6 Forces That Shaped Tobacco in 2022

CHICAGO — A year of normalizing trends is one way to characterize the tobacco category in 2022, according to Vivien Azer, managing director at New York-based investment firm Cowen. In many cases, those trends meant dollar sales grew while volume declined.

The year was also marked by increasing regulation from the U.S. Food and Drug Administration, which controls what products are authorized under the premarket tobacco product application (PMTA) process, proposed rules to ban menthol cigarettes and more.

And while combustible cigarettes remain the largest segment in tobacco, the product mix continued to evolve in 2022 as modern oral nicotine (MON) grew, and companies introduced more non-combustible products.

“The growth historically that we had seen in e-cigarettes in the United States [and] the emergence and consumer engagement with modern oral both suggest that U.S. consumers are open to novel forms of nicotine delivery, in particular ones that are low-risk profile,” Azer told CSP.

When it came to sales in 2022, though, all of tobacco performed well when looking at revenue, she said, although COVID comparisons remained tough.

“We saw flat industry volumes in 2020,” she said. “Which is a pretty meaningful departure from the industry rate of decline. We’ve seen those trends now return to more normalized levels.” 

Missy Holley, buyer and category manager at Lassus Brothers Oil, has seen those changes firsthand.

“When the pandemic started, cigarette sales skyrocketed, beer sales skyrocketed, lottery sales skyrocketed. … And with everybody working from home, they’re smoking more, so they bought more cigarettes,” Holley said.

Now, customers at the Fort Wayne, Ind.-based c-store chain’s 35 stores are buying fewer cigarettes, although it fluctuates, she said.

“But where cigarettes are going down, other tobacco products are going up. The Zyns of the world have skyrocketed during this time, too, and I don’t see that coming back down any time soon,” she said, referring to MON products, like the one from Swedish Match.  

Much of that depends on what the FDA does though, she said. Vapor is up 31% in sales compared to last year, she said, but that could change if the FDA said a new flavored disposable product she picked up this year, for example, is banned by the agency.

While Holley said she treads carefully with regulation, she can’t live by “what ifs.”

“I can’t, and will not, send our management team into a panic” every time something—like Juul receiving a marketing denial order, a denial that was sooner after stayed—happens. “It’s not fair to them,” she said.

Here’s a look at the regulation, company moves and more that shaped the tobacco category in 2022.

The FDA denied far more PMTAs in 2022 than it granted. And more than two years after PMTAs for new tobacco products were due, the agency has set a deadline of when it will complete its review of major e-cigarette players: June 30, 2023.

That deadline includes covered applications from brands such as Juul, Vuse, Njoy, Logic, Blu, Smok, Suorin and Puff Bar.

The agency in 2022 authorized certain tobacco-flavored products and vapor devices for Logic, NJOY and R.J. Reynolds Vapor Co. But it also has refused to allow or denied marketing authorization to more than 7.7 million e-cigarette and nicotine vapor products. So far, the FDA has not authorized any flavor other than tobacco for e-cigarette and nicotine-liquid products.

In late October, though, the FDA issued marketing denial orders (MDOs) for Logic’s menthol-flavored e-cigarette products, the first menthol vape products to receive a marketing decision based on full scientific review from the FDA. Logic appealed the decision, and the U.S. Court of Appeals for the Third Circuit issued an administrative stay on the MDO.

Some tobacco manufacturers that were issued MDOs in 2022 fought the decision and were successful or are still fighting. An appeals court in August, for example, said the FDA must reconsider several PMTAs for electronic nicotine delivery system (ENDS) products and tobacco-flavored e-liquids after it did not adequately consider the companies’ marketing plans. Ultimately, the appeals court decided it was “arbitrary and capricious” for the FDA to ignore the relevant marketing and sales-access-restriction plans and remanded, or sent back, the applications to the FDA for their further review.

The largest shakeup, however, involved Juul. The FDA in June issued Juul an MDO for its Virginia tobacco-flavored pods at nicotine concentrations of 5% and 3% and menthol-flavored pods at nicotine concentrations of 5% and 3%. The FDA later stayed the MDO, though, allowing the products to remain on the market pending further review. The move at least temporarily affected Juul’s sales, according to Goldman Sachs.

After the FDA issued an MDO for Juul’s PMTA, Juul explored a variety of options—including bankruptcy—to protect its business. However, in November, Juul received cash from some of its earliest investors to keep the business afloat while it awaits the FDA’s final decision on the MDO.  

Two proposals from the FDA could significantly change convenience-store’s backbars. In April, the agency announced proposed product standards to prohibit menthol as a characterizing flavor in cigarettes and prohibit all characterizing flavors, other than tobacco, in cigars.

The proposed regulations would not include a prohibition on individual consumer possession or use and would only address manufacturers, distributors, wholesalers and importers of these products in the United States. There is a multi-year process for the FDA to follow to finalize these proposals. The agency is reviewing the nearly 250,000 comments that members of the public submitted for both rules.

The Biden administration also plans to propose a tobacco-product standard that would establish a maximum nicotine level in cigarettes and certain finished tobacco products. This rule hadn’t been officially put forward yet.

California could be facing flavor restrictions sooner than what’s determined at the federal level, though, after 62% of voters approved a flavored tobacco sales ban in the Nov. 8 midterm election. But R.J. Reynolds Tobacco Co. and other interested parties are asking the Supreme Court to issue an emergency order to stop California from implementing the sales ban.

The ban—which prohibits the sale of everything from flavored menthol to e-cigarettes, excluding hookah and some cigars—was signed into law in August 2020 by California Gov. Gavin Newsom. However, a petition gathered enough signatures to take the issue to voters.

