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Tobacco’s 2020 Trajectory

Rising sales are boosting retailer optimism across the category, but regulatory hurdles loom.

Tobacco sales have proved a bright spot for many convenience stores during the COVID-19 pandemic, but while c-stores anticipate robust tobacco sales for the remainder of 2020, retailers are bracing for the potential chill of regulatory headwinds.

As the pandemic first hit the U.S., many customers began hoarding tobacco products — particularly cartons of cigarettes — ahead of shelter-in-place rules, according to data from the InfoMetrics database managed by consulting services firm Management Science Associates (MSA).  

“As the stay-at-home situation has continued, there has been increased consumption of all types of tobacco items with the exception of vape, possibly because consumers are at home and not in locations where there are restrictions on its use,” said Don Burke, senior vice president of MSA.  

A poll by consumer intelligence research platform CivicScience found that from April 28 to May 11 — at a time when most areas of the country were still experiencing stay-at-home orders — 31% of cigarette users reported smoking more frequently, and 28% of e-cigarette/vape users reported vaping more frequently. Some 44% of cigarette smokers and 34% of smokeless, e-cig and cigar users reported buying their tobacco product at a c-store most often during the same period. 

Research firm IRI’s Convenience All Scan data found smokeless tobacco dollar sales grew 7.8%, with spitless up a whopping 80.6% for the four weeks ending April 19, 2020. Tobacco accessories dollar sales were up 33%, and cigars climbed 13.1%, while cigarettes dropped 2.4%, and e-cigs dipped 1.1% for the same period. Nielsen data showed e-cigs down 8.5% and cigarettes down 5% for the four weeks ending April 25, 2020, but similar upticks in other tobacco products, with cigars up 11.3%, pipe tobacco up 14.1% and “shag” or rolling tobacco up 28%. 

Depending on location, c-store retailers are seeing various realities and differing surge/decline timelines when it comes to tobacco sales. 

Store-Level View

Doug Galli, vice president and general manager for Reid Stores and Crosby’s, said sales of other tobacco products (OTP) including cigars, snuff and e-cigarettes climbed at the company’s 82 c-stores in New York and Pennsylvania, ahead of shelter-in-place rules. 

Year over year through April, “cigars are up 7%, e-vape is up 29% and the ZYN/Velo category that was non-existent last year has shown some legs. That category is 50% of the lift over last year,” Galli said. He added that moist snuff was down slightly for the same period.  

On Feb. 6, 2020, the Food and Drug Administration (FDA) ruled that c-stores and other retailers can no longer carry display cartridge-based e-cigs or vaping pods in flavors other than menthol and tobacco, but flavored disposable e-cigarettes are still legal. 

“The FDA attempted to strike a balance between protecting adult access to flavored vaping products and discouraging youth from vaping,” noted Gregory Conley, president of the American Vaping Association. “Unfortunately, this move has undoubtedly led some adult ex-smokers to relapse and less adult current smokers to attempt to switch over.” 

The growth seen at Crosby’s c-stores is “in spite of the (federal) flavor ban in (non-disposable) e-cigs and vape products, along with the addition of the ZYN/Velo products,” Galli added. 

The cigarette segment, meanwhile, has been down 10% at Crosby’s c-stores through April, a slump Galli attributed to the purchase age for cigarettes increasing from 18 to 21 on Nov. 1, 2019, in New York state. Shortly thereafter, on Dec. 27, 2019, the FDA officially changed the minimum tobacco purchase age at the federal level from 18 to 21. The new nationwide Tobacco-21 law was effective immediately and applies to all tobacco products, including e-cigarettes and vaping cartridges.

Across the country, Cenex Zip Trip saw a different trajectory at its 36 c-stores in Montana, Wyoming, North Dakota, South Dakota and Minnesota. 

