Skip to main content

Regulatory Confusion Sparks Vapor Woes in the Convenience Channel

As the tobacco industry struggles with a lack of firm action at the federal level, retailers grapple with the rise of a black market.
A woman vaping

NATIONAL REPORT — The vaping products category is dimming as the black cloud of increasing illicit activity is overshadowed only by the black hole of continued U.S. Food and Drug Administration (FDA) regulatory confusion. It's all adding up to black-market frustration for law-abiding convenience stores.

"The illicit market for disposable vape products is a growing concern for the tobacco industry and retailers as the FDA's crackdown on noncompliant flavors/products has driven traffic to the black market or to retailers willing to sell unauthorized vaping products," said Bonnie Herzog, managing director and senior consumer analyst at Goldman Sachs. Citing data from her company's most recent "Nicotine Nuggets" survey, she added that "a broad majority of retailers believe the situation is getting worse, with the impact felt strongest in urban areas and in states with the strictest flavor bans."

Advertisement - article continues below

National Association of Tobacco Outlets (NATO) Executive Director David Spross agrees, telling Convenience Store News that "generally, states with flavor bans have experienced an increase in illicit product sales, such as flavored products being purchased in surrounding states and also being smuggled in, which includes flavored disposables from China."

Spross reported that flavor bans continue to be a hot issue in many state legislatures: Utah passed legislation to ban flavored vapor products (other than menthol) effective July 1; Vermont's flavor ban, which would prohibit all flavored vapor products in addition to menthol cigarettes and flavored nicotine pouches, is awaiting final review by its governor; and Hawaii, Maine, Minnesota and Michigan are all currently considering flavor bans.

[Read more: Federal Agents Seize $1M-Plus Worth of Unauthorized Vapor Products]

A key concern of Herzog's is that the illicit market activity in vaping products is having a negative impact on backbar bottom lines. According to Goldman Sachs research, illicit e-cigarettes are second (after alternative nicotine products) in receiving the current downtrading volume from inflation-strapped nicotine consumers.

Retailers don't believe the situation will change without more enforcement, and they are broadly pessimistic given the ubiquity of the offering, tracking/enforcement difficulty and relatively light penalties reducing deterrence, according to Herzog. One retailer pointed out that enforcement fines issued by the FDA are manageable, and the extent of policing hasn't resolved the issue. Others pointed out that the retailers selling these products on the gray market are making hefty margins on those sales, helping them offset losses on cigarette sales.

"Some retailers are adding gray area/disposable vapor products for the first time — more as a defensive move — given the rapid rise of specialty vape shops that readily carry these popular unregulated products," Herzog noted.

Confusion Prevails

When Goldman Sachs asked retailers about their plans for space allocation changes, some reported to be planning backbar resets that include increased dedicated space for both premium and gray area products. Others said they are taking a wait-and-see approach to disposable vape offerings as the FDA works on tightening regulation.

In March, the FDA launched the Searchable Tobacco Products Database, touted as a new user-friendly list of the tobacco products — including vapes and e-cigarettes — that can be legally marketed in the United States per the agency.

"CTP remains committed to enhanced transparency in a way that is useful, timely and user-friendly," said Brian King, director of the FDA's Center for Tobacco Products (CTP). "We hope that this database will be an asset to stakeholders — including retailers — that will be used to help facilitate compliance with the law."

Even so, confusion still prevails.

"It's unfortunate, [the FDA database] doesn't address the products that the agency itself has stated it will not take enforcement action against," said Agustin Rodriguez, a partner with the national law firm of Troutman Pepper, who regularly analyzes the FDA's updates.

He is referring to statements made by the FDA on its website that are "murky" at best. They include: "For the vast majority of unauthorized e-cigarettes on the market today, the pendency of an application (PMTA) does not create a legal safe harbor to sell that product. There are a few tobacco products that have received a marketing denial order (MDO) that are under further agency review and for which FDA has stated the agency does not intend to pursue enforcement action during the pendency of the re-review. In addition, in a very limited number of instances, some courts have granted stays of MDOs pending judicial review in order to maintain the status quo, or FDA has administratively stayed MDOs. In those particular instances, FDA does not intend to take enforcement action."

[Read more: U.S. Supreme Court to Hear Challenge to Flavored Vapor Denials]

Additionally, there's many synthetic products that the agency has not acted against, according to Rodriguez. "It's another ball of wax that's just as confusing," he said. "It would be helpful for the agency to provide guidance to retailers for all of it."

NATO's Spross agrees that there is a lack of clarity and information from the FDA — particularly regarding the premarket tobacco product application (PMTA) process. 

"Specifically, it is difficult to identify products covered by timely-filed, still-pending PMTAs. These PMTAs may be pending because FDA has not yet completed its review — even though many of these applications have been before the agency for almost four years — or because FDA or a court has stayed a negative determination," he explained.

"FDA has not clearly communicated its enforcement priorities or shared an accurate and updated list of products covered by timely-filed, still-pending PMTAs," Spross continued. "As a result, despite the diligence of responsible retailers, including requesting documentation of timely-filed PMTAs, it is often impossible to differentiate between products that blatantly flout the law — for example, those for which no PMTA was filed at all or a PMTA was filed after the applicable deadline for on-market products — and those that are the subject of PMTAs that were timely filed but are still waiting for FDA's review process or completion of an appeal."

States Step In

Across the country, states are attempting to fill the regulatory void, both through flavor bans and the latest local government craze: bills put forth to establish state vapor product directories.

In a recent blog, Troutman Pepper explained that these directories would allow states to individually prohibit the sale of vapor products that are not authorized by the FDA or subject to a pending premarket application.

Opponents of this type of legislation believe the bills overstep federal authority, hurt small businesses and provide fewer alternatives to combustible tobacco products. As of press time, approximately 20 states were considering some form of directory legislation.

These directories are intended to reduce the proliferation of illicit vapor products, but Spross acknowledges they could be adding to the problem — which is ultimately the stifling of innovation. "Until the FDA begins authorizing more alternative products, the regulatory confusion and proliferation of the illicit marketplace is likely to continue," he said.

Rodriguez's view is a bit more biting. Warning retailers that the directory statutes are "going to change the game for many," he believes the FDA of today is not the FDA that embraced alternatives when the Tobacco Control Act was initiated over a decade ago with talk of reduced-harm products to incentivize smokers away from cigarettes.

"This agency is not doing that," he said. "They're not approving PMTAs fast enough. They are forcing huge costs in an industry to meet their standards. They're effectively banning all flavors and meanwhile, encouraging a black market that's filling a void that consumers want. That is the reality."

This ad will auto-close in 10 seconds