Popularity Contest Heats Up

Innovation and variety reign supreme as adult tobacco users seek out OTP options

Any talk about the tobacco category lately seems to focus on two things: the cigarette segment is struggling in the face of increased prices, regulations (federal, state and local) and competition from other tobacco products (OTP), and because of those struggles, the smokeless segment is making a play to be voted most popular behind the counter.

As Joe Teller, director of category management for Swedish Match, a developer and manufacturer of OTP, noted recently, moist snuff is experiencing an uptick in sales. Can growth in convenience stores has been rising about 7 percent over the past several months. This growth, and how c-store operators can balance that growth, was the topic of a Convenience Store News webcast, "Putting Tobacco Growth Strategies Into Perspective," held in June. The event was sponsored by Swedish Match and featured presentations by Teller and David Bishop, managing partner of Balvor LLC, a sales and marketing firm.

During the webcast, Bishop pointed to the Balvor/CSNews 2012 Tobacco Retailing Survey, which found that 30 percent of respondents increased OTP shelf space, 56 percent maintained the same space vs. the prior year and 14 percent reduced space. Among those who increased OTP shelf space, the study revealed that space was most often taken away from traditional cigarette products.

Chevron ExtraMile is among the convenience store retailers seeing increased customer demand for OTP — particularly in the smokeless subcategory, according to Jeff Hersh, Americas merchandising, Chevron Products Co. In turn, the retailer is allocating more space to the smokeless segment, but he said ExtraMile is doing so without hurting other segments in the tobacco category.

"We are simply adding more shelving to our backbars," Hersh explained.

Wells Fargo Securities LLC noted similar results in its "Q2 2012 Tobacco Retailer Survey." Roughly 89 percent of the company's contacts said smokeless grew during the second quarter, driven by continued promotional activity. The survey included tobacco retailer and wholesale trade contacts representing more than 10,000 convenience stores across the United States.

As more adult tobacco consumers turn to OTP, tobacco companies need to stay on their toes. Innovation rules when it comes to capturing and retaining these consumers.

"From a Reynolds American perspective, innovation is a trend that we're not merely noticing, but actively leading — and this is a core element of what we call 'Transforming Tobacco,'" explained Richard Smith, a spokesman for the Winston-Salem, N.C.-based tobacco company.

Transforming Tobacco, he added, is Reynolds American's vision of achieving market leadership by transforming the tobacco industry, shared by its operating companies R.J. Reynolds, American Snuff Co., Santa Fe Natural Tobacco Co. and Niconovum.

In keeping with its long-term strategy to transform the tobacco industry and reduce the harm caused by smoking, Reynolds American's operating companies are developing a pipeline of new smokeless tobacco products, including heat-not-burn cigarettes, vapor, tobacco extract products and nicotine replacement therapy technologies.

Product innovation is also more than a buzzword at The Altria Group. "For our operating companies, we see product innovation as an important driver of growth as adult tobacco consumer preferences and the regulatory environment continues to change," said Brian May, manager, communications, Altria Client Services. "That concept of adult tobacco consumer preferences is really important."

The Richmond, Va.-based tobacco company has observed that about 30 percent of adult smokers are interested in various types of innovative, smokeless alternatives to cigarettes. "That's really where our companies are focused, particularly [Philip Morris USA] and [U.S. Smokeless Tobacco], in providing smokers those types of alternatives to cigarettes they are interested in," he added.

So, what does all this mean for tobacco companies? It means they have been busy.

Altria introduced more than 50 smokeless tobacco products — in different varieties, flavors and forms — into lead markets before March 2011 (beginning quarter of 2011). "What we have learned is that for the smokeless user, and the cigarette consumer who may be interested in an alternative, variety is important, the usability of the product is important," May said. "A lot of our introductions last year were seeking to provide those varieties in easy-to-manage forms."

The products are still on the market today and, in some cases, Altria has expanded the geographic reach. The most recent is Copenhagen Long Cut Southern Blend, which the company expanded this May. Other examples of new products that came to market last year are Skoal X-TRA, which went national in 2011, and Skoal Ready Cut and Skoal Neat Cut, both of which entered select lead markets.

"In over a 12-month basis, we are seeing the smokeless category grow at about 5 percent annually. This is definitely a growing category in the tobacco industry," May said. "It is one we are focused on through product innovation. It is one that retailers are focused on because it is a growing category within their stores as well."

Reynolds American has been burning the midnight oil, too. Its subsidiary Niconovum is exploring new markets and products in nicotine replacement therapy and is slated to enter its first U.S. market later this quarter with a new gum product under the Zonnic brand name, according to Smith.

Reynolds American also has found success with its Camel line of smoke-free products: Camel Snus and Camel Dissolvables. And the company doesn't plan to stop there. "Be assured that not only do Reynolds American's operating companies intend to compete in this area, but Reynolds American also believes the product development underway will truly deliver against adult tobacco consumer expectations," Smith said.

Just where the innovation path leads the tobacco companies — or where adult tobacco consumers demand they go — remains anyone's guess.

For comments, please contact Melissa Kress Associate Editor, at [email protected].

New to the Neighborhood

A new kid moved into Virginia convenience stores this June. That's when The Altria Group introduced VERVE discs, a tobacco product aimed at adult smokers interested in new types of spit-free tobacco product alternatives to cigarettes. According to the tobacco company, the product's primary ingredients are tobacco-derived nicotine, non-tobacco cellulose fibers, flavorings and a polymer.

To use, adult consumers put the disc in their mouths, chew on it to release the flavor, then take it out and throw it away when they are done, explained Brian May, manager, communications, Altria Client Services. The product, which comes 16 discs to a pack, is available in blue mint flavor.

"The product itself does not contain any tobacco," he noted.

It's still too early to tell if Altria will expand VERVE to other markets, May said. At the time he spoke to CSNews, the product had only been to market for about a month. "It has been on the market a little over 30 days in limited distribution in some stores in Virginia," he said. "We are in the process of getting adult learnings about it. Once we get them, we will make decisions about its future."