The popularity of cigars and other tobacco products (OTP) has been on an upward climb in recent years, bringing some relief to retailers struggling to replace cigarette volume losses in the past decade. But when the Food and Drug Administration (FDA) unleashed new regulations in May to restrict the manufacture of all cigar products, including filtered or “little” cigars, the industry got another jolt of reality. Will costs go up for retailers? Will the regulation narrow the playing field of products? How much will FDA oversight affect future sales and profits?
“Retailers should anticipate that sales of little cigars will face even more pressure, due to the new regulations,” said David Bishop, managing partner for Balvor. “Declines in demand are likely to only accelerate as prices increase and/or promotional support decreases at the same time retailers adjust shelf space as some products exit the market and very few new ones enter.”
Bishop says the result will likely be fewer brands with more market share and some demand shifting to cigarettes.
The current picture shows convenience-store dollar sales of cigars rose nearly 6% in 2015 to reach more than $2.6 billion, with units up 9%, according to IRI. Sweet, natural and unflavored varieties were growing in the double digits as of December 2015, based on a Nielsen database of 25 large c-store chains representing about 14,000 stores. Unit sales of foil pouches were up more than 24%.
Clearly, increased regulation and compliance mean higher costs of doing business. The increased costs to bring a product to market gets passed on to retailers and, ultimately, consumers. Does that mean the future is bleak? Not necessarily, said industry consultant Lou Maiellano. He predicts a shake-up of some sort as suppliers lacking financial stability or support close their doors as well as rising retail prices for the brands that are able to stay in business (mostly grandfathered-in products). But there’s hope, because the tobacco industry is resilient.
“The manufacturer’s cost of doing business is also going to increase due to new, quarterly-assessed user fees and compliance costs,” said Bishop, “so it’s reasonable to assume that the retailer’s COGS will also increase whether through a list price increase or a decrease in promotional support.”
“This will likely happen with smaller manufacturers that are more recent entrants into this market as the cost to comply will become overly burdensome,” he said.
While those smaller companies may fall by the wayside, the larger, well-established manufacturers will weather the storm. “The key is being proactive in keeping ahead of the curve,” said Shargio Patel, president of Inter-Continental Trading USA. “Developing solutions and stronger partnerships with retailers will be the answer.”
“If retailers can remain flexible like consumers, yes, there will be changes to the mix, but everyone will adjust,” Maiellano said. “The industry has demonstrated this over the years in the face of many challenges.”
This post is sponsored by Inter-Continental Trading Co.