C-store Backbar Shifts Persist in Q4 2023

NEW YORK — Convenience store retailers continue to grapple with a shifting backbar as inflation, illicit tobacco sales and flavor bans take their toll. 

"We remain cautious on the U.S. tobacco/nicotine industry in the near term as the tobacco consumer remains under substantial financial pressure with many being more selective in their purchases and turning to more affordable alternatives, such as fourth tier/deep discount cigarettes, modern oral tobacco and, increasingly, illicit or gray market disposable vapor products," said Bonne Herzog, Goldman Sachs senior financial analyst.

"Shifts in category and consumer spending dynamics have been further exacerbated by flavor ban momentum at the state and federal level, and uncertainty with regard to the future of the e-cigarette category and category innovation," she added.

Herzog also pointed out the Biden Administration is expected to make a final decision on a federal menthol ban in March and the U.S. Food and Drug Administration (FDA) is still reviewing premarket tobacco product applications for "big market brands such as JUUL ad Vuse Alto, as well as menthol variants more broadly."

[Read more: FDA Issues Marketing Decisions on Several Vapor Products]

The insights are based on feedback from retailer and wholesalers contact in Goldman Sachs' fourth quarter 2023 "Nicotine Nuggets" survey, representing 67,000 retail locations across the United States.

Among the survey's takeaways are:

• Cigarette volume declines accelerated sequentially in the fourth quarter and the outlook remains cautious as retailers and wholesalers expressed concerns about consumers shifting away from the segment or leaving as higher costs, regulations and more competition in smoke-free options drive consumers to trade down or exit the category.
• Manufacturer pricing power is weakening relative to a year ago according to 62% of survey respondents vs. 57% in the third quarter survey.
• Downtrading pressure was strong in fourth quarter as a still elevated cost environment and wide cigarette price gaps drove a significant increase in downtrading to fourth tier/deep discount brands.
• Illicit market activity in e-cigarettes is a growing concern and negatively impacting cigarette volumes with most retailers pessimistic that FDA enforcement will improve in the near term.
• Promotional activity picked up in the quarter led by the oral nicotine and e-cigarette segments as manufacturers invest to drive conversion and volumes.
• Smokeless nicotine volume growth remained strong, up double digits, led by ZYN and on!, with retailers optimistic that strength will continue in 2024.