Tobacco Environment Stable as Consumers Face Rising Costs

NEW YORK — Higher costs in cigarette pricing and healthcare — and a slight uptick in gas prices — are causing some drag on consumer spending and cigarette volumes, even as the overall tobacco environment remains largely stable, according to Wells Fargo Securities LLC's latest Tobacco Talk survey.

Retailers participating in the survey said they continue to expect pressure on cigarette volumes. In addition, they are slightly more pessimistic longer term given the Food and Drug Administration's (FDA) new tobacco roadmap, which places the focus on nicotine.

On the other hand, survey respondents are optimistic about the long-term impact the FDA's shift will have on the vapor and reduced-risk tobacco products segments.

Tobacco Talk conducts quarterly surveys with retailers and wholesalers representing roughly 25,000 convenience stores in the United States.

In all, Wells Fargo Securities expects cigarette industry volume to decline 3.8 percent in fiscal year 2017.

The latest survey also found that retailers are not seeing as much as consumer downtrading since the top tobacco companies took cigarette list price increases last month — despite the slightly widening price gap between premium and discount brands.

In addition, the cigarette market is a little more competitive as players compete for shrinking volumes. However, the promotional environment "remains largely rational," said Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities.

According to Herzog, combustible cigarette industry volume deceleration continues, partially offset by price increases and promotional support. "We expect third-quarter shipment volumes declined 4 percent," she noted.