Inflation Begins to Weigh on Tobacco Purchase Decisions

NEW YORK — Rising consumer costs are beginning to impact the backbar.

According to the Goldman Sachs fourth quarter Nicotine Nuggets survey, consumption of tobacco and nicotine products decelerated sequentially during the last three months of 2021.

The change came as "an exceptionally powerful inflationary environment has begun to weigh on purchase decisions," said Bonnie Herzog, managing director at Goldman Sachs.

Nicotine Nuggets surveys retailer and wholesaler contacts representing approximately 48,000 retail locations across the United States.

In addition, more than half of the respondents said downtrading pressure intensified in the quarter "spurred by the increased frequency and strength of cigarette price increases on top of higher gas prices and broad-based inflation pressuring wallets," Herzog added.

Looking forward, Goldman Sachs' outlook is more cautious as retailers and wholesalers expressed increased concerns about inflation and income pressures, especially for low-income consumers, as well as potential regulation aimed at menthol and increases in state excise taxes.

Other takeaways from the survey include:

• Retailers and wholesalers expect cigarette segment volumes to revert to historical declines, and Goldman Sachs conservatively expects underlying industry volume to decline 7 percent in the fourth quarter and 5.1 percent in 2021 and 5.6 percent in 2022.
• Retailers and wholesalers noted that electronic cigarette segment volumes grew modestly in the quarter and in 2021, and expect the category to grow but decelerate in 2022 as uncertainty remains around the Food and Drug Administration's premarket tobacco application process.
• High gas prices above the all-important $3 per gallon psychological threshold weigh on purchase sentiment and cigarette volumes contribute to downtrading.
• Retailers and wholesalers continue to see oral nicotine driving the smokeless segment volume growth supported by stepped-up promotional activity.

"The broad majority, approximately 67 percent, of survey respondents continue to believe the health of the adult tobacco consumer remains broadly unchanged versus last year with overall tobacco/nicotine sales holding strong supported by price increases and effective promotional activity," Herzog said.

"That said, retailers expressed concern about broad-based cost inflation pressuring an already income-sensitive consumer. While there is still a healthy willingness to buy on the part of tobacco consumers, respondents are seeing a pickup in downtrading as inflation — both inside and outside the category — erodes overall purchasing power," she added