Pressures on Tobacco Consumer Drive Shift in Backbar Purchases

NEW YORK — As the tobacco consumer faces overall rising costs, retailers are seeing some changes in their backbar business.

According to Bonnie Herzog, managing director at Goldman Sachs, the health of the tobacco consumer remains weak given broad-based inflationary pressures and lower discretionary income that continue to drive lower usage and increased downtrading.

The firm's third-quarter 2022 Nicotine Nuggets survey found that cigarette volume declines accelerated during the three-month period — reflecting ongoing pressure on the consumer from broader inflation and manufacturer price hikes. As a result, according to the findings, respondents are seeing reduced tobacco purchases frequency and increased poly-usage as tobacco user shift to alternatives.

Nicotine Nuggets surveys retailer and wholesaler contacts representing approximately 76,000 convenience store locations across the United States, or roughly 51 percent of the total channel.

In addition, downtrading pressure remains elevated in the third quarter and more than 70 percent of the survey respondents pointed to higher gas prices, Herzog said, adding there has been "a significant increase in market share of fourth tier/discount brands."

"Consequently, retailers are incrementally more bearish on the tobacco category with approximately 50 percent of respondents indicating that their outlook has become more negative," Herzog said.

Elsewhere, respondents are also concerned about the potential ban on in-person sale of flavored tobacco products in California, which they believe could lead to lower pantry buy-in in 2022. The proposed statewide flavor ban goes before voters next month.

"That said, some respondents were still optimistic given increased poly-usage and shift to alternatives such as e-vapor, modern oral nicotine and cigars, which although smaller, continue to grow and support the broader nicotine category, and the resiliency of the lower income consumer, who some respondents believe are still in a better-off position vs pre-pandemic supported by very strong wage growth," she added.

As for other tobacco products, smokeless nicotine offerings remain strong, led by modern oral nicotine brands ZYN and on!, and electronic cigarette volumes decelerated significantly primarily reflecting volume pressures for JUUL stemming from uncertainty created by the Food and Drug Administration's marketing denial orders. The agency's decision is currently suspended on a judicial stay.

"The outlook is incrementally more cautious as retailers and wholesalers expressed increased concerns about inflation and elevated gas prices driving accelerating cigarette volume declines and downtrading activity, regulatory tightening and continued uncertainty around e-cigarettes," Herzog said.