Following the Ups and Downs of Tobacco

Tobacco has historically been a steady category for convenience stores: Volumes in the largest segments tend to decline year over year, offset by overall sturdy category sales due to both pricing and poly-usage of newer, more innovative products.

The pandemic, rising gas and food costs and a slew of economic uncertainties, however, upended that steadiness recently. Pittsburgh-based Management Science Associates Inc.’s (MSA) distributor shipment data shows total U.S. nicotine units were up 3.8% in convenience stores in 2020, down less than 2% in 2021 and then down 7.1% in 2022.

But perhaps a return to form is coming, according to industry watchers.

“In 2023, we are projecting a little more of a leveling off or even a slight improvement in the decline,” says MSA Senior Vice President Don Burke, who estimates a decline of 4%-6% this year.

Cigarette consumption has typically led those declines, decelerating by 3.5%-4% annually, according to MSA data. But Burke says we’re now seeing total nicotine consumption decline by 2%-3% or more.

“There will be increased declines in nicotine consumption not only because of the economic conditions but also because of the many restrictions being passed,” Burke says.

But it’s not all doom and gloom. The economic and regulatory pressures have prompted manufacturers and retailers to rethink the space behind the counter to meet both consumer demands and create space for new products beyond traditional tobacco.

“Many adult consumers have chosen to migrate to new category products,” says Ed Mirana, senior vice president of trade marketing for Winston-Salem, North Carolina-based Reynolds American Inc. “Within the last 10 years, the backbar sets have evolved to include dedicated space for the smoke-free categories.”

This transition—to both non-combustible tobacco and nicotine products, as well as to nicotine-free alternatives such as kratom, caffeine pouches and even cannabis—has retailers excited for where the category is heading.

“While currently the pouch and vapor segments are not as large as the cigarette or traditional smokeless customers, they see massive growth,” says Victoria Sheppard, category manager of tobacco and CBD for Oklahoma City-based Love’s Travel Stops & Country Stores. “This is where the customers are transitioning.”

Here’s a look at the trends and transitions happening in all the major behind-the-counter categories in 2023.

Tobacco has historically been a steady category for convenience stores: Volumes in the largest segments tend to decline year over year, offset by overall sturdy category sales due to both pricing and poly-usage of newer, more innovative products.

The pandemic, rising gas and food costs and a slew of economic uncertainties, however, upended that steadiness recently. Pittsburgh-based Management Science Associates Inc.’s (MSA) distributor shipment data shows total U.S. nicotine units were up 3.8% in convenience stores in 2020, down less than 2% in 2021 and then down 7.1% in 2022.
But perhaps a return to form is coming, according to industry watchers.

“In 2023, we are projecting a little more of a leveling off or even a slight improvement in the decline,” says MSA Senior Vice President Don Burke, who estimates a decline of 4%-6% this year.

Cigarette consumption has typically led those declines, decelerating by 3.5%-4% annually, according to MSA data. But Burke says we’re now seeing total nicotine consumption decline by 2%-3% or more.

“There will be increased declines in nicotine consumption not only because of the economic conditions but also because of the many restrictions being passed,” Burke says.

But it’s not all doom and gloom. The economic and regulatory pressures have prompted manufacturers and retailers to rethink the space behind the counter to meet both consumer demands and create space for new products beyond traditional tobacco.

“Many adult consumers have chosen to migrate to new category products,” says Ed Mirana, senior vice president of trade marketing for Winston-Salem, North Carolina-based Reynolds American Inc. “Within the last 10 years, the backbar sets have evolved to include dedicated space for the smoke-free categories.”

This transition—to both non-combustible tobacco and nicotine products, as well as to nicotine-free alternatives such as kratom, caffeine pouches and even cannabis—has retailers excited for where the category is heading.

“While currently the pouch and vapor segments are not as large as the cigarette or traditional smokeless customers, they see massive growth,” says Victoria Sheppard, category manager of tobacco and CBD for Oklahoma City-based Love’s Travel Stops & Country Stores. “This is where the customers are transitioning.”

Here’s a look at the trends and transitions happening in all the major behind-the-counter categories in 2023.

"A lot of [smokers] are moving toward the deep-discount category.”

MSA categorizes smokeless tobacco products as oral nicotine, which includes moist smokeless, snus and modern oral. Last year, the category was flat with shipments up just 0.1% year over year. During that time, moist units declined 6% and snus declined 5%, while modern oral nicotine continued to grow double digits, up 36%.

