Tobacco Guide-0822

TO

Preparing Today for the Backbar of the Future The convenience channel can get ahead of what’s coming next with calm preparation.

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EDITOR’S NOTE

Tobacco Regulation on Fire The current regulatory rate has not been seen since the Tobacco Control Act of 2009 in late July, 2022 so far has seen the Food and Drug Administration (FDA) add synthetic nicotine under its regulatory umbrella; announce proposals to ban menthol cigarettes and all flavored cigars, excluding tobacco; and, most recently, announce plans to develop a product standard to establish a maximum nicotine level.

AS I’M WRITING THIS

“These three fundamental proposed product standards are something we have not seen since the Tobacco Control Act of 2009,” Bryan Haynes, a partner with the Troutman Pepper law firm and head of its tobacco law practice, told Convenience Store News as we reached out to tobacco category experts to compile our annual Guide to Tobacco.

“It is clear to me that until the end of this administration, we are going to see activist prohibition. Whether that continues with the next presidential administration is an open question,” he added.

According to industry trade association NACS, the menthol market accounts for approximately 34 percent of cigarette sales, and flavored cigars account for 51 percent of cigar sales. Given the existing market and current user base, NACS believes a ban on these products will push sales to the illicit market, which it says undermines the efforts of responsible retailers and poses a greater risk to communities.

NACS put out a call to the convenience retailer community to speak out against the move. The FDA’s rulemaking process includes a comment period in which the agency considers input from the public before finalizing its proposed rules.

“It’s imperative that the FDA hears from convenience retailers on these proposed bans. NACS cannot replicate the personal testimony convenience retailers can provide with their comment letters,” the association stated. “The convenience industry invests millions in compliance efforts to ensure that legal, regulated tobacco products do not get into the hands of minors. These protections and investments will be lost if the proposed bans go into effect.”

Retailer engagement is one of the best ways to ensure that regulators and legislators have a comprehensive understanding of the situation. NACS has an Advocacy page on its website where you can keep up to date on the major issues affecting the industry, and find out how you can get involved and become an influential voice.

Getting involved does make a difference. Don’t believe otherwise.

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

EDITORIAL EXCELLENCE AWARDS (2016-2022)

EDITORIAL ADVISORY BOARD

2021 Jesse H. Neal National Business Journalism Award Finalist, Best Infographics, June 2021

2018 Jesse H. Neal National Business Journalism Award Finalist, Best Editorial Use of Data, June 2017

2016 American Society of Business Press Editors, National Azbee Awards Gold, Best How-To Article, March 2015 Bronze, Best Original Research, June 2015 2016 American Society of Business Press Editors, Midwest Regional Azbee Awards Gold, Best How-To Article, March 2015 Silver, Best Original Research, June 2015

2020 Trade Association Business Publications Intl. Tabbie Awards Honorable Mention, Best Single Issue, September 2019 2016 Trade Association Business Publications Intl. Tabbie Awards Silver, Front Cover Illustration, June 2015

2020 Eddie Award, Folio: magazine Business to Business, Retail, Series of Articles, September 2019 2018 Eddie Award Honorable Mention, Folio: magazine Business to Business, Retail, Website Business to Business, Retail, Full Issue, October 2017 Business to Business, Editorial Use of Data, June 2017 2017 Eddie Award, Folio: magazine Winner, Business to Business, Retail, Single/Series of Articles, May 2017 Honorable Mention, Business to Business, Retail, Single/Series of Articles, June 2016 2016 Eddie Award Honorable Mention, Folio: magazine Business to Business, Retail, Full Issue, October 2015 Business to Business, Retail, Single/Series of Articles, August 2015

Laura Aufleger OnCue Express

Ray Johnson Speedee Mart

Chad Beck Core-Mark

Ruth Ann Lilly GPM Investments LLC

Edward Davidson Ed Davidson & Associates (7-Eleven Inc., retired) Robert Falciani ExtraMile Convenience Stores Jim Hachtel Eby-Brown Co. Chris Hartman Rutter’s

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Vito Maurici McLane Co. Inc. Matt Paduano Lakeport Markets Jonathan Polansky Plaid Pantries Inc. Greg Scriver Kwik Trip Inc. Roy Strasburger StrasGlobal

Guide to Tobacco

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CONTENTS AUG 22 8550 W. Bryn Mawr Ave., Ste. 200, Chicago, IL 60631 (773) 992-4450 Fax: (773) 992-4455 www.csnews.com

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EDITOR’S NOTE

3 Tobacco Regulation on Fire The current regulatory rate has not been seen since the Tobacco Control Act of 2009.

COVER STORY

CORPORATE OFFICERS

8

Chief Executive Officer

Preparing Today for the Backbar of the Future

The convenience channel can get ahead of what’s coming next with calm preparation.

