retailers to keep the category in perspective, and remind them that it’s still the early days and they need to balance the size of their e-vapor merchandising sets with their other tobacco categories. Each day, AGDC’s field sales force meets with thousands of retailers with one goal in mind — to help our retailer partners responsibly grow their business. That starts by listening and understanding their business goals and how the tobacco category fits within their plans.

CSNews: What steps can c-store retailers take to not lose the sales, profit and foot traffic that the tobacco category has traditionally generated?

Auger: Adult tobacco consumers shop more frequently, averaging two or more visits per week or higher, but you have to have the right mix of products that your consumers want in order to keep them coming back. Proper inventory management is equally important in retaining these valuable consumers. Take the time to understand the trends in your market and take advantage of the opportunities within segments that are growing such as moist snuff, vapor and snus. It also helps to educate store personnel about the products and what’s happening with the brands so they can have informed conversations with their adult tobacco consumers.

Benefiel: [Retailers must] keep their customers front and center, and make sure they’re paying attention to their needs. Our tobacco companies want to partner with their customers to help them get the most out of their tobacco category. And one of the best ways to do that is by focusing on sound category management principles: eliminating out-of-stock situations; merchandising our most popular brands in preferred positions; clearly communicating price and promotional offers; and deterring access by underage purchasers.

“Our tobacco companies’ research tells us that 50 percent of adult tobacco consumers are interested in trying innovative tobacco products. Their job is to develop the products adult consumers are looking for.”
— BLAKE BENEFEL, ALTRIA GROUP DISTRIBUTION CO.

“Alternative product innovation will continue to be a strength for RAI’s operating companies, but we believe that cigarettes will continue to be the primary driver of volume and profit in the tobacco category.”
— MIKE AUGER, R.J. REYNOLDS TOBACCO CO.