Exploring Current & Future Bright Spots on the Backbar
NATIONAL REPORT — Despite the highs and lows of the tobacco category, the backbar remains a crucial piece of the convenience store puzzle.
Today, tobacco products comprise approximately 30% of the c-store industry's annual in-store sales. As cigarette sales continue to ride the wave of traditional declines, alternative tobacco products are ready to step up to the plate and fill the space. Which products will move to the head of the pack remains to be seen, but there are some bright spots — namely, modern oral nicotine products.
In the recent Convenience Store News webinar, "The State of the Backbar," Ethan Harris, senior business analyst at Cadent Consulting Group, and Keelan Gallagher, vice president of operations at Smoker Friendly International, explored the current and future trends in cigarettes and other tobacco products (OTP).
The webinar was sponsored by Premier Manufacturing Inc.
Any discussion about the tobacco category needs to start with the adult tobacco consumer and the regulatory environment. According to Harris, there are three main areas of tension:
- Economic concerns: Consumers are increasingly worried about the economy and their spending power while discretionary tobacco products continue to rise in price.
- Health awareness: More than ever, health is at the forefront of public consciousness, and this is in stark contrast to the well-documented harms of tobacco.
- Regulatory shifts: Government regulations are reshaping the market landscape, but these are often clashing with the market demand and the principles of a free market.
"These three tensions are placing both retailers and manufacturers at a crossroads, making it imperative to address them for the industry's future growth and sustainability," Harris said.
"If these tensions continue to unfold, the tobacco landscape is undergoing significant change. Traditional tobacco is declining, appealing flavors are less available, and the tobacco backbar is becoming increasingly inaccessible for the c-store consumer," he pointed out, adding that this is all leading to lower backbar sales in convenience stores. "But there is a bright spot. Smokeless tobacco alternatives are emerging as the new face of the industry."
According to Harris, there are steps all players in the tobacco space can take to weather any challenges on the backbar. "By implementing smarter assortment pricing strategies, expanding customer education initiatives and operating strategically within the regulatory, the tobacco industry can resolve the tensions and build a strong and sustainable future," he explained.
A Closer Look at the Backbar
Smoker Friendly is one tobacco retailer navigating the day-to-day changing landscape of tobacco. As Gallagher noted, tobacco items are performing well across the Boulder, Colo.-based retailer's network, and the total nicotine space "is performing very well."
He made two main observations, the first around cigarettes and the second around modern oral tobacco. "Cigarettes continue to be the biggest category, and cigarette contracts therefore dictate a lot of what happens on the backbar —and contracts are a main driver of retailers, product assortment, merchandising, layout and even price point," Gallagher said. "And this applies across multiple categories, not just cigarettes."
[Read more: The Harm Reduction Race]
While Harris had noted previously in the webinar that cigarettes were showing a 5.7% decline, "if you dive one level deeper and look at the volume by price segment, you'll see premiums really declining closer to 10%. But there's growth in the fourth-tier cigarette brands," Gallagher said. "There's an obvious downtrading in the category. There are certainly consumers who are leaving the space and quitting, going up to other categories, but a lot of consumers are trading down price points as well."
As for modern oral nicotine, Gallagher advises retailers to carry a variety of brands, flavors and nicotine levels. "Without a doubt, the modern oral tobacco is the fastest growing category, probably the most exciting. But I always keep my eye on cigarettes as well because of the size of the category," he noted, adding Smoker Friendly is giving more space to modern oral brands based on manufacturers' data and marketing plans.
Looking at future innovation in the tobacco and nicotine arena, Harris turns an eye toward the past for clues to what can be coming down the pike.
"There's definitely going to be innovation coming. I think we could definitely look to the history of the industry to inform where it might be going," he said. " I think the vapor products were a really interesting example, and if you think back a few years where the innovation in that category came from — a wider array of flavors and a wide array of strengths, anything from nicotine free paper to high nicotine juices — I think the same can be done for pouches. Even in Europe and in other countries, this is currently being done."
Another area of innovation to watch is other nicotine delivery systems, particularly heat-not-burn technology which is growing internationally. "Rollouts have started a little bit in the U.S., but they haven't really gone full force yet," Harris said. " I think it'll be really interesting to see if that picks up pace over here in the states."
To learn more tips and insights into the tobacco and nicotine space, view "The State of the Backbar" on demand.
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