CATEGORY INSIGHTS

16

U.S. Nicotine Trends

CATEGORY INSIGHTS

18

Convenience Channel Tobacco Trends

Jennifer Litterick

Chief Financial Officer

Jane Volland

Chief Human Resources Officer

Ann Jadown

Executive Vice President, Content

Joe Territo

Executive Vice President, Production

Derek Estey

CONVENIENCE STORE NEWS AFFILIATIONS Premier Trade Press Exhibitor

The contents of this publication may not be reproduced in whole or in part without the consent of the publisher. The publisher is not responsible for product claims and representations.

4 Convenience Store News C S N E W S . c o m

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Speaking with...Matthew Hanson, Chief Growth Officer, Black Buffalo Inc. Convenience stores were the biggest channel for moist smokeless tobacco (MST) sales in the United States in 2021, with sales of MST in c-stores reaching $8+ billion.1 With MST driving so many shoppers in-store, Convenience Store News asked Matthew Hanson, Chief Growth Officer of Black Buffalo Inc., why the company entered c-stores across the country earlier this year.

Convenience Store News: What is Black Buffalo and why did you create it?

Matthew Hanson: Black Buffalo is the world’s only smokeless tobacco alternative that delivers the same ritual and experience as traditional MST. It has the taste, texture (in long cut and pouches form), aroma, rich dark color and even the nicotine — but without any tobacco leaf. Our products are unique because they represent modern oral nicotine (a category experiencing exceptional growth) in MST form (a category beloved by millions of adult consumers).

Black Buffalo’s team always found MST to be an enjoyable ritual. But after years of using MST, we started looking for a dipping alternative that cut out tobacco leaf but still offered the same satisfaction as traditional products. We tried every substitute on the market, and nothing delivered what we were looking for. So, we decided to try to make it ourselves. Little did we know that we’d create a brand that has become a staple in the back pockets of so many adult consumers.

CSN: How do you make a product with the same characteristics as smokeless tobacco without tobacco leaf?

MH: That’s our trade secret! What I can tell you is that after spending over 20,000 hours in research and development, we discovered how to make a variety of edible green leaves behave like tobacco. We worked with experts, including tobacco farmers, to replicate the look, feel and taste of tobacco. We flue-cure our leafy greens instead of fire-curing them, and achieve the same aroma, color and flavor of fire-curing by adding food-grade ingredients. We then add pharmaceutical-grade nicotine derived from tobacco.

CSN: Why should c-stores carry Black Buffalo products?

MH: Until Black Buffalo, adult smokeless tobacco users had two choices: MST in long cut and pouches form, and white powder modern oral nicotine (MON), available only in pouches form. Many adult consumers try MON in an attempt to quit MST but find that it lacks MST’s ritual and satisfaction.

Black Buffalo combines the best of both worlds: a smokeless tobacco experience with the benefits of modern oral nicotine. We’ve collected thousands of testimonials from consumers who’ve quit MST and are now using Black Buffalo as their go-to dip.

We’ve sold millions of cans of Black Buffalo online since 2016 and have generated a rabid adult

consumer base we affectionately call “the Herd.” We did things a bit backwards by not selling first in c-stores, but it gave us information about who’s buying Black Buffalo. That information is powerful for c-stores to drive awareness and purchase at-store from a substantial installed base of adult consumers nationwide. It’s also important to note that we filed PMTAs for our products by September 9, 2020, and our products were on the U.S. market on August 8, 2016 (the Deeming Rule deadline). C-stores are able to carry Black Buffalo’s products with confidence because we’ve invested substantially in regulatory compliance.

CSN: What smokeless tobacco alternatives do you offer c-stores?

MH: We offer a full line of long cut and pouches products. Our long cut products contain approximately 7.5 mg of total nicotine per gram and come in Wintergreen, Mint, Straight, Peach, and Blood Orange flavors.

Our pouches contain approximately 11.5 milligrams of total nicotine per pouch and come in Wintergreen, Mint, and Straight flavors. For adults who want to dip but don’t want nicotine, we offer Black Buffalo ZERO — a nicotine-free, tobacco-free alternative that dips like the real thing.

