Easing Inflation's Impact on Backbar Customers
NATIONAL REPORT — The ideal 2024 tobacco offering comes down to two words: affordable alternatives. As inflation continues to impact the convenience store tobacco business, retailers would be wise to understand the evolving needs of adult nicotine consumers.
"We remain cautious on the U.S. tobacco/nicotine industry in the near term given continued economic pressures on the tobacco consumer, with many growing increasingly selective in their purchases, turning to more affordable alternatives," said Bonnie Herzog, managing director and senior consumer analyst at Goldman Sachs.
Citing data from her company's first quarter 2024 "Nicotine Nuggets" survey of retailer and wholesaler contacts representing 38,000 retail locations across the United States, she noted: "Continued price increases against a still palpable inflationary backdrop are pushing consumers to the fourth tier or lower-cost alternatives, including nicotine pouches, moist smokeless tobacco or vapor."
Some retailers report seeing downtrading not only by low-income consumers, but also premium upper-income consumers. On balance, however, most tradedown activity is still coming from second- and third-tier brands, according to Herzog.
Retailers are also growing increasingly concerned that tobacco consumers are both trading down and purchasing fewer items. A number of respondents reported that their overall item count per basket is shrinking as consumers shop around for the best prices.
One retailer remarked that traffic has become a struggle even though they are priced competitively and do monthly price surveys to ensure they stay competitive.
[Read more: Value-Seeking Tobacco Consumers Impact Cigarette Sales]
Tobacco manufacturers are recognizing the need to shift and pivot as well. Looking at what he calls a "dynamic" external environment, Richmond, Va.-based Altria Group CEO Billy Gifford said the company is particularly focused this year on monitoring the economy, including the cumulative impact of inflation, as well as adult tobacco consumer dynamics, including purchasing patterns and the adoption of smokefree products.
"Our research and development investments have evolved and shifted from our traditional tobacco businesses to new product platforms and technologies," he said.
- A Seven-Year Itch
What is the long-term impact of continued inflation on the tobacco category? Looking at the past seven years, Cadent Consulting Group Business Analyst Ethan Harris said the effect has been "significant."
Citing industry research he's tracked, there's been:
- More than a 30% increase in cigarette prices;
- A 27% decrease in the number of cigarette packs sold; and
- A 6% decrease in cigarette dollar sales.
In 2023, the majority of Altria's pretax research and development (R&D) expense was recorded in the "smokeable products" segment, but beginning Jan. 1 of this year, a substantial amount of its pretax R&D expense is recorded in the "all other" segment, which includes the aforementioned new product platforms and technologies.
As manufacturers shift, so should retailers. Here are some strategies to consider:
Dive Deeper Into Discount
As smokers try to manage rising cigarette prices along with broader inflationary pressures impacting their wallets, they are looking for more value and as a result, retailers and wholesalers are broadly seeing downtrading accelerate.
Altria reported that at retail, its discount segment grew 0.8 share points in the first quarter of this year. "We believe these results were driven, in part, by macroeconomic pressures on adult smokers," Gifford said. "We continue to see increased competitive activity in the discount segment, including multiple branded discount offerings priced at deep discount levels."
There are still premium cigarette consumers, however, who continue to stay brand loyal. Thus, it would be wise for c-store operators to cater to high-end and discount customers alike, perhaps making some SKU cuts in the middle tiers.
Embrace Oral Nicotine Products
As one of the top three beneficiaries of downtrading, according to Goldman Sachs research, modern oral nicotine is gaining ground in convenience stores. Several retailers in the latest "Nicotine Nuggets" survey noted that they reset their stores to make more space for this segment, particularly the ZYN, on! and Rogue brands.
"Promotional activity has recently picked up in the oral nicotine pouch category as manufacturers invest to drive conversion and volumes," Herzog stated. With newer competitors entering the category, modern oral is expected to continue its robust growth this year, gaining share from traditional chewing tobacco.
Think Beyond the Backbar
Some retailers are having success removing nontobacco nicotine and nicotine-free items from behind the counter to free up precious backbar space and establish a better focus on alternatives. Items that fit the bill include nicotine pouches that contain nicotine, but without tobacco leaf, dust or stem. There's also tobacco-free/nicotine-free pouches such as Black Buffalo ZERO, which is a smokeless line made with edible green leaves.
"We see a small but growing trend toward off-shelf displays of nontobacco nicotine products," observed Ethan Harris, a business analyst at Cadent Consulting Group, based in Wilton, Conn.
Get the Word Out About Alternatives
Digital advertising should be part of a c-store retailer's nicotine marketing plan, the way Harris sees it. "Many smokers are still not aware of all the noncombustible, nontobacco product types now available, but digital signage —both inside and out — will better grab their attention. Retailers need to get the word out and start conversations with adult consumers," he explained.
And while it may not have an immediate effect on business, staying up-to-date on the latest nicotine buzz online and being able to talk intelligently to alternative-seeking adult customers can be a plus, Harris added. For example, there's been talk of research showing nicotine has promise as a nootropic, claimed to enhance cognitive function.
"It's been frequently discussed on social media, especially among younger adult consumers that products like ZYN are being used for the touted nicotine benefits of focus, memory and attention," he said, adding that it would behoove retailers to at least be aware of this fact if customers come in to make such a purchase.
Remember Roll Your Own
This oldie-but-goodie category still has merit, especially in the current economic environment. If a retailer is willing to support roll your own (RYO) with space and education, Harris suggests they highlight RYO as space permits and spell out the cost savings compared to traditional name-brand cigarettes being sold in the store.
Continue to Pivot
Perhaps the greatest the greatest takeaway for convenience store operators, though, is that the current economic downturn is not expected to about-face anytime soon. Therefore, they must continue to pivot and go where adult nicotine consumers are going.
"We certainly expect inflation to continue, with current levels nearly two times the Fed's 2% target. Moreover, tobacco companies have consistently priced cigarettes well in excess of inflation to offset declining unit sales. This will result in less and less cigarette demand," Harris predicted.
He believes there is a cigarette pack price ceiling, and said states like New York (currently averaging $12 a pack) are reaching it in the minds of today's consumers. The answer for meeting their needs, he concluded, lies in stocking and promoting other forms of nicotine and reduced-harm alternatives.