Looming Regulation & Economic Pressures Weigh Heavy on Tobacco Category

NATIONAL REPORT — Tobacco retailers and consumers continue to be pulled low and high this year, according to participants in Convenience Store News' recent "What's Next in C-store Tobacco" virtual roundtable, which analyzed industry data and facilitated open discussion among industry experts on the top opportunities and challenges facing the tobacco business in the convenience channel today and in the near future. 

Roundtable participants included Bonnie Herzog, managing director at Goldman Sachs; Mary Szarmach, vice president of trade marketing at Smoker Friendly; Ben Brooks, category manager at Nouria Energy; and Brad Longcake, assistant executive director for the National Association of Tobacco Outlets (NATO).

Current highs include alternative tobacco categories, such as modern oral, premium cigars, and a vapor resurgence. Current lows include the ever-looming cloud of regulation and legislation, though there have been some hard-fought local wins. Economic pressures on the average adult nicotine consumer also weigh heavy on the business.

Adult tobacco consumers are facing some tough purchase decisions due to economic pressures, such as inflation and high gas prices. Retailers in Goldman Sachs' Nicotine Nuggets survey for the second quarter of 2022 confirmed the hardship.

"Both store trips and basket sizes are broadly depressed and below pre-pandemic levels," Herzog reported, citing her company's research. She also noted increased downtrading — particularly to fourth-tier cigarette brands — as nicotine users look for ways to cut costs.

The Goldman Sachs survey also highlighted that cigarette volumes are expected to decline at historical rates. Cigarette volumes have been declining for about 50 years, but more recently the declines have accelerated due to price increases and the fact that more consumers are gravitating toward the reduced-risk category, according to Herzog.

Consumers are making trade-off decisions resulting in a shift from carton to pack purchases, reduced tobacco purchase frequency, and fewer store trips and spending per store, she noted. "But retailers expect there to be a steady decline vs. a more severe or radical drop, which is encouraging," Herzog added.

OTP Bright Spots

Other tobacco products (OTP) hold promise and excitement, particularly in their reduced-risk potential.

At Smoker Friendly, "the oral nicotine products are just exploding like crazy, and I don't see those stopping anytime soon," stated Szarmach, who also reported positive momentum around vapor products on account of industry confusion and pending Food and Drug Administration (FDA) decisions.

"We're actually seeing a resurgence on the vapor products, which is interesting," Szarmach said. "I feel like maybe we've kind of narrowed down what's allowed and what's not. Even with all the confusion, we've made our customers happy."

OTP is likewise the bright spot in tobacco at Nouria Energy, according to Brooks. The retailer is seeing strong performances across all OTP subcategories.

In the Northeast, specifically New England, the tobacco category has cycled through "pretty significant" flavor bans, Brooks explained, along with changes in excise taxes and supply chain issues. "Cycling all that noise helps give us a clear picture of the diverse OTP category, and the best part is consistency across all subcategories and seeing growth in all," he said. "We are very happy with how the OTP category is performing. I'd say we're modestly optimistic for the remainder of this year."

Similar to what Szarmach has witnessed, Brooks finds excitement in the modern oral segment and vapor. "Vapor has remained strong; it's always been strong in the Northeast," he said. "Modern oral as well — we have large value in how that product is taxed in the Northeast and the advantage it gives over traditional products."

Another bright spot for the chain is premium cigars, an offering it embarked on a few years ago.

No Lack of Innovation

Innovation in the tobacco/nicotine category has been rampant lately. Szarmach cited the high number of alternative product booths she noticed at Smoker Friendly's business-to-business tradeshow this year, and at its Rocky Mountain Cigar Festival. Seeing premium cigar users looking to "veer out now, too" has been an eye-opener, she said.

Brooks shared his experience in trying a synthetic vapor product at Nouria. "I did it with a reputable, large parent company in the tobacco industry and had everything documented ahead of time, so it was an easy exit once they became illegal to get out of that," he recalled, noting that he believes in "selling everything you possibly can that's easily legal — I don't do grey area stuff."

The Cloud That Won't Pass

The looming cloud of regulation/legislation continues to be a major challenge for a nevertheless resilient industry. NATO's Longcake updated webinar attendees on the premarket tobacco product applications (PMTAs) still pending with the FDA.  

While the agency has refused to accept more than 7.7 million of them, there are roughly 362,000 pending, "so there's still an opportunity for some of those to make it through," he said. This includes items such as cigars, pipe tobacco, e-cigarettes, hookah and all modern oral products, which had to be filed by Sept. 9, 2020. It also includes items with nicotine derived from other sources, which had to be filed by May 14 of this year.

A bit of good news did come from the FDA recently, as it authorized the sale (in the form of a Marketing Granted Order) of 23 e-vapor devices and nicotine e-liquids sold by R.J. Reynolds, NJOY and Logic. "Unfortunately, of the 23 products authorized, the only flavor allowed right now is still traditional nicotine flavor," Longcake reported.

Among other updates he provided:

• The FDA is currently reviewing an additional 240 PMTA applications from major e-cig/e-vapor manufacturers, including Juul, Vuse, NJOY, Logic, blu and Puff Bar. These are expected to be finalized sometime next year, presumably by June 30.
• Almost a million synthetic nicotine products have been filed with the FDA, but it has so far refused to accept 88,000 of them. The agency continues to move through this backlog.

Beyond PMTAs, Szarmach shared positive news during the roundtable that Smoker Friendly was able to win two flavor-ban fights this past year in Colorado, one for the state and the other for the city of Denver, which she characterized as "huge."

Local issues, whether they involve taxation, age restrictions, self-serve, flavor bans, etc., "are always scary for us," she acknowledged. "It's frightening to see what they're doing — full-on prohibition with certain things."