1

Dollar sales of smokeless tobacco in U.S. retail stores in 2021, by channel; Statista, April 2022.

To learn how Black Buffalo can make your store a go-to stop for adult dippers, visit wholesale@blackbuffalo.com.

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COVER STORY

Preparing Today for the Backbar of the Future THE CONVENIENCE CHANNEL CAN GET AHEAD OF WHAT’S COMING NEXT WITH CALM PREPARATION

By Renée M. Covino

8 Convenience Store News C S N E W S . c o m

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WITH THE FLURRY of regulatory activity in the tobacco category this year so far,

and more and more tobacco manufacturers shifting focus away from combustibles, the convenience store tobacco business of the future is a constantly moving target for retailers.

This year has seen the Food and Drug Administration (FDA) add synthetic nicotine (products that contain nicotine not made or derived from tobacco) under its regulatory umbrella; announce proposals to ban menthol cigarettes and all flavored cigars, excluding tobacco; and, most recently, announce plans to develop a product standard to establish a maximum nicotine level, aimed at reducing underage tobacco use, addiction and death.

Unfortunately, there are no crystal balls in convenience retailing, and certainly not when it comes to the heavily regulated and scrutinized tobacco business.

However, there are reasonable assumptions and smart preparations that can be made, according to industry insiders who recently shared their wisdom with Convenience Store News.

How can convenience store operators meet the needs of current tobacco consumers while positioning themselves for the backbar of the future? Which product innovations should be out in front? Here is what the leading tobacco category experts advise:

Start Mixing It Up Now

Many of the experts who spoke with CSNews expect the backbar of the future to remain significant in its sales contribution to c-stores. Some put their estimate at approximately 25 percent of merchandise sales, compared to the current 34 percent share of in-store sales for cigarettes and other tobacco products. But there’s no doubt in the community that combustible cigarettes will decline, and keep declining, in their backbar status and space.

With major tobacco firms emphasizing a non-combustible future, the backbar in years to come is likely to look quite different, according to Don Burke, senior vice president of Management Science Associates Inc. (MSA), a Pittsburgh-based company focused on analytics and informatics. Burke foresees a 2032 backbar where nicotine items not containing anything from the tobacco leaf, except possibly the nicotine, generate the greatest share of tobacco sales.

It’s not logical to wait; retailers should be mixing it up now. “Today’s backbars should be replacing some cigarette space with a full array of new and innovative non-vapor and potentially lower-harm products, including e-cigarettes, heat-notburn products such as IQOS, and different types of oral products,” advises Cadent Consulting Group Analyst Alex Morrison. “There should also be a focus on spitless, which is growing three to four times as fast as traditional moist snuff products.”

C-stores need to solidify their position now as a tobacco-related destination. “It’s not just about cigarettes, it’s also clearly alternatives,” Morrison said.

At the same time, c-store operators should become familiar with newer and/or smaller cigarette players, Burke noted. “Despite the annual decline in cigarette consumption, this category will remain larger than other tobacco categories for a significant period of time, yet retailers may find that the manufacturers that dominate this product segment could be quite different,” he told CSNews.

Experts agree that the backbar is evolving faster now, on account of the warp-like speed of industry innovation and regulatory activity.

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Guide to Tobacco 9

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COVER STORY

Know Your Customers & Inform Them

Coupled with the idea of a varied product mix is the suggestion of a well-targeted one.

C-stores should be educating their staff to encourage customers who are open to alternatives to potentially switch from cigarettes to less harmful alternatives.

“It is critical that retailers begin talking to their customers about potentially less harmful products like vapor, nicotine modern oral, and snus,” relayed Leila Medeiros, senior vice president of new categories at R.J. Reynolds Vapor Co. “By having these conversations early, your customers will be better prepared to meet their nicotine preferences in the event of a market disruption, such as a menthol cigarette or flavored cigar ban.”

Retailers should additionally have a good grasp on their customer demographics and distinctions. “Since a significant portion of the market in e-cigarettes is comprised of millennials, this is an opportunity for longer-term growth,” Morrison noted.

He also pointed out regional differences in tobacco usage — generally higher use in the West and Midwest, with significant gender differences in types of products purchased. Men are far more likely to use oral tobacco items, for instance.

Social media can, and should, be an important vehicle for spreading the word about new, innovative and potentially less harmful products, according to Morrison.

Technology will also continue to play a critical role through loyalty programs,

omnichannel marketing, and digital marketing. “These will allow for better targeting and more cost-effective spending for the future,” he said.

