Higher Wages, Cheaper Gas & Effective Loyalty Programs Make for a Stable Tobacco Consumer

NEW YORK — Despite numerous unknowns swirling around federal tobacco regulations, Wells Fargo Securities LLC's latest tobacco survey finds an accelerating nicotine pool.

According to the fourth-quarter Tobacco Talk, the adult tobacco consumer is stable given effective loyalty programs and promotions, cheaper prices at the pump, and higher wages.

Tobacco Talk surveys retailers representing approximately 55,000 convenience stores, or about one-third of the channel.

The results also found that cigarette manufacturers' pricing power remains intact with "Altria Group Inc. able to command higher levels of pricing while shielding its most loyal customers via more effective promos/loyalty programs," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

As for vapor products, the survey noted that Juul Labs is introducing new users to the category — accounting for roughly 20 percent of its share source — and sourcing most of its share from electronic cigarette and vapor competitors.

In addition, according to Herzog, there has been no real slowdown in Juul uptake since the Food and Drug Administration announced its crackdown on flavors this past fall despite some volume moving online. In fact, one survey respondent noted that "customers are willing to switch flavors to continuing using Juul," she said.

Other key takeaways from Tobacco Talk include:

• Price gaps have widened as consumers continue downtrading to fourth-tier cigarettes and e-cigarettes; and
• Retailers see cannabis as a huge potential opportunity and broadly view Altria's stake in Canada's Cronos Group as a prescient move especially with its stake in Juul.

Herzog acknowledged there are concerns around increased FDA regulation including additional potential actions against Juul and other vapor companies, and menthol/nicotine in combustible products. "However, we continue to believe Commissioner [Scott] Gottlieb's bark is worse than his bite given his ultimate goal is to save lives," she said.