CSN- Tobacco Guide- August 2023

From TOBACCO to Nicotine

A transformation is underway in this critical category for convenience stores.

CATEGORY & SHOPPER INSIGHTS

Never Boring

The tobacco category has always been dynamic, but even more so in recent years

AS A JOURNALIST, you never want to have to make a story out of nothing. In my past life as a regional newspaper reporter, there were several times when I attended a local board meeting where little new business transpired, but I would still need to come up with a story for the next morning’s edition.

Since joining Convenience Store News in August 2005, I can safely say that I have never once been at a loss for story ideas — this industry is dynamic, ever-changing and exciting to cover. And one segment of the business in particular that is far from boring is the tobacco category.

So far this year, CSNews has reported on:

• Regulation Ramp-Up: There are multiple regulatory matters that stand to impact the tobacco business at c-stores, such as the Food and Drug Administration’s (FDA) flavored cigar ban, product standard for menthol in cigarettes, product standard for the nicotine level of certain tobacco products, nicotine toxicity warnings and more.

• Economic Squeeze: Pressures from ongoing inflation and continued list price increases across all tobacco categories are forcing consumers to make difficult decisions to either buy less, buy cheaper or try to quit, according to industry analysts.

• The Rise of Reduced-Risk Products: Also known as RRPs, reduced-risk products currently include modern oral nicotine, e-cigarettes/vapor and heat-not-burn items, and they are poised to play a bigger role in tobacco retailing. How big — and how soon — depends on the FDA, which is still working its way through the Premarket Tobacco Product Application (PMTA) process, whereby the agency must issue a marketing granted order for all tobacco and nicotine products to be sold in the United States.

• The Tobacco Polyuser: The decline in cigarette usage over the last decade has led to a proliferation of new alternative nicotine products, driving growth of more dual and poly product use. Consumers today are more willing than ever before to cross over between product types and try new alternative products, resulting in nontobacco nicotine product forms like vapor and modern oral often winding up in the baskets of cigarette users. Polyusage is expected to keep growing as adult consumers seek products offering discreet use that they can enjoy in more settings, such as professional and travel.

And speaking of alternative nicotine products, perhaps the biggest headline in the c-store tobacco business right now is the overall transformation that’s taking place as the industry shifts from predominantly “tobacco” terminology and traditional products to “nicotine” nomenclature and alternative products — as the cover of this special category guide heralds.

Read on for pointers on what convenience store retailers should be doing to prepare for the more nicotine-based market of the future. Perhaps next year, we’ll be changing the name of this guide from the Guide to Tobacco to the Guide to Nicotine.

For comments, please contact Linda Lisanti, Editor-in-Chief, at llisanti@ensembleiq.com.

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FROM TOBACCO TO NICOTINE

By Renée M. Covino

ARE YOU STILL REFERRING to your backbar as a tobacco backbar?

If so, you are not in step with the many category players that are recognizing — and helping to accelerate — the shift from predominantly “tobacco” terminology and traditional products to “nicotine” nomenclature and alternative products.

At the national law firm of Troutman Pepper, its team of tobacco attorneys recently rebranded itself to the “Tobacco-Plus Nicotine Team,” according to partner Agustin Rodriguez, who told Convenience Store News that “a pretty significant chunk of our work is now nontobacco,” indicating this trend is much more than semantics.

The most recent “Global Trends in Nicotine” report noted that cigarettes shrunk from 88.9 percent of the total nicotine ecosystem in 2017 to 84.1 percent in 2020. This shift was largely driven by increased alternative tobacco product offerings in the market.

A key growth factor for alternative products has been “a movement away from more harmful tobacco products, like cigarettes, to potentially less harmful, nontobacco pouches and nicotine vapes,”

said Alex Morrison, senior business analyst at Cadent Consulting Group, based in Wilton, Conn. “This trend is just an extension of the clean/potentially less harmful trend we see in all types of consumable products from food to beverages to personal care.”

The movement toward providing reduced-risk options is driven by a growing consideration for the wellbeing of adult consumers, explained John Ellegate, vice president of trade marketing for Buffalo, N.Y.-based 22nd Century Group Inc., which received the first and only Modified Risk Tobacco Product (MRTP) authorization for a combustible cigarette from the Food and Drug Administration (FDA). The company’s VLN cigarettes contain 95 percent less nicotine than the Big Tobacco standard.

“Similar to other consumer packaged goods categories, functional benefit products have gained market share and the tobacco industry is following suit by offering alternatives that can contribute to healthier lives,” said Ellegate.

