NEW YORK — Inflation and higher gas prices are driving lower nicotine consumption and increased downtrading, according to the latest Nicotine Nuggets retailer survey from Goldman Sachs.
The first-quarter 2022 survey represents about 45,000 retail locations across the United States, said Bonnie Herzog, a managing director at the New York-based company.
“The outlook is incrementally more cautious as retailers and wholesalers expressed increased concerns about inflation and income pressures (especially for low-income consumers) driving accelerating [cigarette volume] declines and downtrading activity, regulatory tightening and continued uncertainty around e-cigs,” Herzog said.
Click through to read more highlights from her analysis on the survey …
Cigarette Consumption Declines
Cigarette consumption declined in first-quarter 2022, reflecting increased pressure on low-income consumers who are likely forced to make tradeoff decisions between tobacco and in-store purchases. The return to the workplace also means fewer at-home consumption occasions, Herzog said.
While cigarette volumes were down 3.3% in the first quarter year-over-year, that was still an improvement to declines in the fourth-quarter 2021.
Herzog, however, said she conservatively expects cigarette volumes to decline nearly 6% in 2022.
There were some survey respondents, though, that believe the low-income consumer is still willing to buy tobacco despite higher fuel and food prices, Herzog said.
“Interestingly, one respondent noted that they are seeing a divergence in nicotine consumption by region—with their stores on the West Coast seeing significant decline in consumer demand, driven by flavor bans, while their stores in the Southeast continue to perform well,” she said.
Regulatory Hurdles Remain
Just more than half of tobacco retailers and wholesalers said their outlook has become more negative on the category for several reasons, including regulatory tightening.
Regulatory hurdles the category is facing is a potential menthol cigarette and flavored cigar ban; the U.S. Food and Drug Administration’s authority over synthetic nicotine, which some respondents said could stifle innovation in the tobacco category; and potential state and federal tax increases, among other concerns.
“Conversely, one respondent noted that they are selling more tobacco than ever, likely because the category typically tends to perform well during periods of uncertainty or economic/personal stress,” Herzog said. “Further, one retailer noted that consumers have been more resilient than expected as contrary to their expectations, consumer behavior has not gone back to pre-COVID patterns in most geographies.”
Fuel Prices Affect Downtrading
Fuel prices remain high at more than $4 a gallon nationwide and more than $5 a gallon in some states. Higher gas prices are a concern for the tobacco industry given the disproportionate drag higher prices have on disposable incomes of price-sensitive tobacco consumers, Herzog said.
That’s why nearly 75% of retailers are seeing higher gas prices at the pump negatively affect cigarette volumes, and 90% are seeing more downtrading as a result.
Most respondents think low-income cigarette consumers will trade down to cheaper brands or other nicotine products, or lower their overall nicotine consumption, Herzog said. Most only expect these downtrading pressures to intensify this year as inflationary pressures build and gas prices remain high.
Modern Oral Nicotine Stays Strong
Many retailers are seeing the slowdown in cigarettes being offset by strong growth in modern oral nicotine (MON), Herzog said. Smokeless and MON volumes increased 10% in the first quarter compared to the year prior.
Swedish Match’s Zyn and Altria’s On continue to show robust growth, she said.
“Looking ahead, respondents expect the strong trend to continue, and expect total category growth of 14% in 2022 (also ahead of 9% growth expectations in our prior survey and above 13% growth in 2021),” Herzog said.