C-store Tobacco Environment Remains Largely Stable

NEW YORK — Notable changes in the cigarette environment aside, the overall tobacco category is stable, according to convenience store industry insiders.

In Wells Fargo Securities LLC's latest Tobacco Talk survey, retailers and wholesalers representing approximately 25,000 U.S. c-stores cited cigarette manufacturers' pricing power and a competitive environment that is largely rational as factors in the category's stability.

However, "there are signs of widening price gaps and downtrading which will likely impact mid-tier brands the most, as we believe rising gas prices and other wallet pressures — delayed tax refunds, less disposable income, rising auto loan delinquencies — mostly impacting lower income groups," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

Given this, there are winners and losers behind the backbar, she said.

Winners, according to Herzog, include Newport, which recently joined Reynolds American Inc.'s (RAI) every-day low-price program; followed by Altria Group's Marlboro brand and RAI's Natural American Spirit.

Looking at reduced-risk products, Tobacco Talk found that 80 percent of retailers are excited about Philip Morris International's iQOS heat-not-burn product and plan to carry it.

In addition, 44 percent of retailers said they also plan to increase Altria's shelf space to accommodate the new brand, Herzog said. Through an alternative tobacco pact with PMI, Altria has the exclusive commercialization rights to iQOS in the United States.

Losers, Herzog noted, include ITG Brands Inc., and Copenhagen and Skoal, which were impacted by U.S. Smokeless Tobacco Co.'s (USSTC) recall earlier this year. USSTC is an operating company of Altria. 

"We remain optimistic on the U.S. tobacco sector despite unique tax/smokeless recall headwinds, which we believe will be offset by pricing and product positioning," Herzog said.