5 Takeaways on Tobacco From Goldman Sachs' Retailer Survey
NEW YORK — The tobacco consumer remains resilient, even as the category faces challenges.
In Goldman Sachs' latest Nicotine Nuggets survey, convenience-store retailers and tobacco manufacturers gave feedback on the future of cigarettes, the effect of flavor bans and more.
The New York-based investment banking company’s first quarter 2021 survey represents about 93,000 retail locations across the United States.
Click through to see more insights from Goldman Sachs Managing Director Bonnie Herzog and survey respondents ...
Tobacco consumers remain resilient
The tobacco consumer remains broadly resilient as favorable COVID-19-related consumption trends persist, Herzog said, but higher excise taxes, flavor bans and cigarette price hikes are all concerns for retailers.
Nearly 90% of survey respondents said consumer demand for tobacco products remains the same or stronger today compared to a year ago. Work from home practices, more usage occasions and government stimulus affect this as these trends have carried over into first quarter 2021.
Innovation, like in modern oral nicotine (MON), and increased consumer mobility also support sales across the tobacco category, Herzog said.
Retailers do have some concerns, though. State excise taxes, flavor bans and manufacturer price increases are all pressuring the category.
Retailers also expressed in the survey, which was conducted before the U.S. Food and Drug Administration (FDA) announced it would be pursuing a menthol cigarette ban, that they were concerned about menthol flavor bans. At the time of the survey, less than half of respondents said they expected a menthol flavor ban to be proposed at the federal level. However, since then, the FDA announced it is prioritizing a ban on menthol cigarettes and flavored cigars.
Cigarettes could return to historic declines
While cigarette volumes benefit from pandemic-related consumption, retailers expect consumption to eventually return to historical declines. Goldman Sachs said underlying industry volume declined about 4% in first quarter 2021 and will be down by about 5.5% for the whole year.
While COVID-19-related consumption is benefiting cigarettes, retailers said there are concerns about customers switching from combustibles to other tobacco products, higher cigarette taxes in some states, the increased frequency of price hikes by cigarette manufacturers and Sam’s Club’s removal of tobacco from several locations.
PMTA approvals remain wild card for e-cigarettes
The FDA's premarket tobacco product application (PMTA) approvals remain the biggest wild card for e-cigarettes, survey respondents said.
Retailers and wholesalers said e-cigarette volumes remained strong in quarter one, and they expect acceleration in 2021 because of easy comparisons to the year prior (lapping the FDA's flavor ban), momentum in flavored disposables and strong brand promotions and trials.
Ultimately, the FDA will determine whether flavored e-cigarette pods will return to the market. Some respondents were hopeful for a return of flavored pods, Herzog said. Others noted the FDA’s crackdown on disposable e-cigarettes was not stringent enough as brands that have been warned by the FDA for not following the rules, like Puff bar, are still widely available at retail, she said.
Cigarette downtrading increased in first quarter
Downtrading, or consumers buying cheaper brands, picked up in the first quarter of 2021 for cigarettes. Several survey respondents noted seeing consumers trading down to third- or fourth-tier and discount brands, which are priced at a significant gap to premium cigarettes, Herzog said.
One retailer noted in the survey that they are considering eliminating all cigarette contracts and switching to selling only vapor products as those have surpassed cigarettes in dollar sales for that retailer.
Retailers bullish on oral nicotine
Retailers and wholesalers are encouraged by consumer response to the MON subcategory and expect it to be a key alternative to combustibles going forward, Herzog said.
Some respondents are expecting pouches to constitute half of the moist tobacco category in 2021. Survey feedback suggests that in the first quarter, Altria’s On and Swedish Match’s Zyn grew roughly in line with each other, up year-over-year about 28% and 27%, respectively, Herzog said.
Swisher’s Rogue and R.J. Reynolds Vapor Co.’s Velo are also performing well, she said.