CHICAGO -- Some of the major roadblocks for the tobacco category seemed to lift last summer as the U.S. Food and Drug Administration (FDA) announced a new nicotine-level-focused vision and a more optimistic tone toward e-cigarettes and vaping. Might the change of heart mean a smooth ride for retailers going into 2018?
Not all the potholes are gone—at least according to panelists on a fourth-quarter 2017 CSP-Swedish Match webinar. While more optimism exists today, especially with regard to the FDA, a new set of uncertainties are revealing themselves.
Nik Modi, tobacco analyst for RBC Capital Markets, New York, is not pulling the emergency brake yet, but he is definitely waving a caution flag for retailers in 2018. Mixed economic forecasts and trepidation over emerging products should make retailers temper their optimism over changes at the FDA, Modi said, providing a few key reasons:
For starters, news over the economy and other core c-store categories has been mixed. U.S. beverage sales have been soft in recent months, while at the same time, Corona, Calif.-based Monster Beverage is gaining share. Purchase, N.Y.-based PepsiCo is feeling the effects of lagging beverage sales, while its Frito-Lay division is doing well. Similarly, across the 21 companies Modi tracks as an analyst, the overall picture is spotty. Consumer staples, for instance, are not doing well, he said, citing Colgate-Palmolive, New York, with its toothpastes and deodorant products, and Kimberly-Clark, Irving, Texas, with its facial tissue and diaper products, as having tough years. He generalized about the problems as being tied to inventory issues but also cited a greater concern of waning consumption.
Other issues affecting c-stores are rising gasoline prices and the weather. While gasoline prices are likely not repeating the devastating spike consumers saw in 2008 and 2009, they are higher than $3 per gallon in some markets. As for weather, precipitation has “not been favorable” in many markets, Modi said. Patterns for the past year included unusually heavy rains, flooding and, of course, the sizable hurricanes that hit the U.S. mainland and the Caribbean.
Modi called out the “CNNFox News effect,” by which healthcare battles, tax reform and political controversies are casting a pall on consumer activity.
Traditional and nontraditional retailers are also raising the stakes. McDonald’s has had success with its “$1 any size soda, $2 for any McCafe drink” program, Modi said. The fast-food chain intends to continue such promotional efforts in the months to come. Meanwhile, Amazon and its direct-delivery programs are redefining customer convenience. “The [Amazon] issue is on the periphery,” Modi said, “but it could get worse.”
In the end, c-stores are taking a hit with lower traffic counts and sales, Modi said, citing soft quarterly results from two of the industry’s largest retailers, Casey’s General Stores and Alimentation Couche-Tard.
At the time of the webinar, cigarette volumes had declined 4.5% for the previous two quarters, Modi reported, citing results from tobacco companies. However, he expects a more “normalized” decline of 3.5% for the full year. Altria Group Distribution Co.’s Marlboro brand has lost some share to fourth-tier brands and Reynolds American Inc.’s Newport and Natural American Spirit brands, he said.
On the topic of new products, he expressed some concern about iQOS, the heat-not-burn technology coming from Philip Morris International (PMI). A compressed tobacco-based stick is heated to generate an aerosol that users inhale to receive nicotine. So far, iQOS has seen strong market penetration overseas, especially in Japan. PMI is working with the FDA to not only market the product here, but also to allow the company to say iQOS is less harmful to users than combustible cigarettes.
While Japan is certainly a success story for the product, Modi said that acceptance has been “spotty” in many other countries. “If you didn’t take caution, you’ll get stuck with inventory,” he said. “It’s like what retailers saw with [certain] e-cigarettes.”
For one, Japanese and U.S. smokers are different from one another. “The Japanese consumer is higher-income and white-collar; in the U.S., they’re lower-income, blue-collar,” he said. Modi pointed out that his opinions are not based on data, because the product has yet to become available in the United States.
Altria holds the rights in the United States to market and distribute iQOS, and officials have publicly expressed their enthusiasm over the product. Other analysts have been optimistic about it as well.
“We continue to remain bullish on the iQOS platform [in the United States] given its overwhelming success in Japan, impressive momentum in Korea, increasing mindshare in Europe and strong investment advantage given the product’s favorable tax profile,” said Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities LLC, New York, in a recent newsletter.
The industry may feel a reprieve from the feds, but more detours loom at the state and city level. Brian Carr, deputy executive director and legal counsel for Minneapolis-based NATO, told webinar attendees that retailers need to keep an eye on local legislation, because that level of lawmaking has become the hottest battleground for new regulation.
When the federal government fails to regulate any area of tobacco, local lawmakers tend to fill the gap, he said. Such regulatory activity has popped up recently in the form of menthol bans. In California’s Bay Area and Minneapolis and St. Paul, Minn., such restrictions and bans have passed local councils, threatening retailers who rely heavily on sales of menthol cigarettes.
A recent NATO-sponsored study showed the Minneapolis restrictions would mean an annual loss of $259,000 in sales per store, leading to a loss of 1,000 jobs. Unfortunately, lawmakers in the Twin Cities are standing by their new restrictions. “Our argument didn’t carry much weight,” Carr said.
Still, he advised retailers to continue to track and respond to local legislation, saying the voice of local business owners does carry weight and can effect change.