Riding the Tobacco Rollercoaster

Looming regulation and economic pressures weigh heavily on the business

By Renée M. Covino

TOBACCO RETAILERS and consumers continue to be pulled low and high this year, according to participants in Convenience Store News’ recent “What’s Next in C-store Tobacco” virtual roundtable, which analyzed industry data and facilitated open discussion among industry experts on the top opportunities and challenges facing the tobacco business in the convenience channel today and in the near future.

Roundtable participants included Bonnie Herzog, managing director at Goldman Sachs; Mary Szarmach, vice president of trade marketing at Smoker Friendly; Ben Brooks, category manager at Nouria Energy; and Brad Longcake, assistant executive director for the National Association of Tobacco Outlets (NATO).

Current highs include alternative tobacco categories, such as modern oral, premium cigars, and a vapor resurgence. Current lows include the ever-looming cloud of regulation and legislation, though there have been some hard-fought local wins. Economic pressures on the average adult nicotine consumer also weigh heavily on the business. Adult tobacco consumers are facing some tough purchase decisions due to economic pressures, such as inflation and high gas prices. Retailers in Goldman Sachs’ Nicotine Nuggets survey for the second quarter of 2022 confirmed the hardship.

“Both store trips and basket sizes are broadly depressed and below pre-pandemic levels,” Herzog reported, citing her company’s research. She also noted increased downtrading — particularly to fourthtier cigarette brands — as nicotine users look for ways to cut costs.

The Goldman Sachs survey also highlighted that cigarette volumes are expected to decline at historical rates. Cigarette volumes have been declining for about 50 years, but more recently the declines have accelerated due to price increases and the fact that more consumers are gravitating toward the reducedrisk category, according to Herzog.

Consumers are making trade-off decisions resulting in a shift from carton to pack purchases, reduced tobacco purchase frequency, and fewer store trips and spending per store, she noted. “But retailers expect there to be a steady decline vs. a more severe

or radical drop, which is encouraging,” Herzog added.

OTP Bright Spots

Other tobacco products (OTP) hold promise and excitement, particularly in their reduced-risk potential. “This is the most exciting for me,” Herzog said, naming oral nicotine as “one of the more interesting” segments right now. “It’s very promising, but still in the very early days,” she pointed out.

At Boulder, Colo.-based Smoker Friendly, “the oral nicotine products are just exploding like crazy, and I don’t see those stopping anytime soon,” stated Szarmach, who also reported positive momentum around vapor products driven by industry confusion and pending Food and Drug Administration (FDA) decisions.

“We’re actually seeing a resurgence on the vapor products, which is interesting,” Szarmach said. “I feel like maybe we’ve kind of narrowed down what’s allowed and what’s not. Even with all the confusion, we’ve made our customers happy.”

The pandemic really opened up the ability for tobacco consumers to use and reuse different forms of nicotine products, Szarmach observed, noting that Smoker Friendly stores even saw customers enjoying traditional pipe tobacco. Now, with less time and opportunity since the pandemic has eased, OTP categories have stayed “interesting” even if they’re not as popular as during the height of COVID-19, she said. OTP is likewise the bright spot in tobacco at Nouria Energy, the Worcester, Mass.-based operator of 170 convenience stores, 158 of which are company operated. The retailer is seeing strong performances across all OTP subcategories, according to Brooks.

In the Northeast, specifically New England, the tobacco category has cycled through “pretty significant” flavor bans, Brooks explained, along with changes in excise taxes and supply chain issues. “Cycling all that noise helps give us a clear picture of the diverse OTP category, and the best part is consistency across all subcategories and seeing growth in all,” he said. “We are very happy with how the OTP category is performing. I’d say we’re modestly optimistic for the remainder of this year.”

Similar to what Szarmach has witnessed, Brooks finds excitement in the modern oral segment and vapor. “Vapor has remained strong; it’s always been strong in the Northeast,” he said. “Modern oral as well — we have large value in how that product is taxed in the Northeast and the advantage it gives over traditional products.”

Nouria Energy is also focused on other alternative tobacco products, such as zero-nicotine items. Especially in light of highly regulated municipalities in its service area, “we have to give everything a really hard look,” Brooks acknowledged.

Another bright spot for the chain is premium cigars, an offering it embarked on a few years ago. “We found if you have a strong strategy and you execute it well and put it in the correct stores with the right demographic, it can be successful and attract a whole new consumer to your store,” Brooks stated. “I have a lot of fun doing the premium cigars in the 40ish stores we have it in.”

No Lack of Innovation

Innovation in the tobacco/nicotine category has been rampant lately. Szarmach cited the high number of alternative product booths she noticed at Smoker Friendly’s business-to-business trade show this year, and at its Rocky Mountain Cigar Festival. Seeing premium cigar users looking to “veer out now, too” has been an eye-opener, she said.

