2021 Tobacco Outlook

2021 Tobacco Outlook

By Anne Baye Ericksen | June 10, 2021

Originally Posted on cstoredecisions.com

Every year, the tobacco category gets hit with some kind of twist that convenience store owners and operators must accommodate. Five years ago, it was the deeming rule from the Food and Drug Administration (FDA) that lumped electronic nicotine delivery systems (ENDS) and other tobacco products (OTPs) in with cigarettes. At the end of 2019, the federal government raised the minimum purchase age to 21, quickly followed by the FDA ban on flavored ENDS other than disposable e-cigarettes and open vaping systems.

This April, the agency confirmed it is contemplating a national ban on menthol cigarettes and flavored cigars. Oh, and of course, convenience stores are still dealing with the long-haul economic effects of COVID-19.

Despite all this, the tobacco category is experiencing some uplifting developments. For example, the oral nicotine segment continues to push forward, and even cigarettes withstood the unprecedented circumstances of the past 15 months.

Now, as foot traffic picks up, it’s an opportune moment to assess what the all-important c-store category — accounting for more than one-third of in-store transactions — has in store for the rest of the year.

Cigarettes Hold Strong

Perhaps one of the most unexpected outcomes for convenience stores during the pandemic has been the uptick in cigarette sales. Market analysts don’t believe there’s suddenly a population explosion of new smokers. Rather, they cite coronavirus lockdowns and remote working instigating the surge.

Smokers not only stocked up in the early days of the stay-at-home orders, but free from being remanded to a remote outdoor corner to smoke, people apparently indulged more often. CStore Decisions reported last year that between April 28 to May 11, 2020, 31% of cigarette users admitted smoking more frequently.

Although the hoarding of cigarette cartons eased up as the months passed, sales maintained a positive course. Cigarette dollar sales in U.S. convenience stores gained 1.5% for the 52 weeks ending April 18, 2021, per data from IRI, a Chicago-based marketing research firm. When compared with the same period last year, unit sales slipped by 4.9%. The dip could be attributed to a slowdown from the pandemic-inspired stockpiling, but national data suggest the trend has held strong. For the four weeks prior to April 18, unit sales posted a 1.7% increase, accompanied by 5.5% gain in dollar sales. Nielsen research also recorded a 5.0% increase during the month of March.

“Overall cigarette volume was flat in Q1; however, we continue to see increased market share in regions outside of Colorado,” noted Tim Greene, category director of tobacco and GM for Smoker Friendly. Its parent company, The Cigarette Store Corp., based in Boulder, Colo., operates more than 160 retail stores across seven states, including Gasamat convenience stores, as well as tobacco outlets and cigar lounges.

“Roll-your-own (tobacco) has improved given the passing of Prop. EE in Colorado, where 35% of our stores reside,” he added.

Approved in November, the proposition sets minimum prices for tobacco products, adds an incremental increase to the statutory tax for cigarettes and establishes taxes for previously untaxed ENDs.

Nicotine Pouches Prop Up OTPs

While the cigarette flare-up may burn out as people return to the workplace, the momentum pushing up OTPs started before the pandemic and is expected to carry on afterwards. The oral nicotine segment, in particular, keeps ringing up profits.

“We have seen early success with the nicotine pouches and are working to expand assortment as we prepare for increased growth,” said Matthew Nefferdorf, director of retail marketing for CrossAmerica Partners LP. Based in Allentown, Pa., the company distributes fuel to approximately 1,700 retailers over 34 states as well as operates convenience stores.

“The category is getting a bit crowded, but we do see consumers gravitating to this type of nicotine delivery,” commented Kaitlyn Meara, category manager, tobacco, for GPM Investments. Based in Richmond, Va., it is owned by ARKO Corp., which operates approximately 2,950 locations, including about 1,350 company-operated stores and approximately 1,600 dealer sites to which it supplies fuel in 33 states and Washington, D.C.