Each convenience store is unique and ultimately needs to meet the needs of its adult consumers where they are in their tobacco journey. “Your backbar should reflect the needs of these consumers. While the convenience channel is all about speed of service, adult nicotine consumers are much more likely to try a product if it is recommended to them by an educated salesclerk,” Medeiros said, noting that R.J. Reynolds is committed to providing the necessary programs and tools for an educated retail sales team.

“My biggest advice is not to panic.”

— Bryan Haynes, Troutman Pepper law firm

Stay Knowledgeable on All Fronts

Knowledge goes beyond product information and customer education, though.

C-store retailers looking to their future backbar development must stay knowledgeable about tobacco and tobacco-related regulatory developments, which many industry experts believe will continue to heat up.

Bryan Haynes, a partner with the Troutman Pepper law firm and head of its tobacco law practice, told CSNews that this is best evidenced by the recent happenings surrounding several areas of tobacco, including the FDA’s proposed product standards that would ban menthol in cigarettes and ban “characterizing flavors”

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COVER STORY

in cigars. It is also evidenced by recent reports that the FDA is working on a rule to mandate that all cigarettes contain minimal or nonaddictive levels of nicotine.

“These three fundamental proposed product standards are something we have not seen since the Tobacco Control Act of 2009,” Haynes said. “It is clear to me that until the end of this administration, we are going to see activist prohibition. Whether that continues with the next presidential administration is an open question.”

As for how these and other potential regulations will affect the backbar of the future, “it is reasonable to assume that there will be some consolidation and exit of products,” according to Haynes. Existing products that have pending FDA applications may not receive authorization. And, based on the FDA’s current premarket application authorization pace, it is reasonable to assume that it could take four years or more to sell a newly developed product in the United States, Haynes believes.

C-store operators can stay informed through trade associations, other c-store industry initiatives, and the media. Haynes also believes it is prudent for retailers to be choosy regarding their tobacco suppliers. “Deal only with responsible companies that are participating in the regulatory process and have the resources to make a robust submission,” he cautioned. “If I were a retailer, I would be making sure [my suppliers] had the wherewithal to comply with FDA requirements.”

After that, it’s a waiting game until the FDA implements a more predictable framework for premarket applications and improves its processing times.

It’s also important for retailers to remain engaged legislatively, so they can help form the regulatory framework by providing industry perspectives, according to Mary Elizabeth Barwick, vice president of strategic engagement for Reynolds Services Co. “This type of engagement is the best way to ensure that legislators and regulators have a comprehensive understanding of the issues, which should result in laws and regulations that are appropriately

“It is critical that retailers begin talking to their customers about potentially less harmful products like vapor, nicotine modern oral, and snus.”

— Leila Medeiros, R.J. Reynolds Vapor Co.

tailored and not unnecessarily burdensome on retailers or unnecessarily restrictive for adult nicotine consumers,” she said.

Keep Calm & Carry On While preparing and positioning for a future that is in flux can be exhausting, Haynes offers a simple best practice that all c-store retailers can employ.

“My biggest advice is not to panic,” he said.

The proposed regulations currently at play are not done deals. “It wouldn’t be the first time the FDA proposed something that was significant, but it did not go forward with,” Haynes pointed out. “All these initiatives take a long time to play out.”

In the meantime, R.J. Reynolds’ Medeiros recommends retailers keep existing products on the market fully stocked until the regulation or restriction occurs. CSN

14 Convenience Store News C S N E W S . c o m

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CATEGORY INSIGHTS

U.S. Nicotine Trends

Wholesale Shipment to Retail Data The only retail channel to see an increase in overall nicotine consumer units last year was tobacco outlets.

Units in the convenience/gas channel were down 2.5% vs. a year ago.

ALL OUTLETS

CONVENIENCE GAS

TOBACCO OUTLETS

DRUG STORES

DOLLAR STORES

GROCERY

LIQUOR

MASS MERCH

CONSUMER UNITS

-2.3%

-2.5%

2.3%

-18.0%

-5.2%

-7.5%

-4.4%

-26.0%

SERVINGS

-3.4%

-2.9%

-1.2%

-19.4%

-8.8%

-8.4%

-6.4%

-26.5%

1.4%

2.0%

5.7%

2.5%

2.0%

-3.4%

-1.9%

-14.3%

-8.4%

-4.3%

-3.4%

-2.0%

DISTRIBUTION ITEM COUNT

3.2%

2.1%

0.2%

-9.6%

Percent change 52 weeks ending Q4 2021 vs. 52 weeks ending Q4 2020

Cigarettes vs. All Other Tobacco

CONSUMER UNITS IN BILLIONS

Year over year, for the 13 weeks ending Q4 2021, both cigarette consumer units and other tobacco products (OTP) consumer units declined, according to wholesale shipment data.