“While early March and April saw a small decrease in tobacco sales during the heart of the stay-at-home orders in the states we serve, in the past three weeks, we’ve seen them rise back similar to what we sold during the same time span a year ago,” said Zip Trip Merchandising Manager Jon Fleck. 

Montana — where the majority of Zip Trip’s stores are located — is now transitioning into the next phases of loosening stay-at-home restrictions, but during the lockdown, despite decreased customer traffic, the tobacco category held its own, Fleck said. 

Fleck noted tobacco companies are offering bigger buydowns and providing them earlier than planned. “With advertising these deals with outdoor signs and matrix reader boards, we have seen some (sales) come back,” Fleck said. 

At the end of 2019, a temporary ban on flavored vape products — including menthol — went into effect in the state of Montana. “We did a tremendous business in Montana with flavors prior to the ban,” Fleck said. 

The ban on menthol, however, expired in mid-April, and the chain is now bringing in some flavored disposable e-cigs. 

Given the Montana flavor ban, Zip Trip has seen a 20% drop in e-cig sales. Although the e-cigs/vaping segment is down significantly because of flavor bans, Fleck noted, “the category is doing well as a ‘comfort product’ along with beer during this pandemic.”   

Meanwhile, chew, snuff and cigars are down slightly — “which isn’t bad considering the drop in customer counts (due to the pandemic),” said Fleck. “We categorize tobacco alternatives with these products as well. ZYN, Dryft, etc., have been a pleasant surprise that has picked the overall category up.”

At Zip Trip, tobacco customers are asking for specials, and seeking “the bigger, better deal.” “Similar to beer, cigarettes are comfort products, so while we did a small decrease in business during this time versus the prior year, we attribute most of that to the smoking age increasing to 21 as opposed to COVID-19,” Fleck said. 

Meanwhile, in Texas, Irfan Tejani, CEO and president of Tejani Holdings, the parent company of Charge Up c-stores, said COVID-19 had a big impact on tobacco sales. 

“Sales were down all across the board by double digits as customers did not know how to react to the entire situation, and then we started to get momentum back,” he said. 

Headquartered in Sugar Land, Texas, Charge Up operates 40 c-stores in Texas and Louisiana. 

“Louisiana stores specifically had to adapt to operating during a strict lockdown,” Tejani said. Overall, he noted that “despite the ongoing restrictions, the cigarette category remains the highest grosser all across (our stores).” 

Smokeless tobacco has been stagnant to growing at Charge Up, depending on the location, while cigarillos are “very strong,” particularly the single sticks, which Tejani noted offer good profit margins. What’s more, he sees cigarillo sales growing — “especially the singles and promo packs like 3-for-1 and 4-for-1 packs,” Tejani said. 

Charge Up is also testing the oral nicotine category. Nicotine toothpicks are sold at select stores. 

“It’s a special category that doesn’t sell across the board,” he said. “Nicotine gums seem to be doing good where this category is sold.”

Tejani, Fleck and Galli all anticipate strong sales for tobacco for the rest of 2020. 

“Tobacco in our New York stores is about to grow. Effective May 18, if your retail location has a pharmacy, you will not be allowed to sell tobacco products,” Galli said. Crosby’s stores in Erie County, N.Y., experienced a lift in their tobacco sales when an identical rule went into effect there around a year ago.

Tejani said he believes the tobacco category will continue to stay strong and consistent over the coming years — unless regulations become even stricter — with e-cigs slowly taking over a bigger portion of the category. Despite ongoing regulations, customer needs drive the market, and customers continue to demand tobacco sales, he pointed out. 

“We see tobacco numbers increasing the rest of the year, as many uncertainties lie ahead with COVID-19,” Fleck said. “Once again, for tobacco users, it is a comfort that they rely on during these times.”  

What’s Ahead? 

One headwind for retailers to watch is potential for tax increases on tobacco products due to the pandemic.  