IRI reported dollar sales of spitless tobacco items jumped 52.4% for the four weeks ending April 18 compared with the same period in 2020, nearly matching the 52-week gain of 54.1%. Unit sales jumped more than 67% for the four weeks and nearly 60% for 52 weeks.

Anna Bettencourt credits the product’s discreet nature for its growing acceptance.

“Nearly every office or public space has a no-smoking policy, and vaping is typically included because of the vapor it produces. The spitless pouches don’t produce any of that. You can use pouches almost anywhere, so it’s a great alternative,” said the senior category manager for Haffner’s c-store chain, owned by Energy North Group Inc. The company, headquartered in Lawrence, Mass., also runs gas stations, car washes and foodservice sites in Massachusetts, New Hampshire, Maine and New York.

That said, smokeless tobacco products, including snus, still substantially outsell spitless options, totaling $7.1 million versus $1.1 million, respectively, per IRI.

E-Cigarettes Rebuild Market Share

ENDS continue delivering for c-stores.

“E-cig sales make up close to 41% of our OTP sales today versus 27% a year ago. These higher-ticket items, both in retail price and margin, have really helped drive overall profitability in the OTP category,” said Nefferdorf.

Indeed, both Nielsen and IRI calculated growth for ENDS in a year/year comparison of dollar sales — 7.5% per Nielsen and 10.5% per IRI. This growth comes despite the fact that products without pre-market tobacco applications (PMTAs) had to be pulled last fall. At press time, FDA had just announced 6 million deemed new tobacco products were approved following the PMTA process. PMTA approvals/non-approvals will hopefully provide some consistency to planograms following several years of an evolving environment of brands from startups to Big Tobacco to new technology and expanding regulations.

Cigar Supply Struggles to Meet Demand

The cigar subcategory probably suffered the most from COVID-19 conditions because distributors strained to meet c-store orders under manufacturing slowdowns.

“We did see a pinch on supply as it relates to our cigars and wraps. Supply still remains tight on these items,” noted Nefferdorf.

“We work closely with the manufacturers to understand timing and potential remedies,” added Meara.

In spite of that, dollar sales for cigars bumped up more than 13% for the 52 weeks ending April 4, according to Nielsen research. IRI reported similar findings at 11.5%.

Concentrating on CBD

Although not derived from tobacco or containing nicotine, the cannabidiol (CBD) category has earned its place as a c-store profit producer. Since the 2018 Farm Bill authorized the sale of hemp-derived products, c-stores have built up CBD offerings.

U.S. sales in 2019 reached $4.2 billion, representing a 562% jump from the previous year, according to Brightfield Group.

Last year, CBD sales slowed, but by Q4, a rebound appeared underway. Tinctures and topicals posted the best gains, whereas gummies had minimal loss after a positive 7% showing in Q3, according to research from Management Science Associates.

“CBD continues to be a steady category through the first part of 2021, led by Solari Hemp’s gummies, tinctures and six-pack offerings,” said Greene.

Analysts suspect the category will make steady gains in the coming months, but don’t anticipate a return to pre-pandemic levels until next year. Then again, a national survey by Invisibly suggests there’s substantial room to grow the market now. Thirty percent of respondents who admitted to never trying a CBD product said they would consider using it.

Bettencourt plans to go bold this year with Haffner’s CBD category by expanding brand selection. “I don’t think the category has reached its full potential across the industry. To me, it very much mirrors where the e-cigarette and vaping category was six or seven years ago,” she said.

Readying for New Regulations

As impactful as the pandemic was on the tobacco category, regulations always affect how c-stores manage the back bar. In addition to the PMTA deadline and federal flavored tobacco ban on most ENDS, several states moved to restrict sales of flavored products.

The National Association of Tobacco Outlets (NATO) tracked more than 160 local ban proposals in 2020. Also, California joined Massachusetts in passing a statewide ban that includes menthol products. However, a signature-gathering campaign to place the topic on the 2022 ballot postponed its enactment.