ALL OTHER TOBACCO

CIGARETTES

3.0 -7.4%

2.5 2.0

-3.3%

1.5 1.0 0.5 0.0

13 weeks ending Q4 2021

13 weeks ending Q4 2020

Breakdown of All Other Tobacco Once again, the modern oral segment was the standout among OTP products for the 13 weeks ending Q4 2021. Year over year, its consumer units increased 60%.

1.0

LARGE CIGARS

-6%

LITTLE/FILTERED CIGARS MOIST

CONSUMER UNITS IN MILLIONS

0.8

PAPERS/TUBES/WRAPS ROLL YOUR OWN PIPE TOBACCO SNUS

0.6

VAPOR (INCLUDING ACCESSORIES) MODERN ORAL

-5%

0.4

0.2 -8% 0.0

-2% -13%

-2%

1.2%

60%

Source: Management Science Associates Inc.

13 weeks ending Q1 2021 16 Convenience Store News C S N E W S . c o m

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CATEGORY INSIGHTS

Convenience Channel Tobacco Trends

Cigarettes Snapshot: Full-Year 2021 After a relatively strong showing during the height of the pandemic, cigarette sales fell back in 2021, though still held on to post a gain of 0.3% in total c-store sales.

SALES PER STORE 2021

Premium $373,809 Branded discount $59,441 Subgeneric/private label $17,999 Fourth tier $1,190 Imports $20 TOTAL $452,459

INDUSTRY TOTAL (MILLIONS)

% CHANGE

2021

% CHANGE

2.2% -0.4% 3.6% 0.9% -18.2% 1.9%

$55,249 $8,785 $2,660 $176 $3 $66,873

0.6% -2.0% 2.0% -0.7% -19.5% 0.3%

Source: Convenience Store News 2022 Industry Report

Cigarettes Snapshot: First-Half 2022 During the first six months of 2022, both cigarette dollar sales and unit volume were down vs. a year ago. Units saw a percentage decline more than double that of sales.

DOLLAR SALES

UNIT VOLUME

% CHANGE VS. YA

% CHANGE VS. YA

-2.8% 13.4% 15.6% -4.2% -2.9% -3.9%

-5.8% 21.8% 5.5% -9.5% -7.4% -8.6%

Branded discount Fourth tier Imports Premium Subgeneric/private label TOTAL Source: Convenience Store News 2022 Midyear Report Card

Fourth tier and imported cigarettes were the only segments to post both sales and unit increases during the first half of 2022.

OTP Snapshot: Full-Year 2021 OTP’s total sales increase of 6.4% was on par with the convenience channel’s overall in-store sales rise of 6.2% in 2021.

SALES PER STORE

Smokeless Electronic cigarettes Cigars Papers Pipe/cigarette tobacco Other tobacco TOTAL

INDUSTRY TOTAL (MILLIONS)

2021

% CHANGE

2021

$60,251 $50,257 $29,350 $1,746 $467 $20 $142,091

4.7% 16.6% 2.8% 2.8% -13.3% n/a 8.1%

$8,905 $7,428 $4,338 $258 $69 $3 $21,001

% CHANGE

3.1% 14.8% 1.2% 1.2% -14.6% n/a 6.4%

Source: Convenience Store News 2022 Industry Report

OTP Snapshot: First-Half 2022 Other tobacco products (OTP) had a better year overall than cigarettes in 2021, and the category is on the track to do the same this year. Sales growth, however, is trending lower.

DOLLAR SALES % CHANGE VS. YA

Cigars Electronic cigarettes Other tobacco Papers Pipe/cigarette tobacco Pipes Smokeless TOTAL Source: Convenience Store News 2022 Midyear Report Card 18 Convenience Store News C S N E W S . c o m

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-1.6% 10.7% 0.0% 0.9% -3.4% 61.5% 3.6% 4.4%

UNIT VOLUME % CHANGE VS. YA

-3.0% -3.9% -12.0% -2.2% -0.8% 13.3% 1.1% -1.8%

The smokeless tobacco and pipes segments were the first-half standouts in the OTP category, posting both sales and unit volume increases.

8/2/22 1:41 PM

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