A transformation is underway in this critical category for convenience stores

“Tobacco to nicotine is more than a trend, it is at the core of our organization’s transformation.”

— Dan Sullivan, Reynolds American Inc.

In addition to consumers becoming more thoughtful about the products they consume, they’re also becoming more open to having different nicotine product experiences depending on the situation they’re in, such as while driving, at the office or at a sporting event, pointed out Matthew Hanson, chief financial officer/ chief growth officer for Chicago-based Black Buffalo, a modern oral nicotine product that mimics moist smokeless tobacco but without the tobacco leaf.

In fact, further proof of the developing trend from tobacco to nicotine can be found in the significant growth of the modern oral category, which increased in unit volume by 34 percent in 2022, according to data from Management Science Associates Inc. (MSA), a Pittsburgh-based company focused on analytics and informatics.

MSA also analyzed a combined product category of the two largest nontobacco nicotine product forms: vapor and modern oral. “This combined category showed a growth rate of 20 percent in the fourth quarter of 2022 vs. the year-ago quarter,” cited Don Burke, MSA’s senior vice president.

A Planned Evolution

The increasing shift toward nicotine alternatives is part of a years-long, purposeful evolution, according to tobacco-turned-nicotine manufacturers.

“Tobacco to nicotine is more than a trend, it is at the core of our organization’s transformation,” Dan Sullivan, vice president of trade marketing development at Reynolds American Inc., headquartered in Winston-Salem, N.C., told CSNews. “We have a clear purpose to build ‘A Better Tomorrow’ by reducing the health impact of our business through a multicategory portfolio of noncombustible products, tailored to meet the preferences of adult consumers.”

Tobacco harm reduction is an important aspect of Reynolds’ goal to reduce the health impact of its business. By focusing on scientifically substantiated, potentially reduced-risk tobacco and nicotine products — such as e-cigarettes, nicotine pouches, smokeless tobacco and tobacco heating products — its parent company BAT Group has an overall ambition to have 50 million consumers migrate to its noncombustible products by 2030, according to Sullivan.

The path of Richmond, Va.-based

Altria Group Inc. is also being guided by the evolving consumer. The parent company of Philip Morris USA, U.S. Smokeless Tobacco Co., John Middleton and NJOY has a stated vision to “responsibly lead the transition of adult smokers to a smoke-free future.”

“Our path forward continues to be guided by the consumer, and many are increasingly considering a smoke-free nicotine product,” said company spokesperson Jennifer Kelly. “Our businesses and product portfolio look different. We now have full control of our path within modern oral nicotine. And upon completion of [our acquisition] of NJOY, we will have full global ownership of FDA-authorized products in the e-vapor space.”

Pointers for Preparedness

What should convenience store retailers be doing to prepare for the more nicotine-based market of the future rather than tobacco-based? Here are a few expert suggestions:

Self-educate — The growing shift from combustible products to potentially less harmful nicotine products requires a good understanding of the new products coming onto the market.

“The best thing retailers can do to succeed in the current environment is to continually educate themselves and their staff on products like vapor, modern oral, snus, heated tobacco, etc.,” advised Reynolds’ Sullivan.

Showcase the new — Highly visible, dedicated space for emerging products is a big part of the new nicotine normal, experts contend. “C-store retailers are in a perfect position to take advantage of the inevitable changes that will happen within the social and regulatory environment around tobacco/nicotine retailing,” said Ellegate of 22nd Century Group, recommending that retailers evolve their product offerings and backbar sets to adapt to today’s changing consumer preferences.

and many are increasingly considering a smoke-free nicotine product.”

— Jennifer Kelly, Altria Group Inc.

to be guided by the consumer,

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“One approach would be to organize the backbar sets to feature products based on their relative position on the harm continuum,” he explained, noting that customers can better make informed choices if they see prominently displayed lower-risk nicotine alternatives alongside traditional tobacco products.

Enabling adult consumers to discover novel products is essential for transforming the category, echoed Black Buffalo’s Hanson, pointing out that this requires retailers to intimately know their backbar space.

Digitally market — Reynolds has found that retailers with fully integrated

marketing programs like loyalty programs are the most successful at driving noncombustible nicotine product sales, relayed Sullivan.

Retailers need to know what types of adult consumers are transacting in their stores, which requires a data-forward approach, including digital tools such as loyalty and app-based marketing programs, Hanson agreed. “Digital marketing is a powerful and cost-efficient way to reach adult consumers before they are in your store,” he said. “Adult consumers’ needs and preferences are constantly changing and evolving, and retailers cannot rely on what they did yesterday to drive their sales tomorrow.”