That growth reflects what’s being seen by retailers and manufacturers, as well.

“We are excited by the growth of oral nicotine pouch products, which grew their share of the total oral tobacco category for the 20th consecutive quarter,” says Kelly of Altria Group. “Continued oral nicotine growth was the primary contributor to the estimated 1% increase in total oral tobacco volumes over the past six months.”

“Modern oral remains a growth opportunity as the category continues to evolve and consumers move between brands in search for their preferred alternative to traditional tobacco products,” says Frank Vignone, senior vice president of sales and marketing for Louisville, Kentucky-based Turning Point Brands. “Evaluating brands and how they are differentiated versus other products in the category is critical for retailers to attract a larger portion of this growing consumer base.”

Turning Point’s brands include Fre Nicotine Pouches, as well as Stoker’s smokeless tobacco, Zig-Zag rolling papers and cones, Solace e-liquid and others.

Burke agrees modern oral products are a bright spot for the category but reminds retailers to, again, keep its size in perspective.

“Modern oral is still a fairly small segment, about the same size as papers, tubes and wraps,” he says of modern oral unit sales. “It’s approximately a quarter of the size of moist smokeless and about 10% the size of large cigars.”

Moist remains the largest segment of the smokeless or oral nicotine category. And, as with other major categories, inflation is having an effect.

“We have witnessed branded value’s continued momentum in moist smokeless tobacco,” says Jeffrey Brown, executive vice president of sales for Jacksonville, Florida-based Swisher. “Inflation has prompted some consumers to spread out their purchases or trade down from premium-priced products to lower-priced options.”

MSA shows premium moist smokeless units down 6.7% in 2022, discount units down 8% and deep discount up 3.2%.
“Similar to cigarettes, it’s the deep-discount price tier that is showing growth,” Burke says, adding that, like deep-discount cigarettes, deep-discount MST is the smallest part of the segment. “Deep-discount smokeless products are about half the size of the premium segment and a third of the size of the discount segment. It has by far the least volume of any segment in moist smokeless.”

Vignone, however, believes it’s not simply inflation driving interest in deep-discount smokeless—and therefore that the growth will continue even when the economy stabilizes.

“While we have seen consumers historically gravitating more toward value brands, it’s not purely a value play,” he says. “They expect a premium product at a price they can afford. This extends to the cut, the flavor and the overall satisfaction.”

“Oral nicotine pouch products ... grew their share of the total oral tobacco category for the 20th consecutive quarter.” 

Large cigars, which include cigarillos, saw volume sales decline 4% year over year in 2022. Little filtered cigars also declined—9%—but it was the large-cigar category drop that was of note to Burke.

“That’s somewhat of a change,” he says. “We’ve seen the large-cigar segment declining throughout 2022, but prior to that, it was not.”

Some of the shift is due to post-COVID normalization: Stay-at-home orders and stimulus funds were a real boost for cigar sales.

“While the overall cigar category is down from the highs of the pandemic sales patterns, all segments remain strong traffic drivers with continued healthy growth in the pipe-tip and natural-leaf segments,” says Brown of Swisher.

As with cigarettes and smokeless, the economy is also a likely culprit.

“The entire economic condition—including the ending of pandemic support, gas prices, inflation—that impacts large cigars,” Burke says. “It could be part of the reason for this change in direction.”

Many fear those declines will accelerate if the FDA goes through with its proposal to ban all flavored cigars. Flavors make up such a large percentage of cigar sales that Burke believes local flavor bans could be part of the reason for the category’s recent declines.

“About 55% of all large cigar and cigarillo sales are a flavored product,” he says. “A federal flavor ban would be a big problem.”

“We believe adult consumers should be free to choose the products they prefer,” says Brown. “If adult consumers prefer flavored cigars, these products should be available on the market beside non-flavored cigars.”

Brown adds that historic consumer behaviors suggest a flavor ban might not have the intended effect, much like prohibition didn’t keep people from drinking alcohol.

“Bans on flavors in cigars are likely to have the same uninspired impacts: Black markets for flavored cigars will flourish, tax revenue will decline, and cigar users will transition to non-flavored versions,” he says.

Only time will tell.

“A federal [cigar] flavor ban would be a big problem.”

MSA categorizes the vapor category into cartridges, disposables, kits and e-liquids. At the end of 2022, cartridges—the largest seller in convenience—were down 12.3%, and the entire vape category was down 11% year over year.

