Cigarette Sales Show Strong Rebound

Total Tallies

The ups and downs of the many product lines within the tobacco category seem to balance out in favor of c-stores.

Subcategory

Cigarette tobacco Cigarettes Cigars Dollar sales in U.S. convenience stores: Latest 52-week period ending April 3, 2021 % Change vs. previous year: 52 weeks

% Change vs. previous year: latest 13 weeks % Change vs. previous year: latest 4 weeks

$30.5 M $53.8 B $3.6 B -12.6%

4.5%

13.1% -19.8%

5.1%

10.6% -34.3%

5.0%

8.1%

Pipe tobacco

$131 M -4.1% -12.1% -24.6%

Shag Smokeless tobacco

$7.0 M $7.4 B 6.8%

8.3% -6.0%

6.1% -23.5%

4.5%

Tobacco combination packs

$14.2 M

Electronic cigarettes

Source: Nielsen IQ: Market, Total US Conveniece data, run May 5, 2021 $4.0 B 35.4%

7.5% 25.1%

13.2% 12.5%

5.9%

overall profitability in the OTP category,” said Nefferdorf.

Indeed, both Nielsen and IRI calculated growth for ENDS in a year/year comparison of dollar sales — 7.5% per Nielsen and 10.5% per IRI. This growth comes despite the fact that products without premarket tobacco applications (PMTAs) had to be pulled last fall. At press time, FDA had just announced 6 million deemed new tobacco products were approved following the PMTA process. PMTA approvals/nonapprovals will hopefully provide some consistency to planograms following several years of an evolving environment of brands from startups to Big Tobacco to new technology and expanding regulations.

CIGAR SUPPLY STRUGGLES TO MEET DEMAND

The cigar subcategory probably suffered the most from COVID-19 conditions because distributors strained to meet c-store orders under manufacturing slowdowns.

“We did see a pinch on supply as it relates to our cigars and wraps. Supply still remains tight on these items,” noted Nefferdorf.

“We work closely with the manufacturers to understand timing and potential remedies,” added Meara.

In spite of that, dollar sales for cigars bumped up more than 13% for the 52 weeks ending April 4, according to Nielsen research. IRI reported similar findings at 11.5%.

CONCENTRATING ON CBD

Although not derived from tobacco or containing nicotine, the cannabidiol (CBD) category has earned its place as a c-store profit producer. Since the 2018 Farm Bill authorized the sale of hemp-derived products, c-stores have built up CBD offerings.

U.S. sales in 2019 reached $4.2 billion, representing a 562% jump from the previous year, according to Brightfield Group.

Last year, CBD sales slowed, but by Q4, a rebound appeared underway. Tinctures and topicals posted the best gains, whereas gummies had minimal loss after a positive 7% showing in Q3, according to research from Management Science Associates.

“CBD continues to be a steady category through the first part of 2021, led by Solari Hemp’s gummies, tinctures and six-pack offerings,” said Greene.

Analysts suspect the category will make steady gains in the coming months, but don’t anticipate a return to pre-pandemic levels until next year. Then again, a national survey by Invisibly suggests there’s substantial

room to grow the market now. Thirty percent of respondents who admitted to never trying a CBD product said they would consider using it.

Bettencourt plans to go bold this year with Haffner’s CBD category by expanding brand selection. “I don’t think the category has reached its full potential across the industry. To me, it very much mirrors where the e-cigarette and vaping category was six or seven years ago,” she said.

READYING FOR NEW REGULATIONS

As impactful as the pandemic was on the tobacco category, regulations always affect how c-stores manage the back bar. In addition to the PMTA deadline and federal flavored tobacco ban on most ENDS, several states moved to restrict sales of flavored products.

The National Association of Tobacco Outlets (NATO) tracked more than 160 local ban proposals in 2020. Also, California joined Massachusetts in passing a statewide ban that includes menthol products. However, a signature-gathering campaign to place the topic on the 2022 ballot postponed its enactment.

“Like in 2019 and 2020, 2021 has seen a number of states consider flavor bans impacting tobacco and nicotine vaping products. Thus far, none of these bills has become law, and the bill that is closest to becoming law — a Connecticut proposal specific only to vaping products — has an exemption for products with PMTAs filed or authorized by the FDA,” said Gregory Conley, president of the American Vaping Association.

Interestingly, some bills have sought to prevent additional regulations.

“We have seen a number of states — Florida, Montana and Tennessee among them — pass bills to preempt local governments from banning or stringently regulating the sale of tobacco and/or nicotine products,” said Conley.

On Capitol Hill, lawmakers introduced the Tobacco Tax Equity Act of 2021, under which the federal government could set the minimum retail price on all tobacco products. That amount would be tied to inflation, so it could go up based on economic factors.

“The gigantic tax hike on smokeless tobacco and vaping products would undoubtedly be detrimental to many convenience store owners, as these products are a growing category that are helping adult consumers transition away from combustible cigarettes,” said Conley.

Then there’s the issue of a potential federal menthol ban.

In 2019, Massachusetts became the first state to add menthol to its prohibited flavors, which was implemented last summer. When New York legislators confirmed they were contemplating a similar bill, the New York Association of Convenience Stores (NYACS), along with other retail organizations, commissioned a study to assess the financial fallout. Researchers concluded the expanded ban could end up eliminating more than 1,200 jobs and approximately $454 million in tax revenue. Plus, the study found c-stores could lose sales equivalent to the combined average income of 80 New York convenience stores.

In April, FDA said it plans to announce a ban on menthol cigarettes and flavored cigars within the next year — a move that would be clearly detrimental to c-store retailers.

“As part of the rulemaking process, FDA will accept and review comments on the impact of the proposed rules on tobacco and other industries, including the projected impact on domestic jobs,” an FDA spokesperson told CStore Decisions.

Already opponents have vocalized concerns.

“If it is enacted, I think we will see what we’ve seen in Massachusetts; the product will be sold illegally across the country as opposed to just across the state. There is such a high demand for menthol, and that

does not go away overnight,” said Bettencourt.

“Menthol is over 37% of the tobacco market. The National Association of Convenience Stores (NACS) is on record opposing menthol bans as we believe illicit vendors will quickly source and begin selling foreign and counterfeit menthol cigarettes,” said Lyle Beckwith, NACS senior vice president, government relations. “Illicit vendors do not verify age, do not collect and remit taxes, and sell other illegal products beyond just menthol cigarettes. We have not yet seen the FDA proposal, so I cannot comment on a specific response, but we are prepared (if necessary) to activate the industry in any appropriate fashion.”

Even the American Civil Liberties Union has spoken out against a menthol ban, citing the disproportionate impact on communities of color. According to the National Survey on Drug Use and Health, African Americans constitute 85% of menthol consumers.

At this point, it’s difficult to accurately predict what will transpire with menthol restrictions or federal taxes, but the tobacco sector has a history of unpredictability. C-store owners and operators who incorporate flexibility into their category management strategies allow room to respond and protect profit margins.

“We are always looking to ensure we remain one step ahead as this category continues to evolve and customer buying habits change,” said Nefferdorf. “Our tobacco category manager is currently reviewing space-to-sales for each of the subcategories in our stores, so we can work to allocate the proper amount of space to those items we are seeing positive growth on. This analysis will allow for us to complete back bar resets and eliminate any slow movers during the process. By ensuring proper space by subcategory, we hope to reduce any out-of-stocks and avoid any inconvenience to our customers.”

“We believe that we are positioned nicely as the states start to relax COVID restrictions,” concluded GPM’s Meara. “We think there is a lot of pent-up spending power that we hope to benefit from through our busy summer months.” CSD

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