Altria has increased its digital efforts at retail, according to Kelly. A new digital trade program, launched last spring, includes multiple participation options for retailers. “For those participating at the highest level, we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. Once a consumer is verified, retailers can provide offers and messaging from our brands within the retailer’s app,” she explained.

Trial offers and stock-up promotions can be effective tactics to incentivize shoppers and polyusers (those who use multiple products) to try nontobacco nicotine alternatives at a lower financial risk, Cadent Consulting’s Morrison advised.

“Polyusage of multiple products will mean a greater diversity of alternatives and less dependence on one particular segment within a broader range for both consumers and retailers,” he said. “The shift will be gradual but steady, with less harmful alternatives proliferating and tobacco eventually becoming the less popular alternative.”

Carefully vet all products — Make sure that any alternative nicotine product meets federal, state and local laws and regulations. Manufacturer compliance is essential for a c-store retailer to have confidence in their evolved backbar, Hanson stated.

“They have to know which products can be sold, as opposed to illegal disposable products which are openly marketed to youth and could result in costly fines,” added Sullivan.

Keep your finger on the pulse of the FDA — In addition to vetting manufacturers and maintaining a dialog with them, convenience store retailers need to keep abreast of all products recently approved or denied by the FDA.

“Altria believes FDA engagement is key,” said Kelly. “Retailers are responsible for knowing which products they can legally sell to adult tobacco/nicotine consumers. They play a significant role by maintaining distribution and in-stock conditions on chosen products.” CSN

“Adult consumers’ needs and preferences are constantly changing and evolving, and retailers cannot rely on what they did yesterday to drive their sales tomorrow.”

— Matthew Hanson, Black Buffalo

Convenience Channel Tobacco Trends

Five-Year Trend: Cigarettes

While still the top-selling category at c-stores, cigarettes took a hit in 2022 as total sales declined by 3.3% for the year.

Cigarette Share By Segment

Unit volume for mid-level and economy/value cigarettes each rose slightly at the expense of premium/super premium, which lost a full point in share over the past year but remains the overwhelming category leader.

Five-Year Trend: Other Tobacco Products

OTP experienced a slowdown in 2022 with only a 4.6% increase in total sales — the category’s smallest growth in more than five years.

OTP Share By Segment

Smokeless remains at the top in OTP dollar share, but continues a pattern of declines while vaping products gain share, albeit at a slower pace than in previous years.

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LEARN MORE:

The C-store Tobacco Customer

Retail Channels Where Shoppers Purchase Tobacco in a Typical Month

Convenience stores remain the go-to place for adult tobacco consumers to make their backbar purchases.

Among shoppers who purchase cigarettes at a convenience store in a typical month, 23% report buying these products more today vs. a year ago. This is a 2-point drop from 2022.

Among shoppers who buy OTP at a convenience store in a typical month, 21% report purchasing these items more today than a year ago. This is a 4-point drop from 2022.

Reasons Why Shoppers Don’t Purchase Tobacco at C-stores

One-quarter of shoppers cite high prices as compelling them to purchase cigarettes and OTP at a location other than a convenience store.

Price is too high Don’t offer good selection/variety

Don’t offer sales/promotions

Products aren’t in stock when I need them

Don’t trust the quality

While only 12% of all shoppers surveyed said they bought electronic cigarettes/vapor products at a c-store in the past month, that number jumped to 27% among Generation Z.

The C-store CBD & Cannabis Customer

Store Types in Consideration Set for CBD Purchases

Up 7 points year over year, convenience stores are gaining ground on CBD retailers as the preferred spot for purchases.

CBD retailer/dispensary

Convenience store

Grocery store

Online retailer

Drugstore

Vitamin & supplements store

Store Types in Consideration Set for Cannabis Purchases

Current cannabis purchasers prefer to buy such products at a dispensary rather than a convenience store.

Cannabis retailer/dispensary

Convenience store

Vitamin & supplements store

Grocery store

Online retailer

Drugstore

16% 24%

of all surveyed shoppers said they bought cannabis products at a c-store in the past month. This figure jumped to 27% among Generation Z and to 32% among millennials.

of surveyed shoppers said they bought CBD products at a c-store in the past month. The prevalence was highest among millennials at 35%.

In the past, CBD sales have been hindered by a lack of consumer knowledge, but today a majority of c-store shoppers are either somewhat familiar (35%) or extremely/very familiar (36%) with CBD.

The top three reasons cited by c-store shoppers for why they don’t purchase CBD products are:

1. Not appealing

2. Price is too high

3. Not comfortable using CBD