Changing the Narrative

The only thing constant in the tobacco/nicotine business is its ever-evolving nature. For convenience store retailers, whose No. 1 product category in sales per store is cigarettes, this is a blessing and a curse. On the one hand, tobacco restrictions are adding up and tightening. On the other hand, innovation is multiplying and opening. Convenience Store News recently consulted with industry experts to get their perspectives on the year ahead for the convenience store backbar. Here is what they said: Economic Squeeze When it comes to the business of tobacco, the challenges often get mentioned before the opportunities. For instance, analysts and manufacturers were quick to bring up the economic squeeze and its expected effect on the tobacco consumer this year. “We believe the most pressing challenge for 2023 will be the continuation of consumer pressure on discretionary spending,” said Mike Wilson, vice president of trade strategy and operations for Reynolds Marketing Services Co., based in Winston-Salem, N.C. “Inflation, rising interest rates and a lagging economy in general are impacting how consumers make their purchasing decisions.” Similarly, Bonnie Herzog, managing director at Goldman Sachs, pointed out that the macro environment is still uncertain and thus negatively affecting the category. “Gas prices have calmed down, but remain a near-term headwind to adult tobacco/nicotine consumers,” she noted. A recent Goldman Sachs survey of retailers and wholesalers projected a “quite cautious” outlook for the nicotine category, thanks to broad-based inflationary pressures, lower discretionary income, lower usage and increased downtrading. Inflation and rising prices will continue to lead to trade-downs to off-brands, private label and generics/subgenerics in the tobacco/nicotine category, according to Alex Morrison, senior business analyst for Cadent Consulting Group, based in Wilton, Conn. “The economic pressure facing consumers is real and many are choosing to trade down to lower-priced brands or products that result in lower register rings at retail,” echoed Becky Roll, chief revenue officer for Glenview, Ill.-based Republic Brands, maker of Top, Premier, Gambler and other roll-your-own (RYO) tobacco products. Don Burke, senior vice president of Management Science Associates Inc. (MSA), a Pittsburgh-based company focused on analytics and informatics, believes the key challenge of managing the 2023 backbar will be for retailers to continue capitalizing on the trend toward value brands in each product segment. “As inflation and gas prices are expected to remain high this year, being able to offer a strong product selection of value-priced items, while maintaining the right items in the higher-priced segments, will require some retail ingenuity,” he told CSNews. Regulatory Uncertainty While economic pressure has been a recent challenge for the category, regulatory uncertainty is a longstanding foe that has been intensifying, especially as it relates to the Food and Drug Administration (FDA) and its painfully slow process for determining which electronic cigarette, vape, modern oral products and more are authorized for sale on the market. Some that were denied authorization are involved in litigation, causing even more industry confusion. Running parallel with that is the uncertainty around enforcement action “because the FDA has not acted terribly aggressively,” noted Bryan Haynes, a partner with the national law firm Troutman Pepper. He believes the dynamic needs to change to avoid all of the unlawfully marketed products that are on shelves currently. Of late, the regulatory activity has surrounded electronic cigarette/vape items. There’s been no regulatory action around modern oral products yet, which he said is causing further confusion as to how things might translate from one category to another down the road. Inventory exposure is top of mind for many retailers, but they are often confused as to the timing of enforcement and when they have to remove product from their shelves, added Agustin Rodriguez, another partner specializing in tobacco at Troutman Pepper. That’s the conundrum, Haynes explained: “FDA orders speak in immediate terms; there is no sell-through period. So, as a retailer, you basically have two options: rely on the manufacturer to avail itself to stay the action, which has happened a number of times, or you potentially rely on the FDA to delay taking action.” Morrison of Cadent Consulting concurs that there is widespread industry confusion, citing headlines regarding the market removal of certain popular vape items. “By all accounts, these products should no longer be available,” he relayed to CSNews. “With seemingly no enforcement being taken in the last several months, we believe that the biggest backbar challenge in 2023 will be for c-stores to juggle the products offered on-shelf while the regulatory environment is increasingly unclear.” Haynes offered a prudent way for retailers to deal with the uncertainty in the meantime. “They can take a level of diligence with the companies they deal with,” he said. “This is not rocket science. Deal only with reputable companies that have the resources to undertake compliance. Then, seek to understand at a basic level where they have undertaken regulatory efforts by asking them or consulting some of the publicly available resources on the FDA website.” Richmond, Va.-based Altria Group Inc., one of the world’s largest producers and marketers of tobacco products, believes more could be done by the FDA to advance harm reduction in the United States. “The FDA should move more deliberately toward creating a market of authorized smoke-free products to help accelerate smoker transition away from cigarettes,” CEO Billy Gifford stated during Altria’s third-quarter earnings call. “The fact remains that to date, only a small percentage of e-vapor volume has been authorized, and no oral nicotine pouch products have received market authorization. We believe collaboration and accountability from all stakeholders are required for this market transition to take place.” An Untapped Dance On the opposite end of the challenge spectrum lies opportunities, and industry experts are quick to point out that 2023 is robust with potential. One under-recognized trend MSA is beginning to see this year is “a return to growth in the pipe and roll-your-own tobacco segments,” according to Burke. “While these segments did not particularly fare well during the pandemic, the current ongoing economic conditions of high inflation and higher gas prices are encouraging more consumers to make their own cigarettes.” Republic Brands is also observing a resurgence in the RYO space. Convenience store retailers can choose to become a top-of-mind destination for these items by carving out dedicated space in their stores for RYO, Roll advised. Meanwhile, Burke of MSA has several pieces of advice for c-store operators looking to maximize their tobacco/nicotine business this year. First, stock items with a lower product quantity and/or a lower price point. Second, use window and in-store window signage to make note of your value-priced tobacco items. Also, maintain strong product selection in what Burke identifies as growing categories: value cigarettes, value moist, modern oral and vapor disposables. On the topic of modern oral, Morrison made note of oral pouch promotions, particularly three-for-one manufacturer deals that retailers across the country are starting to tap into. These promotions are drawing new adult users into the subcategory. Reynolds Marketing Services’ Wilson believes consumer choice across segments remains one of the greatest untapped opportunities. “Many adult consumers are looking for potentially less-risky products and as these consumers continue to navigate away from combustible cigarettes, polyusage continues to rise,” he told CSNews. To meet the demand, c-store retailers need a robust nicotine offering. “The days of backbars entirely dedicated to cigarettes are gone,” Wilson said. “Year after year, we see that adult nicotine consumers are looking for different ways to enjoy the category. Incorporating next-generation products into your backbar provides consumers the option to explore new ways to enjoy nicotine." Staying on the forefront of nicotine innovation also means retailers should constantly evolve their programs, the Reynolds executive added, citing digital partnership programs that provide additional resources to retailers. “Beyond technology, remaining engaged with the category with new-product offerings helps ensure your customers will stay loyal to your location,” Wilson said. The way Herzog sees it, strong promotional activity and loyalty programs will mitigate downtrading to some extent. Also, a shift to more noncombustible alternatives and more affordable options will continue as cigarette pricing remains high.

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