Cigarette Category Weathers Highs & Lows
NATIONAL REPORT — For the resilient cigarette category, it's not all bad news lately — and that's good news.
Cigarettes are still a very important driver of convenience store inside sales, according to Bonnie Herzog, managing director at Goldman Sachs, based in New York. "Along with OTP [other tobacco products], cigarettes drive about 20% of gross margin dollars inside the store," she noted.
"I certainly don't consider it all gloom and doom. We see some bright spots, particularly in the discount price tier," said Don Burke, the recently retired senior vice president of Pittsburgh-based Management Science Associates Inc. (MSA), citing the company's distributor/retail data for 2024.
Looking at cigarettes by price tier, the biggest unit volume declines are being seen in the premium and discount segments — more than 12% and almost 11%, respectively, according to MSA data. Super premium also is declining by about 5%, which is less than the average decline across the whole category. The deep discount price tier is the only cigarette segment not declining, Burke pointed out. It showed an increase of less than 1% last year.
"Deep discount is the only one of the price tiers that has been increasing and we expect that to continue," he said. "You need representation across all the price tiers, but keep in mind that deep discount is the one to watch."
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Herzog agreed that deep discount's share is rising and attributed it to economic pressures on consumers and wide price gaps between the premium and deep discount tiers.
For premium brands, she said retailers can expect more promotions, buydowns and different SKUs as manufacturers try to keep premium consumers in the franchise.
"We're hearing that more and more retailers are allocating more space to deep discount. The CEO of a large retailer we visited told me they're making the biggest changes in 20 years to the backbar," Herzog relayed, adding that more retailers are also making room for alternative products. "Retailers are following where the adult nicotine consumer is heading."
On the Regulatory Front
In mid-January, under the final days of the Biden Administration, the U.S. Food and Drug Administration (FDA) issued a proposed rule that would set a maximum nicotine level in cigarettes and other products. The FDA stated that it seeks to "make cigarettes and certain other combusted tobacco products minimally addictive or nonaddictive by limiting the nicotine yield of these products."
If finalized, the United States would be the first country globally to "take such a bold, life-saving action to prevent and reduce smoking-related disease and death," the FDA said in a statement.
As proposed, the rule would set a maximum nicotine content level of 0.70 milligrams of nicotine per gram of total tobacco. It would apply to cigarettes, cigarette tobacco, roll-your-own tobacco, most cigars (including little cigars, cigarillos and most large cigars) and pipe tobacco, the agency said. The rule would not include e-cigarettes, nicotine pouches, noncombusted cigarettes such as heated tobacco products, waterpipe tobacco (hookah), smokeless tobacco products or premium cigars.
"This would represent a drastic reduction in nicotine content," said Bryan Haynes, an attorney with the national law firm of Troutman Pepper Locke, who specializes in tobacco. "By comparison, one recent study — which FDA cited in the proposed rule — reported that the average nicotine content in the top 100 cigarette brands of 2017 was 17.2 milligrams of nicotine per gram of total tobacco."
Several tobacco companies have spoken out against the proposed nicotine cap. Altria Group Inc.'s Director of Corporate Communications David Sutton said in a statement that the proposed rule is "unnecessary" and "lacks scientific support." Instead of prohibition, he urged the FDA to authorize smokefree products. A spokesperson for Reynolds American Inc. echoed that the FDA should focus its resources on authorizing the potentially reduced-risk products that exist today.
The National Association of Tobacco Outlets believes the proposal, if enacted, would result in significant lost revenue and job losses, and would shift sales from licensed and regulated dealers, "creating a huge illicit market," according to David Spross, the association's executive director. "This proposed regulation is misguided as cigarette smoking rates are already declining and at historic lows."
The public can submit comments on the proposed rule through mid-September. The FDA initially explored nicotine limits in 2018 under the first Trump Administration. The agency received 7,000 submissions during that public comment period.
Even if successful, industry experts say such a rule wouldn't be finalized for years.