CHICAGO — The promise of nicotine-delivery alternatives keeps burning brightly for the tobacco category. As the convenience-store industry reviews its full-year 2018 and first-quarter 2019 data, it is seeing the resilience of e-cigarette brand Juul despite the manufacturer having pulled flavors from stores. Meanwhile, combustible cigarettes continue their slow but steady decline.
E-cigarette sales are strong at c-stores, up 87% in the four-week period ending March 23, 2019, according to Nielsen data shared by Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities, New York, in an investor newsletter. However, sales have decelerated from a growth rate of 104% in the 12 weeks ending March 23. Overall, e-cigarettes represent 3% of c-store retail sales on a trailing 52-week basis, Herzog reported.
More significant was the continued strength of Juul Labs, San Francisco, and its e-cigarette and vaping pods. Despite having pulled its flavored pods from retail shelves late last year in response to U.S. Food and Drug Administration (FDA) negotiations, all-channel sales for e-cigarettes—with Juul leading the pack—rose 85.3% in the four-week period ending March 23, with volumes up 60.9%, Herzog reported. “This is notable as Juul volume continues to shift to online and nonmeasured channels,” Herzog said in her newsletter.
Herzog wasn’t surprised by Reynolds American Inc.’s gain of 50 basis points to command 13.4% dollar share of e-cigarette sales with its Vuse brand, “given its decision to wait for formal FDA guidance before removing any flavors,” she said. At the 2019 NACS State of the Industry (SOI) Summit in April in Chicago, NACS cited Nielsen numbers showing a 179.4% increase in sales and 98.2% jump in volume for e-cigarettes in 2018, which pushed total unit sales of other tobacco products (OTP) up 6.8%. And for the first time, e-cigarettes (25.5%) represented slightly more share of OTP sales than cigars (25%) in 2018, NACS reported.
The potential of the heat-not-burn device IQOS from Philip Morris International (PMI) also continues to grow, Herzog said. The product received the green light from the FDA earlier this year. Altria Group (which has the rights to market IQOS in the United States) will introduce it using multiple tactics, including distribution through 500 c-stores in the Atlanta area. The bullishness Herzog has expressed over IQOS is based on a number of factors, including strong demand in countries where IQOS is developing a track record (Japan, South Korea and Russia); flat volumes of combustible products despite cannibalization from IQOS; strong pricing power from major manufacturers; and PMI’s conservative outlook, which Herzog said only belies the device’s potential for success. Herzog said there has been “no noticeable impact” on IQOS sales in countries where Juul has entered the market.
While the potential for alternative nicotine-delivery devices remains strong, the core segment of combustible cigarettes continues its slow decline. Charlie McIlvaine, chairman and CEO of Coen Oil Co., Canonsburg, Pa., said c-store cigarette sales fell 3.1% in 2018 to an average of $54,249 per store per month, with gross profits falling 4.6% to $7,881, according to NACS CSX data. McIlvaine cited Nielsen data showing a 1.7% drop in c-store sales of premium cigarettes in 2018 and a 3.9% drop in units. C-store sales of branded discount cigarettes fell 6.2%, with units off 8.7%, while fourth-tier cigarette sales dropped 20.1% as unit sales fell 28.2%. Subgeneric private-label cigarettes saw a 6.9% increase in sales and an 8.5% increase in units.
However, Herzog disputed some of the same Nielsen data, saying that cigarette volumes, especially from some of the major manufacturers, were “not as bad as feared.” Also, while dual usage—when people use more than one category of tobacco—was likely to grow, it would do so “not necessarily at the expense of combustible-cigarette volume,” she said. OTP represented a more hopeful note within the category, with CSX data showing sales in 2018 growing 23.6% to $11,878 per store per month, and a 30% increase in gross-profit dollars to $3,611. Smokeless dominated the category at 47.4% of c-store OTP sales for 2018, according to Nielsen data.
The growth in OTP resonated through every region of the country. CSX data showed double-digit percent sales increases in all but one of the six regions in the breakdown. The Northeast saw the highest increases in OTP sales at 33.3% last year, with the Midwest coming in second at 23.6%. The South Central region had the lowest gain in OTP sales at 8.1%
McIlvaine asked retailers at the SOI Summit to speak out against recent FDA calls for curtailing the sale of flavored tobacco products, especially with regard to vaping. McIlvaine said flavored products represented 54% of unit sales and 64% of dollar sales for e-cigarettes in 2018, according to SwiftIQ—a potential that will surely go to cross-channel competitors or to online sales if the FDA achieves its goals. A number of factors are keeping the overall outlook for the category a mixed bag, said Herzog, who cited Wells Fargo’s first-quarter survey of retailers representing about 60,000 stores. They include:
- With “poly-users” now also opting for e-cigarettes and OTP, combustible cigarettes are seeing further erosion.
- Lower unemployment and more disposable income are helping tobacco customers.
- Loyalty programs and promotions are helping manufacturers retain pricing power.
- Widening price gaps mean customers are going to continue to trade down to cheaper alternatives. Retailers are still concerned about FDA actions on nicotine and flavored-tobacco products.
Overall, the year is shaping up to be one of hits and misses. “It’s increasingly clear to us that the tobacco industry is being disrupted as smoker conversion to e-vapor accelerates, negatively impacting cigarette volume as a result,” Herzog said.