“Like in 2019 and 2020, 2021 has seen a number of states consider flavor bans impacting tobacco and nicotine vaping products. Thus far, none of these bills has become law, and the bill that is closest to becoming law — a Connecticut proposal specific only to vaping products — has an exemption for products with PMTAs filed or authorized by the FDA,” said Gregory Conley, president of the American Vaping Association.

Interestingly, some bills have sought to prevent additional regulations.

“We have seen a number of states — Florida, Montana and Tennessee among them — pass bills to preempt local governments from banning or stringently regulating the sale of tobacco and/or nicotine products,” said Conley.

On Capitol Hill, lawmakers introduced the Tobacco Tax Equity Act of 2021, under which the federal government could set the minimum retail price on all tobacco products. That amount would be tied to inflation, so it could go up based on economic factors.

“The gigantic tax hike on smokeless tobacco and vaping products would undoubtedly be detrimental to many convenience store owners, as these products are a growing category that are helping adult consumers transition away from combustible cigarettes,” said Conley.

Then there’s the issue of a potential federal menthol ban.

In 2019, Massachusetts became the first state to add menthol to its prohibited flavors, which was implemented last summer. When New York legislators confirmed they were contemplating a similar bill, the New York Association of Convenience Stores (NYACS), along with other retail organizations, commissioned a study to assess the financial fallout. Researchers concluded the expanded ban could end up eliminating more than 1,200 jobs and approximately $454 million in tax revenue. Plus, the study found c-stores could lose sales equivalent to the combined average income of 80 New York convenience stores.

In April, FDA said it plans to announce a ban on menthol cigarettes and flavored cigars within the next year — a move that would be clearly detrimental to c-store retailers.

“As part of the rulemaking process, FDA will accept and review comments on the impact of the proposed rules on tobacco and other industries, including the projected impact on domestic jobs,” an FDA spokesperson told CStore Decisions.

Already opponents have vocalized concerns.

“If it is enacted, I think we will see what we’ve seen in Massachusetts; the product will be sold illegally across the country as opposed to just across the state. There is such a high demand for menthol, and that does not go away overnight,” said Bettencourt.

“Menthol is over 37% of the tobacco market. The National Association of Convenience Stores (NACS) is on record opposing menthol bans as we believe illicit vendors will quickly source and begin selling foreign and counterfeit menthol cigarettes,” said Lyle Beckwith, NACS senior vice president, government relations. “Illicit vendors do not verify age, do not collect and remit taxes, and sell other illegal products beyond just menthol cigarettes. We have not yet seen the FDA proposal, so I cannot comment on a specific response, but we are prepared (if necessary) to activate the industry in any appropriate fashion.”

Even the American Civil Liberties Union has spoken out against a menthol ban, citing the disproportionate impact on communities of color. According to the National Survey on Drug Use and Health, African Americans constitute 85% of menthol consumers.

At this point, it’s difficult to accurately predict what will transpire with menthol restrictions or federal taxes, but the tobacco sector has a history of unpredictability. C-store owners and operators who incorporate flexibility into their category management strategies allow room to respond and protect profit margins.

“We are always looking to ensure we remain one step ahead as this category continues to evolve and customer buying habits change,” said Nefferdorf. “Our tobacco category manager is currently reviewing space-to-sales for each of the subcategories in our stores, so we can work to allocate the proper amount of space to those items we are seeing positive growth on. This analysis will allow for us to complete back bar resets and eliminate any slow movers during the process. By ensuring proper space by subcategory, we hope to reduce any out-of-stocks and avoid any inconvenience to our customers.”

“We believe that we are positioned nicely as the states start to relax COVID restrictions,” concluded GPM’s Meara. “We think there is a lot of pent-up spending power that we hope to benefit from through our busy summer months.”

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