3 Takeaways From Q4 2021 Nicotine Survey

NEW YORK — Many factors are weighing on convenience-store consumer’s purchasing decisions, especially when it comes to cigarettes.

In New York-based Goldman Sachs’ Nicotine Nuggets survey from fourth-quarter 2021, tobacco retailers and wholesalers noted downtrading pressures, regulatory threats and the uncertainty of premarket tobacco product application (PMTA) decisions as concerns. The survey represents about 48,000 retail locations across the United States.

Here are some highlights from the survey, analyzed by Goldman Sachs Managing Director Bonnie Herzog…

More than half of respondents said downtrading pressure in cigarettes intensified in the fourth quarter of 2021, spurred by inflation, price increases and higher gas prices.

Retailers are concerned about broad-based cost inflation pressuring an already income-sensitive consumer, Herzog said. And while there is still a healthy willingness to buy on the part of tobacco consumers, survey respondents are seeing a pickup in downtrading as inflation—inside and outside the category—erodes overall purchasing power, she said.

“In terms of tobacco consumption, one respondent described the average cigarette customer as being in a state of shock at the magnitude and frequency of recent cigarette/tobacco list price increases especially given broader inflationary headwinds,” Herzog said.

In this environment, fourth-tier cigarette brands have emerged as winners and branded/premium cigarettes are lagging, she said.

High gas prices are also affecting purchase decisions—especially as they cross over $3 per gallon.

Higher gas pries at the pump are often a significant burden on disposable incomes, and as core tobacco consumers generally fall into the low-to-moderate income brackets, higher expenditures often mean cutting back on other discretionary spend or downtrading to more affordable substitute products, Herzog said.

“More than half of retailers are seeing higher gas prices at the pump negatively impact cig volumes and about 75% are seeing more downtrading as a result,” she said.

When it comes to regulatory issues, potential excise tax increases at the state level, the potential for menthol bans at the local and federal levels and the ongoing PMTA process are a top focus for retailers. 

The FDA hopes to issue proposed product standards to ban menthol in cigarettes and flavors in cigars by April. And while it has acted on more than 90% of PMTAs, key decisions have yet to be made on products like Juul and Vuse Alto.

And although potential excise taxes remain a concern, some retailers noted that regulatory and excise tax pressures are easing with the influx of federal relief funding helping to offset state budget shortfalls, Herzog said.

Retailers and wholesalers said e-cigarette volumes grew modestly in the fourth quarter of 2021, but they expect that growth to slow in 2022 due to uncertainty about pending PMTA decisions for market leaders like Juul and Vuse Alto.

E-cigarette volume was up 2.7% year-over-year in the fourth quarter of 2021, according to NielsenIQ data, Herzog said. Flavored disposable e-cigarettes have benefited from the reduced e-cigarette competition, as have synthetic nicotine products.

For the full year, respondents said e-cigarette volumes increased 4.3% year-over-year. That number is expected to be just under 3% in 2022, as FDA enforcement of non-compliant players picks up and legislation to bring synthetic nicotine products formally under the jurisdiction of the FDA likely moves forward, Herzog said.

Some retailers are also seeing flavor bans at a local level, which puts further pressure on volumes.

The outlook of e-cigarettes, though, will ultimately depend on the FDA’s PMTA decisions.

The only marketing order for a vapor product the FDA has granted through the PMTA process is for Vuse Solo. R.J. Reynolds Vapor Co.’s Vuse Alto, however, still has a pending application along with Juul, from San Francisco-based Juul Labs.

“Notably, even under the most optimistic scenario, respondents do not expect a pickup in e-cigarette volumes in 2022 to be able to make up for the anticipated decline in cigarette volumes, on an absolute basis,” Herzog said.