Opportunities Exist in Changing Tobacco World

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Opportunities Exist in Changing Tobacco World

By Melissa Kress, Convenience Store News - 01/25/2017

LAS VEGAS — Some may say these are exciting times to be in tobacco. Whether you think it's good exciting or bad exciting, there is no denying tobacco is an ever-changing and dynamic industry.

Tobacco retailers and manufacturers are coming down from a high period for cigarettes and beginning to see combustible volumes return to historical deceleration rates. Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC, puts the deceleration rates at roughly 2 percent to 2.5 percent for 2016, and a predicted 3.5 percent for 2017.

"It's an industry in secular declines," she said during a presentation at Tobacco Plus Expo (TPE) 2017, being held this week in Las Vegas. 

Herzog attributed the combustible cigarette upswing to lower gas prices and greater confidence among adult tobacco consumers, which had boded well for premium uptrading — a trend retailers continue to see, according to Wells Fargo Securities' latest Tobacco Talk survey.

The pricing environment has also remained healthy as tobacco companies take list-price hikes across brand portfolios, which has narrowed price gaps among the different cigarette tiers. In fact, the price gaps are the narrowest they have been in the past 10 to 15 years, she noted.

And overall, the competitive environment, which slightly heightened, is still rational, according to Herzog. Given Reynolds American Inc.'s (RAI) acquisition of Lorillard Inc., "the big guys are playing nice in the sandbox," she said. 

Retailers have noticed, with Tobacco Talk respondents saying "neither of the Big Two [tobacco companies] seem interested in rocking the boat at this time." However, respondents did say that tobacco manufacturers are "trying to grab business" as cigarette volumes decline again.

The vapor segment is also experiencing interesting times, as interest is now shifting from electronic cigarettes to heat-not-burn products and other reduced risk products (RRPs).

According to Herzog, it's still early days for vapor products. In the approximately $900-billion global tobacco market in retail sales, vapor accounts for just 1 percent. The United States tops the list of global markets.

"The U.S. is the largest market and the most lucrative opportunity," she said.

Consumer sentiment remains lukewarm at best, though, she added, and retailers are weary of having "dead inventory" on the shelves under the black cloud of deeming regulations. 

That being said, Herzog remains bullish on vapor. She predicted that by the end of 2017, the vapor industry will grow to $4.4 billion in retail sales, and retail sales of vapor and RRPs could eclipse $10 billion by 2020.

She also expects the broader RRP segment to grow faster than e-cigarettes, adding that RRP may be the industry's "greatest growth opportunity." In fact, with Philip Morris International, British American Tobacco, JTI and RAI testing heat-not-burn products internationally, there could be "a global arms race" of RRPs, Herzog said.

TPE 2017 took place at the Las Vegas Convention Center Jan. 25-26. In addition to education sessions, Tommy Chong, author, activist and actor, joined the keynote presentation as the celebrity speaker on Jan. 25. TPE also featured a show floor with exhibitors occupying Tobacco Turnpike, Vapor Vista, Alternative Alley, and General Merchandise Main Street sections.