CHANGING THE NARRATIVE

TODAY’S CHALLENGES IN THE TOBACCO CATEGORY CAN BECOME UNTAPPED OPPORTUNITIES

BY RENÉE M. COVINO

THE ONLY THING CONSTANT in the tobacco/nicotine business is its ever-evolving nature. For convenience store retailers, whose No. 1 product category in sales per store is cigarettes, this is a blessing and a curse. On the one hand, tobacco restrictions are adding up and tightening. On the other hand, innovation is multiplying and opening.

Convenience Store News recently consulted with industry experts to get their perspectives on the year ahead for the convenience store backbar. Here is what they said:

Economic Squeeze

When it comes to the business of tobacco, the challenges often get mentioned before the opportunities. For instance, analysts and manufacturers were quick to bring up the economic squeeze and its expected effect on the tobacco consumer this year.

“We believe the most pressing challenge for 2023 will be the continuation of consumer pressure on discretionary spending,” said Mike Wilson, vice president of trade strategy and operations for Reynolds Marketing Services Co., based in WinstonSalem, N.C. “Inflation, rising interest rates and a lagging economy in general are impacting how consumers make their purchasing decisions.”

Similarly, Bonnie Herzog, managing director at Goldman Sachs, pointed out that the macro environment is still uncertain and thus negatively affecting the category. “Gas prices have calmed down, but remain a near-term headwind to adult tobacco/ nicotine consumers,” she noted.

A recent Goldman Sachs survey of retailers and wholesalers projected a “quite cautious” outlook for the nicotine category, thanks to broad-based inflationary pressures, lower discretionary income, lower usage and increased downtrading.

Inflation and rising prices will continue to lead to trade-downs to off-brands, private label and generics/subgenerics in the tobacco/nicotine category, according to Alex Morrison, senior business analyst for Cadent Consulting Group, based in Wilton, Conn.

“The economic pressure facing consumers is real and many are choosing to trade down to lower-priced brands or products that result in lower register rings at retail,” echoed Becky Roll, chief revenue officer for Glenview, Ill.-based Republic Brands, maker of Top, Premier, Gambler and other roll-your-own (RYO) tobacco products.

Don Burke, senior vice president of Management Science Associates Inc. (MSA), a Pittsburghbased company focused on analytics and informatics, believes the key challenge of managing the 2023 backbar will be for retailers to continue capitalizing on the trend toward value brands in each product segment.

“As inflation and gas prices are expected to remain high this year, being able to offer a strong product selection of value-priced items, while maintaining the right items in the higher-priced segments, will require some retail ingenuity,” he told CSNews.

Regulatory Uncertainty

While economic pressure has been a recent challenge for the category, regulatory uncertainty is a longstanding foe that has been intensifying, especially as it relates to the Food and Drug Administration (FDA) and its painfully slow process for determining which electronic cigarette, vape, modern oral products and more are authorized for sale on the market. Some that were denied authorization are involved in litigation, causing even more industry confusion.

Running parallel with that is the uncertainty around enforcement action “because the FDA has not acted terribly aggressively,” noted Bryan Haynes, a partner with the national law firm Troutman Pepper. He believes the dynamic needs to change to avoid all of the unlawfully marketed products that are on shelves currently.

Of late, the regulatory activity has surrounded electronic cigarette/vape items. There’s been no regulatory action around modern oral products yet, which he said is causing further confusion as to how things might translate from one category to another down the road.

Inventory exposure is top of mind for many retailers, but they are often confused as to the timing of enforcement and when they have to remove product from their shelves, added Agustin Rodriguez, another partner specializing in tobacco at Troutman Pepper.

That’s the conundrum, Haynes explained: “FDA orders speak in immediate terms; there is no sell-through period. So, as a retailer, you basically have two options: rely on the manufacturer to avail itself to stay the action, which has happened a number of times, or you potentially rely on the FDA to delay taking action.”