NATIONAL REPORT — If there is one common thread within the macro environment that is impacting today’s nicotine consumer, it is uncertainty.
Not only is there mounting pressure on the consumer as stimulus payments come to an end, but unemployment is also still relatively high despite labor shortages. And the onset of the Delta variant of COVID-19 is beginning to overshadow everything that consumers are trying to do in terms of getting back to their so-called "normal" lives.
Then, there are gas prices. As is typical during the summer, gas prices rise sharply. To some extent, this could be putting extra pressure on the nicotine category as a Goldman Sachs analysis found that gas prices historically are correlated with an impact on cigarette volume.
"We've seen when gas prices are low, cigarette prices trend more favorably, and the reverse is true as well. We are seeing cigarette volume tending to decelerate right now," Goldman Sachs Managing Director Bonnie Herzog said during a recent webinar hosted by Convenience Store News entitled "Retailer Roundtable: What's Next in C-store Tobacco."
The retailer participants in the virtual roundtable included:
Chris Dillard, tobacco category manager at The Spinx Co., operator of 82 convenience stores across South Carolina;
Tim Greene, category director of general merchandise and tobacco for Boulder, Colo.-based The Cigarette Store LLC, Smoker Friendly's largest authorized dealer with 182 stores; and
Karen Saber, vice president of business analytics and strategic sales innovation at Swisher.
Herzog, a senior consumer analyst at Goldman Sachs covering the beverage and tobacco sectors, pointed to the potential federal menthol ban as another area of concern for retailers. On April 29, the Food and Drug Administration (FDA) announced it is taking steps to ban menthol as a characterizing flavor in cigarettes, and ban all characterizing flavors — including menthol — in cigars within the next year.
However, Goldman Sachs estimates that a process like this is a multi-year endeavor given its complexity, and could take anywhere from five to seven years. "I'm not expecting any changes any time soon, but retailers should certainly be aware of which brands could win a litigation if in fact this ban goes into effect," Herzog advised.
According to Goldman Sachs' July 2021 Nicotine Nuggets survey, retailers said their view on the U.S. adult nicotine consumer is the same today as it was last year. Yet, the quarterly survey shows that over time, retailers' outlook is skewing more negative. From the April 2021 Nicotine Nuggets survey to the July 2021 survey, retailers' outlook on the nicotine consumer showed a greater decline — going from 17 percent to 28 percent having a negative outlook.
What retailers say they are most concerned about is:
More regulation — potential FDA menthol ban and nicotine cap;
Broad-based excise tax increases — potential hikes at the state and federal levels; and
Uncertainty — delays in FDA premarket tobacco product application (PMTA) approvals raise concerns about the viability of the e-vapor market.
"In some of the comments we're hearing from retailers, they are also concerned about usage occasions, which are down as work-from-home eases and consumers head back into the office. Maybe consumers are going back to their pre-pandemic behaviors," Herzog pointed out. "There are also overarching concerns about more legislation on the horizon, and certainly the potential for excise taxes continues to be an overhang."
Another trend impacting the nicotine market is pricing. Price increases from manufacturers have become more frequent and higher. Annual increases on packs each year have risen from 13 cents in 2013 to 25 cents in 2019 to, most recently, 45 cents in 2021.
"We have seen cigarette prices go up. As a result of that, when you look at the relative price gap between a Marlboro and the lowest price brand on the market, you see that price gap widen," Herzog noted. "This relative price gap is widening potential downtrading pressure."
Cigarettes on the Decline
In Goldman Sachs' April Nicotine Nuggets survey, nearly 70 percent of retailers said they expected cigarette volume declines to accelerate in 2021. Fast forward to July and retailers said they expect cigarette volumes to decline slightly this year and decelerate further next year.
Retailer Roundtable participant Greene said he is seeing a decline of about 2 percent this year vs. 2020 at Smoker Friendly.
"In Q1 2021, we were down significantly due to a large tax increase in Colorado where 30 percent of our stores reside. When you look at that vs. Q4 2020, we were down about 13 percent," Greene said of the company's volumes. "We rebounded a little bit in Q2. Looking at Q2 2021 vs. Q4 2020, we’re down about 3 percent in cigarettes."
The COVID-19 pandemic has introduced more volatility and greater uncertainty as it relates to current trends and retailers’ outlook. Cigarette volume spiked during 2020, but since then, it has reverted as consumer behavior returns to pre-pandemic levels.
"We have seen some deceleration in volume, but we historically have been and are still well under that deceleration percentage for overall volume. When rolling over heavy COVID-19 comps, we’ve maintained a lot of that volume," said Spinx's Dillard.
According to Dillard, consumers traditionally have pulled away from premium, branded or discount cigarettes and moved to third- or fourth-tier brands, which retailers are starting to carry. However, in Spinx's market, the retailer has not witnessed that pull-away.
"We've seen the opposite where those branded or discount buyers have traded up to the premium segment. I think it's interesting to see how customers are moving between those cigarette categories," he expressed.
PMTA: A Year in the Making
Now more than a year since the deadline for premarket applications for newly deemed tobacco products passed, the FDA has moved on the lion's share of the submissions.
On Sept. 9, exactly one year post deadline, the agency announced that it has taken action on 93 percent of the PMTAs that manufacturers submitted for more than 6.5 million tobacco products. Of those submissions, the FDA issued Marketing Denial Orders (MDOs) for nearly 1 million flavored electronic nicotine delivery systems (ENDS). A majority of the PMTAs submitted by the court-ordered deadline of Sept. 9, 2020 were for ENDS products, including electronic cigarettes and e-liquids.
Acting FDA Commissioner Janet Woodcock and Mitch Zeller, director of the FDA's Center for Tobacco Products, said the agency issued the MDOs because the product applications "lacked sufficient evidence that they have a benefit to adult smokers sufficient to overcome the public health threat posed by the well-documented, alarming levels of youth use of such products."
Like many convenience store operators, as the PMTA deadline approached last year, Smoker Friendly identified as many products as possible that weren’t going to be submitted and worked with its suppliers and manufacturers to discount those products for a quick sell. Some suppliers even took back product for credit or replacement.
"In the end, we had to write off quite a bit of inventory as well that we know wasn’t submitted for PMTAs," Greene explained. "Post-PMTA, we took a very conservative approach to adding new products mainly from the big manufacturers, and took a conservative approach to disposables by not introducing anything new until the first of the year, which has been a value added to the vapor category since then."
Similarly, Spinx carefully examined the products across its backbar that were being submitted for PMTAs. One area in particular that the c-store chain took a hard stance on was not carrying pop-up disposables that offered different flavors and "that slid under the radar of the PMTA," Dillard shared during the CSNews webinar.
"I didn't want to position myself that once the PMTA process is complete, we have one-off brands that are taking up space for items that have been accepted and now, I have no space for them," he said. "I am cautiously optimistic about coming out of the other side of the PMTA."
An on-demand replay of "Retailer Roundtable: What's Next in C-store Tobacco" is available here.