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11/29/2022

U.S. Nicotine Trends Offer Some Bright Spots

New research presented in a recent NATO webinar finds the backbar is not all gloom and doom.
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The tobacco backbar in a convenience store

NATIONAL REPORT — There are category concerns, but U.S. tobacco and nicotine trends are showing several signs of health, according to Management Science Associates Inc. (MSA).

In the first of three tobacco-related webinars sponsored by National Association of Tobacco Outlets (NATO), Don Burke, MSA's senior vice president, highlighted the current trends in the tobacco and nicotine markets by product segments and through an analysis by trade channels, including convenience stores, tobacco stores, grocery stores, dollars stores and more.

According to Burke, c-stores are clearly out in front when looking at nicotine distribution by trade class. While convenience/gas stores account for 60 percent of stores selling nicotine in the United States, they account for 71 percent of nicotine sales volume, according to the MSA research, which studied wholesale shipment to retail data through July 2, 2022.

Comparatively, while tobacco outlets account for only 4 percent of stores, they account for 8 percent of all tobacco sales in the U.S. and, though historically "dollar stores haven't been too much of a concern for us," Burke noted a shift is coming.

Currently, they account for 8 percent of stores and only 2 percent of tobacco volume. "But we're going to keep an eye on that one," he said.

Specifically, it is little filtered cigars, pipe tobacco, modern oral and roll-your-own (RYO) subcategory that are picking up in dollar stores. "We never saw them as being big competition in nicotine; this may be the first sign they're doing something right and a bit of a concern," Burke said.

Cause for Concern?

When studying the percent change in nicotine units across all backbar segments, the convenience/gas channel was down 8 percent in units for the 52 weeks ending the second quarter of 2022, compared with the 52 weeks ending the second quarter of 2021. The decline in units was 7.6 percent across all outlets.

However, Burke isn't too concerned. "I wouldn't take this as seriously as some analysts suggest," he told the webinar audience, noting two reasons why.

  1. When looking at servings, which considers how consumers use nicotine SKUs (for example, a pack of cigarettes, with 20 in a pack, would count for 20 servings), the declines aren't quite as bad. For c-stores, that percentage decline, comparing the same second-quarter periods of 2022 and 2021, was 7.2 percent vs the 8 percent decline in units.  
  2. The pandemic influence has inflated the current downturns, During the stressful times of the pandemic, consumption of tobacco was higher — and that is in the base now. "When you compare the current period to the base, it's not looking as good," he said, adding he believes that "once the pandemic gets out of the base period, the numbers are going to level off" and not be as sharp as what the industry is currently feeling.  

Still, MSA is predicting another 5 to 7 percent drop in nicotine consumption, measured in units, for 2022. Again, this will be influenced by the pandemic and a higher based period, Burke explained.

Segment Close Ups

Cigarettes account for about three-quarters of every tobacco item purchased in the U.S. — or 76 percent share of servings. However, that is a 2 percent decline since last year. "Cigarettes are, by far, the number one way consumers choose to use nicotine," Burke said.

The only two subcategory showing growth in the MSA study are vapor, increasing 1.6 percent to 7.4 percent servings share, and modern oral, increasing 0.7 percent to 1.9 percent share of servings. "Retailers may not realize; vapor is really seeing a surge in consumption right now," he added

Some other category trends Burke made note of include:

  • Modern oral nicotine is driving the growth in the overall oral category, but distribution builds are starting to level off, which is slowing the growth rate in the category.
  • Modern oral and vapor are both growing; the tobacco-free delivery of nicotine, in general, is growing considerably.
  • As the modern oral category grows, the number one category it cannibalizes is moist smokeless.
  • Large cigars, which for years have enjoyed "nice growth," and been "a bright spot," according to Burke, are starting to decline.
  • Within the vapor category, cartridges have historically seen the biggest growth in convenience, but more recently, it's disposables because they're allowed to be sold in flavor varieties.
  • The overall vapor category is projected to be flat to enjoying "a little bit" of growth for the year.
  • Within the cigarette category, the deep discount subsegment is up by 4 percent; Burke believes inflation and gas prices will continue to drive this trend. In tobacco outlets, the growth rate for fourth-tier cigarettes is even stronger, showing a growth rate of more than 5 percent.
  • Along with modern oral and vapor, pipe tobacco is seeing growth and Burke noted pipe tobacco has tax advantages vs. RYO tobacco.
  • Within the moist smokeless segment, deep discount brands are also growing.