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

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.

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”

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

“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.

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