“Both store trips and basket sizes are broadly depressed and below pre-pandemic levels.”

— Bonnie Herzog, Goldman Sachs

She cautions fellow buyers, however, to be diligent when considering alternatives. “You really have to do your homework with these manufacturers to make sure what you’re bringing in is legitimate and safe,” she explained.

Brooks shared his experience in trying a synthetic vapor product at Nouria. “I did it with a reputable, large parent company in the tobacco industry and had everything documented ahead of time, so it was an easy exit once they became illegal to get out of that,” he recalled, noting that he believes in “selling everything you possibly can that’s easily legal — I don’t do gray area stuff.”

He agrees with Szarmach that retailers have to ensure they’re partnering with reputable companies, above all else in the category. “Then, take it a day at a time because you don’t really know what’s going to happen,” he added.

Moving the industry away from combustibles is what Herzog “firmly believes” is the future of the category, specifically reduced-risk products. “What’s so exciting to me is the technology and the role that’s playing,” she said. “The frustration has been the innovation has been stifled, given the regulations, but you see more of it internationally.”

She expects manufacturers will continue to push the envelope with innovation, whether it’s internally, through acquisition, or some combination of the two. It will be fascinating, she said, to see what the next generation of innovation will be to converge smokers to use products they enjoy that are less harmful.

On one end of the innovation spectrum, there are what she calls the “inhalables” and on the other end, there are the oral nicotine products. “It will be fun to see if there’s some hybrid in the future that can combine the best of both for the user and accelerate conversion,” she said, noting, however, that regulation is always a potential roadblock.

The Cloud That Won’t Pass

The looming cloud of regulation/legislation continues to be a major challenge for a nevertheless resilient industry. NATO’s Longcake updated webinar attendees on the premarket tobacco product applications (PMTAs) still pending with the FDA.

While the agency has refused to accept more than 7.7 million of them, there are roughly 362,000 pending, “so there’s still an opportunity for some of those to make it through,” he said. This includes applications for cigars, pipe tobacco, e-cigarettes, hookah and all modern oral products, which had to be filed by Sept. 9, 2020. It also includes items with nicotine derived from other sources, which had to be filed by May 14 of this year.

A bit of good news did come from the FDA recently, as it authorized the sale (in the form of a Marketing Granted Order) of 23 e-vapor devices and nicotine e-liquids sold by R.J. Reynolds, NJOY and Logic. “Unfortunately, of the 23 products authorized, the only flavor allowed right now is still traditional nicotine flavor,” Longcake reported.

Among other updates he provided:

• The FDA is currently reviewing an additional 240 PMTA applications from major e-cigarette/e-vapor manufacturers, including Juul, Vuse, NJOY, Logic, blu and Puff Bar. These are expected to be finalized sometime next year, presumably by June 30. • Applications for almost a million synthetic nicotine products have been filed with the FDA, but it has so far refused to accept 88,000 of them. The agency continues to move through this backlog.

The real challenge for synthetic nicotine products, as Longcake sees it, is that if a Marketing Granted Order (MGO) was not issued by the FDA on or before July 13 of this year, those products are currently illegal and not eligible for sale. “In fact, the FDA has stated that manufacturers, distributors and retailers may be subject to FDA enforcement, but time will tell and hopefully, they’ll grant a few more MGOs of these as we move forward,” he said.

Longcake also pointed out that the FDA generally announces actions first — targeted usually at manufacturers — followed up by warning letters that give companies the chance to make changes.

Beyond PMTAs, Szarmach shared positive news during the roundtable that Smoker Friendly was able to win two flavor-ban fights this past year in Colorado, one for the state and the other for the city of Denver, which she characterized as “huge.”

Local issues, whether they involve taxation, age restrictions, selfserve, flavor bans, etc., “are always scary for us,” she acknowledged. “It’s frightening to see what they’re doing — full-on prohibition with certain things.”

Szarmach urged fellow retailers to stay the course and fight such legislation by utilizing their stores, consumer base and NATO to put forth grassroots efforts that can make a difference, as it did for Smoker Friendly.

Total industry regulatory items, including a potential menthol ban and nicotine cap, are also causing stress, but the roundtable participants said they’re not panicking yet.

“We’ve been talking about these for a very long time. It’s tough to know what the outcome will be. It’s a lengthy process, nothing will be decided soon,” said Herzog.

Thankfully, the industry is not afraid of litigation and the tobacco consumer is resilient. “I expect the category to remain strong, and consumers will ultimately adapt, and manufacturers are going to be doing things to pivot their workflows as best they can until this plays out,” she said.

With an eye toward all-encompassing solutions, Herzog also suggested a name change for the category should be considered, moving from “tobacco” to “nicotine.” CSN