“COVID-19 is creating serious budget issues that we’re only just now starting to calculate. States that had started to grow accustomed to having large surpluses now have huge deficits that may surpass what states dealt with during the 2009 recession,” Conley pointed out. “As a result, tax increases on all tobacco and nicotine products are absolutely going to be considered in dozens of states over the next year. On the plus side for retailers, budget deficits will make it more difficult for state legislators to justify banning flavored vaping or tobacco products due to the tax revenue and jobs they provide.”

Another is how the premarket tobacco authorization (PMTA) will impact the category. 

At press time, the new date when (PMTA) applications are due to the FDA is set for Sept. 9, 2020. 

“In theory, this would mean that after the September deadline, only products with pending or approved PMTAs before the FDA can continue to be sold by retailers across the U.S. Those selling JUUL, NJOY, Vuse, blu, etc. have little or nothing to worry about in terms of potential dead stock, but some of the more fly-by-night companies that make disposable vaping products seem likely to exit the market in September,” Conley warned. 

For a while, the shelf space for vaping products in c-stores seemed to be increasing by the month, he said. But now that some products are likely exiting the market ahead of the PMTA deadline, “the opposite appears to be occurring.” 

Conley believes states will begin to police the market more aggressively than the FDA. “We are going to see attempts at the state level to make selling products without a pending or approved PMTA a crime. Of course, this will not stop the black and gray markets, but will just drive them further underground,” he said.

As things stand now, Burke expects that vape sales could rebound by the end of the year and finish out 2020 on a positive note, “but showing a lower level of growth than what has been seen in the past few years.”

MSA has found that vape success requires retailers to offer a selection of products “not just the market leader,” Burke said. “The varying products offered by the different vapor brands appeal to different vapor consumers,” he said. “If you are not carrying an item your shopper wants, they will find a store that does carry it.” 

One possible silver lining is that the upheaval in the vape category could have benefits for cigarette sales. Conley said one Big Tobacco manufacturer reported cigarette sales in America are not declining as fast as they were when JUUL and its flavors were freely available because many consumers are switching to lower-priced cigarettes. 

“One of the questions facing the vapor category in 2020 is if dual-usage consumers — those that both smoke and vape — and those smokers that mostly converted to vapor, and who now appear to have decreased their use of vapor and possibly increased their use of combustibles, will eventually resume their prior level of vapor consumption,” Burke said.

Based on MSA’s research, Burke predicts cigarettes will have a better-than-average year, the cigarillo cigar segment will remain steady and the modern oral category will continue its upward climb, while vape continues “to suffer from the illegal tetrahydrocannabinol (THC) vaping crisis and the loss of flavors that occurred in 2019.” 

Conley concurred, “This rise in discount cigarette use coincides with the American public being grossly misinformed by government agencies and the media about ‘vaping-related lung illnesses,’ which we now know were caused by illicit THC products, not nicotine vaping products.”

The key to success for cigarette sales will be carrying a broad selection of brands at the various price tiers, Burke advised. “Although the (cigarette segment) typically shows a unit sales decline, two sub-segments — the super-premium and deep-discount categories — have shown growth. And while these are the two categories that are growing, it is still the premium category (Marlboro, Camel, Newport) that accounts for the bulk of cigarette sales, emphasizing the need for a broad selection of brands and prices.”

The future of menthol cigarettes remains uncertain after the U.S. House passed H.R. 2339 on Feb. 28. The bill calls for a nationwide sales ban of all flavored tobacco — including menthol — and flavored vaping products, with few exceptions. The bill would also end remote or online sales. The bill is not expected to pass the Senate — for now. “If the composition of the U.S. Senate changes in the November elections, the flavor ban fight absolutely will start up again at the federal level,” Conley said. 

Menthol represents approximately one-third of cigarette sales, according to MSA. “So a significant level of revenue for the tobacco retailer and billions of dollars in tax revenue each year,” Burke pointed out.  

