A Renaissance for Combustible Cigarettes?

NEW YORK — Despite the rise in sales of electronic cigarettes and vapor products, the combustible cigarette environment remains "robust" due to a renaissance in combustible sales. Year-over-year industry volume is expected to be up 0.2 percent in the second quarter of 2015, according to Wells Fargo Securities LLC's latest Tobacco Talk survey.

Tobacco retailer and wholesaler contacts representing more than 30,000 convenience stores in the United States took part in the survey, according to the firm.

Other factors contributing to the "robust" combustible cigarette environment include continued strong manufacturer net price realization, a stable competitive environment and moderating vapor category growth.

Additionally, several dynamics continue to drive moderating smokeless tobacco growth, including consumers "up trading" to combustible cigarettes; the highest number of non-combustible options that has ever existed; and difficulty in indefinitely sustaining major growth for the segment.

Some consumers have grown disillusioned by e-cigarettes and are "switching back to combustible cigs, again highlighting that stepped-up innovation is critical for the long-term success of this category," said Bonnie Herzog, managing director of beverage, tobacco and convenience store research at Wells Fargo Securities.

Greater consumer disposable income is also serving as a "tailwind" for c-stores, aided by lower fuel prices and favorable weather in some regions, according to the survey. Retailers noted an increase in foot traffic for in-store purchases and a greater propensity for consumers to indulge in premium-branded merchandise and higher fuel gallon purchases during the quarter.

Overall, the latest survey identified multiple positive signs for the U.S. tobacco sector in 2015, including stronger pricing power; the market's insulation from volatility; strong fundamentals; multiple cost-saving levers; and e-cigarettes/vapor potential.

"We believe the industry is entering its next generation of growth as reduced risk/vapor products will accelerate combined-profit-pool growth over the next decade," Herzog stated.