The day after the election, R.J. Reynolds Tobacco Co., R.J. Reynolds Vapor Co., American Snuff Co. LLC, Santa Fe Natural Tobacco Co., Modoral Brands, the Neighborhood Market Association and Morija LLC (doing business as Vapin’ the 619) filed a lawsuit in the U.S. District Court for the Southern District of California against California Attorney General Robert Bonta and District Attorney for San Diego County Summer Stephan seeking to invalidate the ban.  The earliest the ban could take effect would be Dec. 21.

The district court on Nov. 15 denied the companies’ request for a preliminary injunction, prompting the plaintiffs to file a motion with the U.S. Court of Appeals for the Ninth Circuit to prevent the ban, according to a notice from the National Association of Tobacco Outlets (NATO), Minneapolis. On Nov. 28, the Nine Circuit Court denied the motion for an injunction.

R.J. Reynolds, Winston-Salem, N.C., and the other plaintiffs then on Nov. 29 filed the emergency injunction with the Supreme Court. In it, the companies argue that California’s ban, Senate Bill 793, falls under the Family Smoking Prevention and Tobacco Control Act’s (TCA) preemption clause, which states, in part that a state cannot adopt or enact “any requirement which is different from, or in addition to…tobacco product standards.”

As regulation in the category affects what new tobacco products can come on the market, tobacco companies are shifting to sell fewer combustible products.

While combustibles are the largest segment of the tobacco/nicotine market, more innovation is coming in nicotine pouches, vapor devices and more.

Philip Morris International (PMI), for example, is aiming to be a majority smoke-free company by 2025, and as of the first half of 2022, smoke-free products already accounted for more than 30% of its total net revenues, the New York-based company said. Altria, Richmond, Va.; E-Alternative Solutions (EAS), Jacksonville, Fla.; British American Tobacco/Reynolds American Inc., Winston-Salem, N.C.; and more have followed suit.

At the 2022 NACS Show in Las Vegas, EAS, a sister company to Swisher, even announced a completely nicotine- and tobacco-free product, a departure from its Leap vapor products. Its new Mojo Balanced Energy Pouches look like modern oral nicotine pouches but are instead filled with 50 milligrams of coffee-derived caffeine and a blend of functional ingredients like ginseng root, yerba mate and B vitamins.

Two companies that have reduced-nicotine cigarettes or tobacco- and nicotine-free cigarettes are also growing traction. Taat Global Alternatives is selling in Valentine, Neb.-based Speedee Mart c-stores and at all 34 Texas Buc-ee’s stores. VLN cigarettes, from 22nd Century Group, expanded its presence in Laval, Quebec-based Circle K and Boulder, Colo.-based Smoker Friendly stores in 2022.   

After Juul faced significant challenges in 2022, Altria, which owns a 35% stake in the e-cigarette company, released itself from its noncompete agreement with Juul. The agreement required that Altria participate in the e-vapor business only through San Francisco-based Juul Labs. But it had the option to be released from the obligations under certain circumstances, including if the carrying value of its investment in Juul dropped below more than 10% of its initial carrying value of $12.8 billion. As of June 30, 2022, the carrying value hit $450 million, the company said.

“We believe the decision to terminate our non-compete maximizes our flexibility to compete in the e-vapor space while maintaining our economic interest in Juul,” Steven Callahan, spokesperson for Richmond, Va.-based Altria, told CSP in September.

Altria later announced that Japan Tobacco and Altria Group subsidiaries are forming a joint venture to bring heated tobacco sticks to the United States. The product will be made of Ploom-branded devices and Marlboro-branded consumables, it said. Japan Tobacco subsidiary JTI and Altria Group’s subsidiary Philip Morris USA will market and commercialize Ploom, which likely won’t be available in the U.S. until 2025 or later.

In April, the FDA gained explicit authority over synthetic nicotine after President Biden signed H.R. 2471, or the Consolidated Appropriations Act 2022. Three months later, the FDA announced that a non-tobacco nicotine product could only be legally marketed in the United States if it has received premarket authorization from the FDA.

Subsequently, the FDA received applications for about 1 million non-tobacco nicotine products submitted by more than 200 manufacturers, but none have received authorization from the agency as of press time.

About 350 applications, mostly for e-liquid or e-cigarette products, had been accepted by late September for further review. The FDA also issued more than 340 warning letters to manufacturers and retailers for illegally selling non-tobacco nicotine products and selling the products to underage purchasers.

PMI completed its offer for Swedish Match A.B. for about $15.8 billion, with an ownership of about 93% as of Nov. 25, according to a note from Goldman Sachs, New York.

“We view the acquisition as a key strategic positive for PM that will improve its position in reduced-risk products—arguably the biggest growth opportunity in tobacco/nicotine—and accelerate its transformation towards becoming a majority smoke-free company by 2025,” Goldman Sachs Managing Director Bonnie Herzog said.

In October, PMI increased its offer to buy the Richmond, Va.-based company, which it said will help it transition into a smokeless portfolio. Shortly after, PMI agreed to buy Swedish Match with only 83% ownership, but extended its offer until Nov. 25. Swedish Match owns Zyn, the No. 1 nicotine pouch brand in the United States, which shipped nearly 198 million cans worldwide in 2021, according to the company.

PMI also ended its agreement with Altria for Altria’s subsidiary Philip Morris USA to sell heat-not-burn system IQOS in the U.S. PMI will pay a total of $2.7 billion to Altria and have the full rights to commercialize IQOS in the United States as of April 30, 2024. The product hasn’t been sold in the country for nearly a year, due to a U.S. International Trade Commission (ITC) ruling that said the product infringes on two patents held by rival R.J. Reynolds, Winston-Salem, N.C.