CHICAGO —The tobacco and nicotine category faces many unknowns going into 2021. From the effects of the pandemic to regulation of flavored products and the results of the premarket tobacco product application (PMTA) process, manufacturers and retailers are braced for a tenuous year.
There are some upsides, however:
- The smokeless tobacco category, led by spitless tobacco, was up 1.7% in unit sales in c-stores for the 52 weeks ending on Nov. 1, data from Chicago-based market research firm IRI shows.
- Cigars showed a 7.7% increase.
- Electronic smoking devices increased 10.8%.
- Cigarettes, while down 4.2% in unit sales, were up in dollar sales compared to the previous year (1.8%), and decreased less than analysts previously projected, due, in part, to increased consumption amid the pandemic.
For Senior Category Manager Peter Frattarola of La Plata, Md.-based Wills Group Inc.’s Dash In convenience stores, the health of the category is good, and likely will be next year, too. Frattarola said almost all tobacco subcategories are reflecting growth in Dash In’s more than 50 stores.
“The demand for tobacco- and nicotine-derived products appears strong, and perhaps resilient, when you look at the seemingly difficult current retail environment for c-stores,” Frattarola said.
Here’s a look at factors weighing on the category and how key segments might react ...
One thing that will remain on retailers’ minds in 2021 is what products the U.S. Food and Drug Administration (FDA) will authorize through its PMTA process and when the agency will let retailers know which tobacco products have already submitted applications.
Frattarola said he made sure to speak to his manufacturers about which items they would be submitting for the PMTA process and made changes to Dash In's plan-o-grams based on those conversations.
“Overall, changes were few and far between as we pride ourselves in utilizing data to carry the highest ranked products based on sales and unit movement,” he said.
With the PMTA deadline months passed, the FDA is still sifting through the applications and working on a public list of which companies have submitted applications.
The FDA’s Center for Tobacco Products Director Mitch Zeller told CSP in November that the FDA remains committed to releasing a public list of the new tobacco products deemed to be subject to an FDA review, were on the market as of Aug. 8, 2016, and for which a premarket application was submitted by Sept. 9. The list will help convenience-store retailers know which tobacco products to keep on their shelves.
First, though, the FDA must sort through thousands of applications that came in all different forms, including CDs, DVDs, hard drives and some hard copies, Zeller said. And within those applications, some companies are seeking authorization of thousands of products. The FDA will also need to ensure the publishing of any information complies with federal disclosure laws and regulations.
The result is an “extremely labor-intensive manual exercise of unpacking every single application,” Zeller said. “But we have lots of people working on this, and we absolutely intend to provide such list.”
There are several ways the agency is prioritizing which applications to process first, Zeller said.
“One of our goals is to transform the marketplace for these unauthorized products into a regulated marketplace,” Zeller said. “And the principle that we came up with is to devote a certain percentage of the reviewing resources to those products that have, or are having, the greatest impact on public health, either positive or negative, simply by virtue of share of market.”
The other aspect Zeller said the FDA is considering is fairness, giving priority to companies that submitted applications on time, regardless of that company’s size or market share. The FDA is also prioritizing e-cigarettes and electronic nicotine delivery systems (ENDS).
At least one analyst said she’s “cautiously optimistic” about how e-cigarettes will fare in the future; however, she acknowledges several burdens on the segment, including the FDA’s flavored cartridge ban, state-level tobacco sales bans in places like California and Massachusetts, the THC vaping crisis and a long and expensive PMTA process, all of which stunted the category’s growth.
“Certainly, I was a lot more bullish a couple of years ago when regulation was more limited,” Bonnie Herzog told retailers in September during a webinar for the National Association of Tobacco Outlets (NATO), Minneapolis.
E-cigarettes, or e-vapor, is about 5% of the total nicotine market, based on 52-week retail dollar sales through Sept. 5, said Herzog, managing director for New York-based Goldman Sachs. While substantial, Herzog notes that just a couple of years ago she expected that number to be double the share it is now.
Nielsen’s numbers support this. For the 52-week period ending on Oct. 26, 2019, c-store sales of e-cigarettes saw a 95.3% increase in dollar sales compared to the previous year. For the 52 weeks ending on Oct. 24, 2020, that percentage change was 4.7%.
The curtailed growth will continue, at least in the near-term, Herzog said. One of the consequences of the FDA’s flavor regulation was consumers turning back to combustible cigarettes, she said.
“I’m not convinced that that’s what the FDA had in mind, but that is reality. And that’s also what’s helping the broader cigarette category,” Herzog said. “We’re going to have to wait to see how this plays out as the FDA works through [the PMTAs], which, by the way, is going to take a very long time.”
Zeller, however, said a straight line cannot be drawn between the final January 2020 guidance to ban flavored pods and increased cigarette use. The guidance was a policy based on the best available data, including the 2019 National Youth Tobacco Survey, he said, which made it clear that certain flavored cartridge-based products were really popular with underaged consumers who were vaping. Tobacco and menthol flavors were excluded from the guidance.
Zeller said the policy was a balancing act between disturbingly high levels of youth using e-cigarettes and technology that could benefit addicted adult cigarette smokers.
“And so with that guidance, when it went into effect, we not only preserved tobacco and menthol flavoring for cartridge-based products, but it didn't affect the availability of flavors in any other form, starting with disposable products,” Zeller said.