“Cigarettes hands down are the most powerful segment in the tobacco category,” said Charge Up’s Tejani. “I don’t see any other (segment) taking over anytime soon, unless it was to be stopped completely and customers were forced to buy (tobacco) without that option.”

The unpredictability is Tejani’s biggest concern when it comes to the state of tobacco today.  He compared it to a game of cat and mouse. “It’s just getting intense. The c-store industry relies on the cigarette category heavily. It doesn’t provide good margins — not at all — but (remains) one of the top three drivers of customers to the c-store. If the cigarette segment is banned or heavily restricted, it could have a devasting impact on sales for many c-stores as they wait for customers to adapt by switching to new tobacco segments.” 

For Zip Trip’s Fleck, flavor bans have been a big concern over the past few years and hit his chain hard in 2019. “The tightening of flavor bans to include menthol, especially with cigarettes, would be a major concern,” he said.  

As Galli and Fleck both noted, the effects of Tobacco-21 caused an immediate jolt to sales, but it’s a blip already in the rearview mirror. 

“Most national chains and many local businesses began enforcing the (Tobacco-21) law immediately after it was enacted,” Conley said. 

Growing the Nicotine Business

Last fall, MSA found that 43% of c-store retailers were busy growing their nicotine business, a trend expected to continue in 2020. 

“One key finding was that these retailers expanded their tobacco category (growing their items by more than 10.5%) to carry the right selection of SKUs that would appeal to a broad tobacco audience,” said Burke. “Retailers need to regularly review their SKU selection and instead of just removing (products) that are not selling, judiciously replace those SKUs with items that have the potential to appeal to their shoppers.”

If a c-store has a strong selling tobacco item, and very few similar alternative items, this may be a good place to add an additional SKU, Burke pointed out. “Most tobacco consumers are fairly loyal to the brands they prefer, and if they are not available at one store, they will find a store that does carry their preferred item,” he said. “As the tobacco consumer typically purchases additional items while in a c-store, and typically visits the store several times a week, this is a lucrative customer.”

Another way retailers are growing their tobacco sets is by increasing space devoted to the modern oral category, which Burke called “the strongest growing category in tobacco, yet currently a smaller category when compared to cigarettes or cigars or moist.”  

Much of the growth rate, Burke said, is due to new distribution, but MSA is beginning to track a strong level of repeat purchase.

 “The top-selling items with the strongest distribution are the pouches, but the other category items, such as toothpicks, are also picking up steam. Retailers are missing an opportunity if they are not adding this category to their tobacco section. The relatively small footprint and escalating sales in this segment provide an incremental revenue opportunity with strong growth potential,” Burke said. 

Stocking CBD

Consumer interest in cannabidiol (CBD) is strong, evidenced by MSA’s tracking of Google search levels on the product.

“C-store retailers need to realize that many of their sales will be to first-time purchasers, so it is critical to offer a selection of lower-priced items that encourage this trial,” Burke said. 

Charge Up is selling various products across all the different segments of CBD. “The response is good,” said Tejani. “It not only offers higher dollar margins but provides high-ticket items sales in the stores, customer tend to draw towards it more (as time goes on), and it will be a very strong category very soon.” 

For Zip Trip, it depends on the market. While CBD has done well in some of the chain’s stores, it has also pulled it from shelves in other markets. 

From February to March, CivicScience observed an uptick in the percentage of U.S. adults who have used CBD products (increasing from 21% in February to 24% in March), which has remained consistent through April. 

Meanwhile, reported cannabis use increased three percentage points in April compared to February and March, with 20% of U.S. adults polled saying they used cannabis in April, according to CivicScience. At press time, cannabis was legal in 11 states, plus Washington, D.C. It offers another potential segment to c-stores in those states. 

Typically, MSA’s data has shown that lotions, gummies and tinctures are the better selling CBD items. 

“Many purchases of CBD are conducted online currently, so for the retailer to capture these purchases and encourage trial, their CBD items need to be near or at the front register to maximize shopper visibility,” Burke said. 

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