Tobacco

Behind-the-Counter Virtual Roundtable: Retailers and Suppliers Have Their Say

7 tobacco/nicotine experts discuss the category’s biggest challenges and opportunities
Image: Shutterstock

CHICAGO — Easily one of the best parts of in-person events is the kind of open and honest discussions that happen when you get a group of category authorities together, especially tobacco category experts. As the industry eagerly awaits the return of such in-person gatherings in 2021, CSP recruited some of the foremost behind-the-counter masters to participate in a virtual roundtable.

Here’s what these behind the counter experts had to say:

Our Virtual Panel

Sean Carroll: Category manager and PDI program manager for G&M Oil Co., Huntington Beach, Calif., and a 2021 Behind the Counter Category Manager of the Year nominee

Matt Domingo: Senior director of external relations at Reynolds American Inc., Winston-Salem, N.C.

Kevin Harder: Tobacco and car-wash category manager for Yesway, Des Moines, Iowa, and CSP’s 2021 Behind the Counter Category Manager of the Year

Danielle Holloway: Senior director of industry engagement at Altria Group Distributing Co.

Kraig Knudsen: Tobacco category manager for Circle K–Heartland Division, Lisle, Ill., and CSP 2020 Behind the Counter Category Manager of the Year

Cory Robinson: Director of marketing for E.J. Pope & Sons, Mount Olive, N.C., and a CSP 2021 Behind the Counter Category Manager of the Year nominee

Karen Saber: Vice president of business analytics and strategic sales innovation at Swisher International, Jacksonville, Fla.

The Discussion

CSP: It’s tough to reflect on any category right now without bringing up COVID-19. How did the pandemic change the category?

Carroll: The pandemic has led to a number of lockdowns at city, county and state levels within California. The byproduct of these lockdowns is a consumer base that makes fewer stops, with larger baskets. It requires retailers to increase the amount of inventory they carry to meet those fluctuations.

Knudsen: At first, we saw a drastic reduction in the number of shopper trips. Many retail outlets were closed or had reduced operating hours. When consumers did get to the store, they were bulk buying in fear that they would not be able to get products in the short term. Multipack and carton sales replaced much of the previous single-pack volume. Much of this has now changed; however, consumers’ purchasing habits have not fully returned to the pre-pandemic patterns. We are still seeing increased carton sales vs. a year ago, but not to the same extent.

Harder: With more people working from home, usage opportunities have increased, which has led to increased consumption.

Domingo: When you go back to last March and the volume decline on cigarettes was considerably better than what you’d normally forecast. COVID took hold and you had volume declines less than the 3%-4% you’d normally see on an annualized basis. That was a huge change.

Holloway: 2020 was a dynamic year in the tobacco industry with notable changes in each category. Tobacco consumers continue to adopt non-combustible alternatives to cigarettes. Most significantly in the oral tobacco space, with rapid growth in oral nicotine pouches off of a small base. The e-vapor category, however, contracted in 2020 as it continues to undergo a transition period pending FDA market determinations. And in combustibles, cigarette volumes were little changed from 2019 as the COVID-19 pandemic altered smoker behaviors and purchasing patterns.

CSP: And what changes did you see beyond consumer consumption?

Robinson: In light of tobacco manufacturers making significant changes to merchandising support, we needed to get operational buy-in on merchandising tobacco fixtures. Tobacco fixtures, as an example, are extremely costly, and it is easy to forget how valuable in-store merchandisers are until you don’t have them anymore.

Saber: The OTP category was placed under a great deal of stress and uncertainty in 2020. The COVID-19 pandemic and the resulting impacts on the economy, logistics and supply chains affected both adult consumers and the manufacturing process. Retailers and OTP manufacturers continued to embrace category-management integration despite continuing headwinds from COVID-19-related issues, as well as federal, state and local government [oversight].

Harder: Production issues have really hurt certain segments like cigars, but at some point, they will overcome their issues.

CSP: Do you expect these changes to be permanent as we move on from COVID?

Knudsen: As we move away from the pandemic, product availability in supply for the cigarillo category will hopefully improve. Curfews in the Dominican Republic are still impacting the amount of product that can be produced.

Domingo: 2020, a little bit of 2021, was kind of an anomaly in terms of consumer behavior and what was available to them as a result of the pandemic. We anticipate some kind of reset to what we’d expected had the pandemic not happened.

Harder: If the work-from-home movement sticks, there may be less decline than in pre-pandemic years.

Carroll: I do believe many of the changes that have happened in the past 12 months will be permanent. The importance here is this pandemic has extremely impacted consumer behavior to its very core, in a very short time frame. It has influenced everything from how much they buy, to how they buy, to when they buy.

CSP: Onto more enjoyable topics. What’s new in this space that has you or your customers excited?

Robinson: I’m excited about all things in the modern oral nicotine (MON) segment. I think these products are in their infancy and we may see other nicotine delivery systems. We’ve had Zyn for over a year, and it is doing fantastic. We started selling On! last quarter and are having very good results.