A future for flavors?
How quickly flavored e-cigarettes are allowed back on the market will have a huge impact on the category, though, said Jeff Brown, vice president of sales with Jacksonville, Fla.-based E-Alternative Solutions, a sister company to Swisher, which manufactures products under the Forth CBD, Leap Vapor and Cue Vapor System brands.
“In my view, I think that will have the biggest impact. That's kind of what everyone's waiting for, in particular, the companies that spent all that money and time, like us, to put PMTAs together [and] to meet the requirements. That day is coming,” Brown said.
Regardless, there is still much for retailers to be excited about in tobacco, said Frank Vignone, vice president of sales with Louisville, Ky.-based Turning Point Brands Inc., a marketer, manufacturer and distributor of branded products including rolling papers, smokeless and vapor products and more.
“The big challenge for both the stores and manufacturers is how do we make room for all the innovation that is coming while satisfying existing product demands,” he said. “Everyone has to get smarter, realigning inventory and making room in the stores, at the same time manufacturers have to careful about making unrealistic demands on stores to not over-inventory stores with unproven products.”
Until PMTAs are authorized by the FDA, it remains to be seen what e-cigarette flavors and brands will be allowed back on shelves. In the meantime, many retailers are focusing their energy on other emerging categories, such as modern oral nicotine (MON) products.
The other tobacco products (OTP) category, which includes modern oral nicotine, will be a driver of key growth into the fourth quarter of 2020 and beyond, Herzog said, citing a third-quarter of 2020 retailer survey by Goldman Sachs that showed retailers are optimistic about the product segment.
Richmond, Va.-based Swedish Match’s nicotine pouch brand Zyn continues to outpace all other brands, growing 34% in the third quarter of 2020, Herzog said. It is followed by Richmond, Va.-based Altria’s On, Jacksonville, Fla.-based Swisher’s Rogue, Velo and Dryft.
British American Tobacco plc announced in November its U.S. division of the BAT Group acquired the nicotine pouch product assets of Dryft Sciences LLC, a Moorpark, Calif.-based modern oral nicotine product company. BAT will rebrand Dryft’s U.S. portfolio under its global modern oral brand, Velo.
Long-term growth in the category is very exciting, said Matt Domingo, senior director of external relations with Winston-Salem, N.C.-based Reynolds America, which is a subsidiary of British American Tobacco. Nicotine pouches are the highpoint in the category right now, he said, and with BAT’s recent acquisition of Dryft, the consolidation of the number of players continues.
“Now that we are seeing this consolidation occur, you’ll see the remaining players start striving for category ownership, and you’ll see that in terms of what things look like at retail relative to space, pricing and brand program agreements,” Domingo said.
Best practices in managing a MON set is a matter of grouping those products together, according to Joe Teller, director of category management with Swedish Match. If retailers have too many supplier programs, MON products could be scattered.
“The good ones are figuring out how to separate e-cig/vape from modern oral so they have discreet sections where shoppers can see the breadth or variety that’s available,” Teller said.
Frattarola said Dash In stores started carrying Zyn and Velo in August 2019. He added Dryft in the last few months of 2020 and is working to add On, as well, to diversify Dash In’s tobacco and nicotine offerings.
“In my opinion, being highly diversified with our tobacco/nicotine offerings will help off-set risk/disruption and put us in a position to grow the business today and in the future,” Frattarola said.
The COVID effect
The lingering effects of the coronavirus crisis will affect tobacco well into 2021, especially when it comes to consumption levels and taxes.
Total tobacco/nicotine actually performed well in 2020. C-store dollar sales were up 3.6% for the 52-week period ending on Oct. 24, about a point better than 2019 growth, according to Nielsen, Chicago.
Downtrading, or consumers switching to cheaper brands, remains the biggest potential risk for the category, according to Herzog, as unemployment remains high and government stimulus wanes.
The coronavirus pandemic has disproportionately affected lower-income consumers, Nik Modi, tobacco analyst for New York-based RBC Capital Markets said. “Those are the core tobacco consumers,” he said. “In the absence of stimulus, are we in the situation where those consumers are really under a lot of pressure?”
Cigars have had a good bump due to people enjoying the nicotine experience as a result of being at home so much and dealing with a lot of stress, Teller said. But cigars have faced out-of-stock problems as COVID-induced demand has risen and as manufacturing workplace rules changed to allow for more worker safety.
“If we all could’ve made enough [cigars], who knows how high the category sales could be,” Teller said.
Consumer packaged good (CPG) manufacturers and c-store retailers are seeing pantry loading again as the virus spikes in November, Herzog said, but there are some signs of consumers pulling back in the tobacco/nicotine category.
Potential excise tax increases at the state and federal level are concerns among retailers and tobacco suppliers. Colorado and Oregon voters in November approved measures to increase taxes on tobacco products.
How other local governments hurting from the pandemic react remains to be seen.
“Will they look for the tobacco industry to help fill the coffers again?” Modi asks. “Conversely, could decriminalization of cannabis or states opening up recreational [cannabis] in certain areas and jurisdictions help the tax? Does that fill the gap? That, I think, is going to be an important question. What is the source of those taxes to help states fill their coffers?”