Midyear Tobacco Update Shows Ups, Downs

Big cigarette drop, e-cig strength mark first half of 2019
Photograph: Shutterstock

CHICAGO As cigarette volumes declined, electronic cigarettes filled tobacco headlines in the first half of 2019. Flavor bans, U.S. Food and Drug Administration (FDA) action and surprisingly favorable e-cigarette volumes and sales numbers have kept the industry focused on this fast-growing tobacco subcategory.

But of course, plummeting cigarette volumes set off alarms. Volumes at convenience stores were down a whopping 11.2% in the four weeks ending May 18, 2019, according to Nielsen. Through 2018, cigarette volume decline rates at c-stores averaged 5.3%, so the recent four-week plunge stood out, said Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities, New York, in a recent newsletter.

The double-digit volume decline led to a 7.1% decrease in cigarette sales, which was offset by a 5.1% increase in pricing, Herzog said. Possible reasons she cited for the larger-than-normal declines were recent price increases and more consumers trying other nicotine-delivery methods.

Meanwhile, e-cigarette sales rose 58.1% in the same four weeks. However, this was a weaker pace than the 72.1% increase over the 12 weeks ending May 18, Herzog said.

Altria Group’s $12.8 billion deal for a minority stake in e-cigarette maker Juul Labs, San Francisco, which was announced in December 2018, put the topic of vaping on an accelerated track for 2019.

A few weeks prior to announcing the deal, the Richmond, Va.-based tobacco giant pulled the plug on its own e-cigarette lines, causing speculation that it would make a significant move on what was the biggest brand in the retail vaping space, Juul. But the decision to buy into Juul came at a high price: Juul announced it would limit the sale of four flavored pods—creme, cucumber, fruit and mango—to online options, and it pulled them from stores.

These developments came amid a backdrop of ever-increasing FDA pressure, after the September 2018 release of the National Youth Tobacco Survey, which revealed a spike in vaping among middle school and high school students. In media interviews, then-FDA Commissioner Scott Gottlieb discussed the idea of the agency removing flavored e-cigarettes from store shelves.

The FDA then took multiple steps against retailers allegedly caught selling tobacco products to underage operatives. This included sending warning letters to several retailers and even threatening to ban sales of tobacco products at two locations.

All the while, e-cigarettes outperformed all other tobacco subcategories in terms of growth. In a review of preliminary numbers from the 2019 NACS State of the Industry Summit, Joe Teller, category management director for Swedish Match, said other tobacco products (OTP), led by e-cigarettes, had become the fastest-growing segment of the category. OTP grew in c-store dollar sales (up 20.5%) and gross profits (26.4%) in 2018 vs. a year ago, according to NACS, while cigarette dollar sales fell 3.1% and gross profits decreased 4.4%.

“[OTP] not just partially offset [cigarette losses] like in the past, but more than offset those losses,” he said during a May CSP webinar sponsored by Richmond, Va.-based Swedish Match. “That’s really an amazing story.”

FDA heat

Meanwhile, retailers began to buckle under FDA scrutiny. The 2,500-store Rite Aid drugstore chain, based in Camp Hill, Pa., announced it would stop selling e-cigarettes at its stores. That chain, and two others—Walgreens, Deerfield, Ill., and Walmart, Bentonville, Ark.—subsequently announced they would raise the purchase age of tobacco products from the federal minimum of 18 to 21 at their stores.

While the FDA targeted flavored e-cigarettes, industry trade groups spoke out against the growing restrictions, arguing for consumer choice and warning of burgeoning illicit markets. Both NACS and SIGMA released comments defending the industry as a responsible channel for the sale of age-restricted products.

Then just two years into his term as FDA commissioner, Gottlieb abruptly announced his resignation. Since his departure in April, questions have lingered about how the FDA would proceed on flavored e-cigarettes. Many industry observers expected the agency to stay the course.

The same month that Gottlieb left, however, the FDA made an industry-friendly move by authorizing an electronic nicotine delivery system (ENDS) into the market. After almost two years of review, the FDA authorized Philip Morris International’s (PMI's) heat-not-burn device, IQOS, for marketing and sale in the United States. In April, the FDA decided favorably on the New York-based tobacco maker’s premarket tobacco application (PMTA), allowing PMI’s marketing partnership with Altria to proceed. Altria announced it would start its efforts in Atlanta, employing a strategy that would involve about 500 area c-stores and at least one IQOS-branded retail location.

Meanwhile, CNBC reported that Juul was considering opening Juul-branded retail stores. An anonymous source told CNBC that the company had not made a final decision but had executed preliminary moves.

Winston-Salem, N.C.-based R.J. Reynolds Vapor Co. also ramped up advertising of its Vuse e-cigarette brand during this time period.

Then in May, a court ruled against the FDA’s decision to push back deadlines for new tobacco product applications from 2018 into 2021 and 2022. In response, the FDA asked the court for a time frame of at least 10 months after its final decision on the matter, saying anything less would overburden the agency’s review process and potentially kill the e-cigarette market.

Also in June, the FDA issued its final guidance document on PMTAs, both the application processes and agency expectations. The guidelines provide a road map for manufacturers wanting to officially introduce new tobacco products—including all vaping devices—into the U.S. market.

State, local activity

Throughout the first half of 2019, the specter of local flavor bans loomed, including in San Francisco and in Albany County in upstate New York. In the meantime, Beverly Hills, Calif., became the first U.S. city to ban the sale of all tobacco products from a majority of retail establishments.

In New York, the state c-store association and several member retailers raised concerns about Local Law E, the proposed ban on flavored-tobacco products in Albany County. Local Law E would ban the retail sales of flavored cigarettes, cigars, chewing tobacco, e-cigarettes and OTP if the Albany County Legislature approved the measure, according to the published bill.

Jim Calvin, president of the New York Association of Convenience Stores (NYACS), spoke at a press conference in front of a Stewart’s Shop in Latham, N.Y. The store was located in Albany County, just across the street from an XtraMart c-store in Schenectady County. Under the proposed law, displaced smokers could simply cross the intersection and the county line to buy their brand of flavored product, defeating the policy objective and exporting the sales tax out of Albany County, he said.

Also speaking at the press conference was Christina King, legislative committee chair of the NYACS and owner of two Albany County c-stores. She said that one of her sites was located just down the road, about a half-mile from the county line. “This ban would chase my tobacco customers across the border,” she said. “And while they’re over there, they’ll also buy the gas, food, beverages and lottery they used to buy from me. As a result, I lose business, the county loses sales tax, yet smokers still get flavored tobacco. This law would do a lot more harm than good.”

Local Law E referenced a statistic that said that 5% of retailers statewide sold tobacco to minors from 2010 to 2012. But Calvin said the rate was less than half of a percent in Albany County.

“The adult smoking population is not a captive audience,” Calvin said. “With easy access to border counties and online vendors, Albany County smokers will have no problem circumventing the proposed flavor ban, needlessly hurting businesses and taxpayers.”

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