NEW YORK -- Though it’s par for the course for RBC Capital Markets tobacco analyst Nik Modi and Swedish Match category manager Joe Teller to present their industry insights around November every year, 2015 was far from common when it came to cigarette sales.
“This year was a great year in terms of cigarette volume declines in that it was much lower than what we’ve normally seen across the category,” Modi said during the annual CSP/Swedish Match-sponsored Tobacco Update Webinar, citing the 0.5% cigarette volume declines anticipated for 2015. “What was really interesting is when you looked at the volume decline rates, they moderated despite pricing actually going up faster. This was obviously a very, very strong year.”
Though last year Modi predicted the historical declines of 3% to 4% would continue in 2015, he pointed to a few reasons it became such a positive year. Yes, lower gas prices and lower unemployment rates certainly helped. But Modi also described a kind of “shifting” back from previous tobacco trends: namely the movement from cigarettes to smokeless, roll your own (RYO) and other lower-cost alternatives at the start of the recession and the “hysteria” around electronic cigarettes and vape starting in 2013 and 2014.
“I think a lot of these things kind of reversed themselves in 2015,” Modi said.
Unfortunately, Modi does not anticipate the decelerated declines will be sustainable in the long run—or even the short run.
“I do not expect to see a repeat of this year in 2016 in terms of being down just a half a point,” he said. “We’ll see how things pan out a year from now, but I think we all should be expecting the category decline rates to go back to 3% to 4%, maybe closer to 3% given that we still have a lot of economic tailwinds.”
That’s the bad news.
The good news is that Modi predicts the overall economic outlook for the core tobacco consumer will remain favorable in 2016.
There are lots of indicators for this prediction: housing starts are currently at post-recession highs (meaning more construction jobs), gas prices remain low—“Given oil forecasts, that should continue to be the case at least for the near-term,” Modi said—and consumer confidence has skyrocketed.
And convenience stores are reaping the benefits. A recent CSP/RBC Capital Markets retailer survey had 63% of respondents reporting improvement in c-store traffic (up from 25% in March 2014 and 50% in June 2015).
“The low-income consumer is going to have many, many years of tailwinds because we’re starting to see a shortage of skilled workers,” said Modi. “Wage inflation, I think, is really going to start to help consumption patterns.”
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