Making Cents of the Tobacco Category

NACS Show panel discusses consumer preferences, regulatory issues

Melissa Vonder Haar, Freelance Writer

Judy Hong

ATLANTA -- As most c-store retailers are aware, there is no shortage of challenges to today's tobacco category: declining sales, squeezed margins, new competitors in new channels and a cloudy regulatory agenda from the FDA, which has repeatedly delayed webinars that will allegedly give more clarity. "The one thing that's certain is that we're moving into a new age with this category," said David Bishop, managing partner of the Barrington, Ill.-based sales and marketing firm Balvor LLC during the 2013 NACS Show "Tobacco: Vapor, Smoke and Mirrors" session.

Bishop added that to thrive in this new age, it is critically important that retailers better understand the tobacco consumer. To provide insight on both the tobacco consumer and regulatory issues facing the category, Bishop was joined by Goldman-Sachs tobacco analyst Judy Hong and vice president of merchandising for the Naperville, Ill.-based Eby-Brown, Andy Batt.

According to Hong, there's one customer demand that's fueling innovation across all consumer packaged goods.

"Consumers today are very much into flavors," she said. "Over the last couple years, I'd say that over 50% of product innovations have come from flavors."

"There's definitely a demand for flavors," agreed Batt. "The question is, what will the FDA do? Many cigar manufacturers are moving away from flavors and retailers should embrace these in their plamograms."

Rather than flavors, Batt sees a premium opportunity for retailers looking to make up declining dollar sales in the cigar segment.

"General Cigar and Drew Estates have both introduced foil pouches for their premium cigars," he said. "It's been a good fit for the c-store channel because of demographics and price point. It's doing very well for us."

Of course, more and more retailers are turning to the booming electronic cigarette segment to drive dollar sales--when Bishop asked the retailers in attendance how many e-cig brands they were carrying, nearly everyone had more than two, with several carrying five or more brands.

"We can't not talk about regulations," Hong said of the new products. "The lack of regulations is allowing innovations, marketing and advancement you don't see in conventional cigarettes."

While no one knows when or how the FDA will regulate electronic cigarettes, Hong said she believes initial regulations will be driven by access to youth concerns. A minimum purchase age, online sales and flavors are all areas that are likely to be regulated; however, Hong also noted that she believes there's an awareness of the potential health benefits of these products and is hopeful that any regulations will allow the marketing and product innovations that have been central to the segment's early success.

Additionally, because new director of the FDA's Center for Tobacco Products (CTP), Mitch Zeller, has been so clear about his priorities when he started earlier this year--and because he has already followed through on his promise to do something on substantial equivalence and menthol--Hong anticipates that deeming regulations are imminent.

"Assuming the government shut-down ends in a reasonable time, I'm optimistic that we'll see something [on deeming] before the end of the year," she said.

Because of the regulatory uncertainty surrounding electronic cigarettes--for example, a flavor ban could leave retailers with surplus inventory that they cannot sell--Batt emphasized that retailers should be looking to variety of segments to drive growth.

"There's an opportunity [with snus]," Batt said. "It's a solid category and for us, it's much larger than electronic cigarettes still. Electronic cigarette growth has been much more rapid, but snus has continued to grow and be solid for us. It's a balance."

Or, as Bishop surmised, "keep your eye on the puck--and there's a lot of pucks out there."