Harder: Zyn, On! and Rogue nicotine pouches continue to grow, and the promotional spend of the manufacturers is making the battle between these products fun to watch.

Domingo: Modern oral is carrying the majority of the excitement in terms of what’s next. Retailers and wholesalers are encouraged by the development of a new category. They’re always looking for the manufacturers to demonstrate evolution beyond traditional products, and this segment is delivering on that goal with some good scale.

Saber: The MON category realized growth of 163% in 2020. The unique proposition is that these products come in a variety of formats, shapes, sizes and strengths so the adult consumer can choose the product that best meets their busy lifestyle. Although currently the majority of products reside in pouch format, tablets, gums and lozenges are gaining notable traction.

Knudsen: Had the pandemic not occurred, I believe that this growth would have been even more pronounced. When people return to offices and travel, their opportunity to smoke will once again become more limited. At this point, we should see these products gain even more momentum.

CSP: What are some of the biggest head[1]winds facing tobacco retailers, both today and in the future?

Carroll: Hands down, it’s regulations. Challenges continue … in both the local flavor ban ordinances we’ve seen in counties and cities across California and/or anything that the incoming (administration) might do on that front. I’ve always been a proponent of letting consumers decide what they want to use. Prohibition was tried in our country and didn’t work. Worse, elected officials are banning products in many cases (such as Zyn) with no scientific information to back up the regulations they are creating.

Knudsen: Regulatory uncertainty with the FDA is still challenging. Traditional established vapor products took a huge hit when flavors were banned last February. Their decision, however, not to take enforcement actions against flavored disposable products created a huge market for these types of products. While some of these disposables are quality products, many of them are fly-by-night opportunistic brands. They are being manufactured almost exclusively in China with little to no oversight. These are the exact products that the FDA had originally said they were trying to eliminate.

Harder: Governments continue to see tobacco as an easy target for increased taxation and proposed legislation tends to be more political posturing than science- and fact-based. Knudsen: Knowing what you can and cannot sell going forward will be hard to predict. There are products I would like to get into; however, their long-term viability is questionable. Any guidance from the FDA on PMTAs will help to reduce these current issues.

Holloway: The tobacco consumer’s understanding of the relative risks of non-combustible products compared to cigarettes is critical to achieving harm reduction. Peer-reviewed, published studies on the relative harm from nicotine-containing products show a profound risk differential between combustible and non-combustible product categories as a whole.

CSP: What could we—both tobacco retailers and tobacco manufacturers—do better to help this category grow and succeed?

Saber: At the heart of it all is partnership and communication. This being said, in support of this endeavor is category management. It assists in optimizing one’s business within the retail environment, and it is incumbent on retailers to evaluate and include strong category-management principles as they plan to maximize stock rates and meet adult consumer preferences and demands. More than ever, fact-based decision making will be critical.

Robinson: Educate the general public on the convenience-store industry being a responsible tobacco retailer. The public perception is not always a flattering one; however, as an industry, we have made strides to be responsible retailers. With new technologies … we really are working on being best-in-class when it comes to handling this going forward.

Knudsen: If even one transaction involves a tobacco product getting into the hands of a minor, it is one too many. Anything less than 100% compliance in this area is unacceptable. With new technologies being created, I am confident that we can get to that 100% compliance level in the near future.

Harder: (We need to) speak up and ensure our voices are heard by legislators. Carroll: I agree about making our voices heard. The convenience area has done a great job thus far relating to flavor ban ordinances, but we have to continue to partner and improve.

CSP: When you factor in all the regulations, taxes and limitations, tobacco is admittedly a challenging space. What’s one thing that makes you excited for the future of the category?

Harder: Continued innovation and how well will it be received by adult tobacco consumers.

Holloway: It’s important to step back and look at how the total tobacco space has evolved. Altria equivalizes volumes across categories; total domestic tobacco industry volumes declined 1% over the past five years on a compounded annual basis. With cigarette volume declining over time, noncombustible categories such as oral tobacco and e-vapor have become a larger portion of tobacco volumes, standing at approximately 22% in 2020.

Robinson: It is going to be super exciting to see how new products unfold in the innovation space over the next couple years.

Saber: The overall tobacco/nicotine category has always been an exciting and interesting place in which to exist. The category continually evolves and grows with new products, offerings and extensions to satisfy adult consumer demands.

Domingo: The c-store industry is wrought with brilliant minds and a lot of great creativity. Tobacco and convenience are so linked together, so a lot of the times we have a seat at the table in trying to redefine what behind-the-counter looks like. I have great excitement that the partners we deal with are not wanting to abandon the industry and instead want to evolve with us.

Carroll: It will be interesting to see how the category evolves over the next 10 to 20 years. The key is to be engaged, focused and listen to your consumers.

Knudsen: I have been in the tobacco business for over 35 years. Never in my career has there been a time when we have so many new innovative products. If the FDA can figure out a way to regulate, but not impede, new-product developments, the future will be very exciting. If I can help make available these newer, less harmful products to my tobacco customers, I will feel a sense of personal satisfaction.

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