Retailers Optimistic on Reduced-Risk Tobacco Products

NEW YORK — The next evolution of tobacco may be reduced-risk products, and retailers are optimistic about that future.

According to Wells Fargo Securities LLC's recent Tobacco Talk survey, 75 percent of responders are excited about Philip Morris Internationals' (PMI) heat-not-burn product, iQOS, plan to carry it with 40 percent planning to increase shelf space for the product.

Tobacco Talk surveys retailers and wholesalers representing around 30,000 convenience stores in the United States.

The industry optimism comes despite the doubts the Food and Drug Administration's Tobacco Products Scientific Advisory Committee (TPSAC) expressed about PMI's Modified Risk Modified Risk Tobacco application.

"While disappointing, TPSAC’s vote against PMI’s modified risk application as currently framed is not a deal-breaker, in our view, and certainly doesn’t derail the huge commercialization opportunity ahead — even without MRTP approval," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

While Tobacco Talk respondents are optimistic about reduced-risk products, retailers remain cautious on Philip Morris' Marlboro. Philip Morris is an operating company of Altria Group Inc. According to Herzog, the overall environment remains largely stable but Marlboro pressures continue.

As Herzog explained, respondents said price confusion, and inroads by R.J. Reynolds Tobacco Co.'s Newport brand, fourth-tier brands and the vapor category have "hurt" Marlboro as the premium cigarette brand moves to recover from the $2 increase in California's state cigarette excise tax. The new levy went into effect in April.

Specifically, the survey found that Newport is winning over younger adult smokers with effective promotions and fourth-tier brands are getting the price value equation right. In vapor, JUUL is capturing the interest of millennials with an "Apple-like" approach.

"We realistically expect Marlboro's cigarette volume/share pressures to continue near term but stabilize in fiscal year 2018," Herzog said. "We estimate Marlboro volume was down 4.6 percent in the fourth quarter — compared to a 4.8-percent decline in the fourth quarter 2016 — and are down about 3.5 percent, in line with the industry, for fiscal year 2018. Importantly, Marlboro's margins remain very strong and continue to expand."