Tobacco Category Feels the Impact of Inflation in Q2

NEW YORK — The tobacco category has come up against headwinds.

According to the Goldman Sachs second quarter Nicotine Nuggets survey, higher gas prices and inflation started to take a toll on lower income/core tobacco consumers.

"Overall, our contacts are incrementally cautious and highlighted that cigarette volume declines accelerated, downtrading pressure intensified and pricing power is softening in Q2 as increased pressure on low-income consumers is forcing them to make trade-off decisions," said Bonnie Herzog, managing director at Goldman Sachs.

Nicotine Nuggets surveys retailer and wholesaler contacts represents approximately 75,000 c-store retail locations across the United States, or roughly half of the total channel.

According to the quarterly survey, cigarette volume declines accelerated in the second quarter of 2022 reflecting increased pressure on low-income consumers forced to make trade-off decisions resulting in shifts to packs vs cartons, reduced tobacco purchase frequency and less store trips and lower spending per store trip on tobacco/nicotine products.

Downtrading pressure intensified in the three-month period, with more than 70 period of respondents flagging this as a response to elevated retail gas prices, Herzog said.

In addition, pricing power softening as consumers have less money to spend on tobacco purchases. "Approximately 65 percent of retailers noted manufacturers have less pricing power today than one-year ago, which is a marked shift from our previous surveys," she said, pointing out it is a sharp increase from an approximately 30-percent average in prior surveys.

Looking at segments, Nicotine Nuggets found smokeless nicotine remains strong, led by modern oral nicotine brands on! and ZYN.

As for electronic cigarettes, volume remains "broadly stable reflecting growth in flavored disposables and increased out-switching from cigarettes," Herzog noted.

Additionally, Goldman Sachs retailer and wholesaler contacts did not report any broad negative impact to JUUL from the Food and Drug Administration's marketing denial order and subsequent judicial stay in late June.

"In fact, most respondents indicated that JUUL saw a short-term surge in sales following the ban which has since normalized," she added.

However, the survey respondents remain concerned about a potential nicotine cap rule and related unintended consequences, but they believe it is too early to implement a change in their tobacco strategy given the policy could take several years to be implemented, according to Herzog.

She added consumers are also largely unaware of the proposed policy.

On June 21, the FDA said it would develop a proposed product standard to establish a maximum nicotine level. The goal of the rule, according to the agency, is to reduce underage tobacco use, addiction and death.

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