“We believe the category is continuing to undergo a significant reset,” says Kelly of Altria. “We have observed a decline in traditional multioutlet and convenience channel volumes, which we believe is primarily a result of the FDA marketing denial orders issued for Juul and myblu.”

Juul and myblu fall into the cartridge—or rechargeable—segment.

Disposables provided a bright spot, up 5.2%—a number Burke admits may not show the whole picture because many retailers carry flavored disposable products purchased through online retailers or directly from manufacturers, figures that don’t get reported in MSA data.

“Disposables are likely up more than 5.2%,” he says, “but we don’t have the data because they’re not being purchased from the established tobacco distributors.”

One trend Burke is seeing within data for disposables is growth in nicotine-free products. Zero-percent nicotine products were up 34.2% in 2022, and MSA shows 90% of them were disposable.

“It’s still very small as compared to total disposable sales, but it’s an emerging trend,” he says.

Cartridge products, though declining, remain an important part of convenience vapor sets. Burke says disposables are about 20% the size of cartridges, which “are by far the largest seller in the vapor category.”

Despite its challenges, manufacturers remain optimistic about vapor’s importance to the future of the backbar.

“Vapor is still one of the fastest-growing categories in the smoke-free nicotine space,” says Mirana of Reynolds. “Adult smokers tend to turn to vapor first when they decide to migrate to innovative, alternative nicotine products that may present less risk.”

“Vapor is still one of the fastest-growing categories in the smoke-free nicotine space.”

The newest section of the behind-the-counter category is arguably one of the most exciting yet difficult to track and manage.

It’s exciting due to the large, diverse customer base. Vignone, whose company produces the popular Zig-Zag brand of rolling papers, notes that 38 states have now passed some form of cannabis legalization.

“There are more consumers engaged with alternative products than ever before,” he says.

One challenge in understanding what products are selling is the lack of traditional distribution networks and data. Seventy percent of traditional tobacco and candy distributors carry CBD, according to MSA, but just 35% carry kratom, and only 15% offer Delta-8, Delta-9 or other minor cannabinoids.

“We don’t even make a projection to the size of this category because we know we’re undercounting it,” Burke says. “We can’t really compare it to tobacco yet.”

What MSA can track is promising as the category expands beyond CBD (cannabidiol). MSA now includes products made with CBD, kratom, Delta-8, Delta-9, Delta-10, HHC, THC-O and CBG as part of its “alternative product” category.

In 2022 kratom grew to twice the size of CBD in convenience sales. While CBD units declined 62% year over year in 2022, kratom was up 51%. “Even with the limited data we have, we’re seeing that kratom is going crazy,” Burke says.

Non-CBD cannabinoids are even tougher to track. But manufacturers and distributors are reporting a shift toward products that offer a more immediate, intoxicating effect.

“The most popular hemp-derivatives right now are psychoactive,” says Dorsey Sparks, vice president of Las Vegas-based distributor Distro+. “Customers like them as a readily available and affordable alternative to dispensary products.”

The most common psychoactive hemp cannabinoid, Delta-8, has been restricted or banned in 21 states, with four more considering similar restrictions. While MSA puts Delta-8 as the third-best-selling alternative product in convenience, manufacturers like Global Widget expect more growth to come from hemp-derived Delta-9 products.

“There’s a lot less risk with Delta-9,” says Vincent Gillen, vice president of sales for Global Widget, Tampa, Florida. “I think you’ll see a lot more uplift in sales in Delta-9 products in 2023-2024, especially as there’s continued clarity state-by-state.”

Vape is the most common format for psychoactive cannabinoids such as Delta-8 and Delta-9.

“Vape rules the day as far as format,” says Sparks, adding that gummies and combustibles are also popular while beverages are “picking up steam” and edible snacks and chocolates are emerging, as well. “It’s been so interesting to watch the evolution of customer knowledge.”

Though CBD isn’t as strong as it once was, Burke says the huge growth in other segments justify “alternative products” as a legitimate segment for behind the counter.

“It’s maintaining its own due to the growth of kratom and Delta-8,” he says.

That’s only going to continue as more and more states legalize various forms of cannabis and other plant-based alternatives.

“The cannabis train has left the station,” Sparks says. “Now is the time to establish a loyal customer base in this category.”

“Now is the time to establish a loyal customer base in [cannabis].”