Convenience Stores See Cigar Sales Moderate Following Pandemic Swings

NATIONAL REPORT — Were you lucky enough to be a tobacco retailer during the cigar boom of the 1990s? 

Chances are, you experienced the more recent boom during the pandemic that found the industry comparing and reminiscing about the turn-of-the-century stogie phenomenon.

In 2020 and 2021, premium cigar sales soared for the first time in decades, with shipments up 50% by some industry estimations. The effect trickled down throughout the category, touching cigarillos and little cigars, too. Americans were reaching for affordable pleasures they could enjoy at home, and convenience stores were more than happy to oblige their new cigar customers and existing loyal base.

Fast forward to 2022 and naturally, the momentum could not be sustained as life began to return to normal. Mostly double-digit declines put the category in the red. The boom had reversed.

[Read more: FDA Sends Final Menthol Rule for Review]

In 2023 volumes began to stabilize, translating to moderate declines or flat sales. And there has been some positive news for premium cigars on the regulation front that may or may not affect convenience channel sales, while other pending cigar regulations that will affect the channel remain in waiting.

Here is a look at the current dynamics shaping the category:

Cigarillos Are Stabilizing

Cigarillos — longer, slimmer versions of large cigars — are predicted to post a flat to slight decline this year, according to data from Management Science Associates Inc. (MSA), a Pittsburgh-based company focused on analytics and informatics.

While this segment was down in sales volume in the convenience/gas channel by more than 5% in 2022, it is on track this year to post declines of only 1% to 3%.

"The slight decline in cigarillos reflects somewhat of a reduction in the pre-price and other promotions offered in this category over the past couple of years," Don Burke, senior vice president of MSA, told Convenience Store News.

During a recent National Association of Tobacco Outlets (NATO) webinar, Burke discussed "the jagged line" of the cigarillos category in recent years. "They had some strong periods in 2021, not so great in 2022, and are picking up a little bit as we got into 2023," he explained.

As a side note, in an MSA state-by-state comparison chart showing cigarillo growth in the second quarter of 2023 vs. the 52 weeks prior, one state — Alaska — posted enormous growth of 49%. No other state came close. Only 11 other states showed a positive growth change with most in the low single-digits to low double-digits.

According to Burke, Alaska was impacted by a particular retailer adding cigarillo SKUs to its mix. So, the state's growth was impacted by new distribution, not year-over-year growth. Still, it is significant volume added in a state that seems to recognize the segment's growing value to cigar consumers.

Little Cigars Are Harder Hit

Little cigars — those that are packed like a cigarette, have a filter and are smoked similarly to a cigarette — are not bouncing back in sales volume like their larger counterparts.

In fact, MSA research shows they are continuing to decline at a greater rate. Recent data showed declines in the 12% range for convenience stores in the second quarter of 2023 compared to the same timeframe a year ago. And that number is predicted to drop for the remainder of the year.

"Little filtered cigars are hit harder than cigarillos because, in general, their price advantage over cigarettes has dropped," Burke noted. "The advantages they once had are declining because many states and municipalities are figuring out that because consumers smoke them like a cigarette, they should be taxed like a cigarette. It's hurt them in many markets where there is no longer a big price gap."

Interestingly, the "discount" retail channel tracked by MSA showed sales volume gains of more than 3% in little cigars for the same second-quarter period vs. the prior 52 weeks; a strong contrast with the double-digit declines seen in most channels, including convenience stores.

This channel includes dollar stores, which Burke said have cracked the code on little cigars. "They figured out what to do with them — they started to stock up on little filtered cigars in the past year and promote them as a value to their consumers. It's clearly working," he said.

Flavored Cigars Are in Waiting

Most convenience stores have a pretty large investment in flavored cigars.

"Mass-market cigars sold in c-stores are split fairly evenly between flavored and unflavored," said Alex Morrison, senior business analyst for Wilton, Conn.-based Cadent Consulting Group.

MSA data confirms this, with flavored large cigars comprising 56% of the category for c-stores vs. 44% made up of tobacco flavor. But that could all drastically change depending on the U.S. Food and Drug Administration (FDA).

In late April 2022, the FDA proposed two product standards: one to prohibit menthol as a characterizing flavor in cigarettes and the other to prohibit all characterizing flavors (other than tobacco) in cigars. As of press time, the FDA had submitted final product standards for both to the White House Office of Management and Budget (OMB) for final review. The OMB reviews potential regulations to assess their economic impact — a necessary step before an FDA rule can be implemented.

"There's a lot of FDA attention being paid to flavored cigars and menthol and with the flavored representation, if there is regulation, that's going to have a very significant impact on the cigarillo category," maintained Burke. "In little filtered cigars, menthol also plays a part, it's about a third of the category, so it will play a big role here as well."

Convenience store industry association NACS told the FDA in comments sent to the agency last year that "adopting these regulations that ban two of the most popular tobacco products in the United States will push a portion of current smokers to the illicit market and severely injure the convenience store industry."

Two states did not wait on the FDA to ban flavored products: In 2020, Massachusetts became the first state to ban all flavored tobacco products, and California's flavored ban went into effect at the end of last year. R.J. Reynolds and other tobacco companies sued to stop California's ban, but federal courts have allowed it to stay in place.

From research that MSA conducted on the flavored ban in California, much of the business went to surrounding states. Burke also suspects a good amount went to the black/gray market. While the latter is "very difficult to measure," he said, "there was research conducted on cigarette packages thrown away and almost half were not stamped. So, we know people are buying menthol from places other than traditional/legal classes of trade."

Premium Cigars Score a Victory

As of press time, premium cigars are not regulated by the FDA. This came about in August after a U.S. District Court judge issued a final memorandum in the Cigar Association of America v. FDA, vacating the decision of the FDA to deem premium cigars subject to its regulatory authority — meaning it took that authority away.

Premium cigar manufacturers and associations were exuberant and hoping to get back to focusing on innovation. However, in late September, the FDA appealed the decision. Still, there are still positive vibes flowing that could potentially affect c-stores.

"The premium cigar industry has a decision they think was correct in all respects; there is still reason for lots of optimism," said Bryan Haynes, a partner specializing in tobacco with the national law firm of Troutman Pepper. "As we sit here right now, the category is not under federal regulation and in fact, the FDA has acknowledged that."

Like most appeals, a decision will not come quickly. "The appeal will definitely go into next year. ... The industry has some freedom," he added.

The reason all this matters to the convenience store industry is that "it may give manufacturers of convenience store brands inspiration to look at adding premium offerings to their portfolio, which could provide them opportunities in a post-FDA environment," said Jay White, senior brand manager, Garcia y Vega, for Swedish Match. "It also gives premium cigar manufacturers more confidence to move forward with innovation in their category."

As for c-store retailers, "those that have a tobacco humidor and currently emphasize a premium cigar selection will likely benefit," added Burke.

Cigars & C-stores Remain a Good Partnership

Overall, the outlook for cigars in the convenience channel is cautiously optimistic.

"The commanding share of the OTP category occupied by cigarillos means that this category will be a significant contributor to c-store tobacco sales for many, many years," stated Burke. "The little cigar category will eventually level out with a dedicated consumer following that appreciates the characteristics of this product."

As previously mentioned, a ban on menthol and flavored cigars could propel a big movement from c-stores to the black and gray market, but it could also grow alternative products and tobacco-flavored options, according to Burke.

The way Cadent Consulting's Morrison sees it, "cigar dollar sales in c-stores will continue to grow at a slow rate, driven by price increases, while units will decline."