Tobacco: Facing Hurdles

How COVID-19, regulation is affecting c-store sales behind the counter
Photograph: Jason Little

CHICAGO — Tobacco category managers are facing mounting regulation hurdles in 2021; however, the past year has also brought some positive changes. Innovation, especially in smokeless tobacco, has category managers excited for the future. Here’s how three convenience-store and tobacco-industry veterans are making it work during a challenging time.

What drives Kevin Harder’s passion for the tobacco category is clear: He wants to help customers find products that will transition the category to a smoke-free future.

“It’s important for everyone’s well-being that we eventually get there, but it needs to be done responsibly, in a way that moves people from smoking to less-harmful forms of tobacco/nicotine usage over time,” Harder, tobacco category manager at Des Moines, Iowa-based Yesway, says.

This is challenging, though, as the category faces increasing regulation from the U.S. Food and Drug Administration’s (FDA’s) premarket tobacco product application (PMTA) process to local and state flavor bans and cigarette warning requirements.

“Solely legislating our way to a smoke-free future would have a tremendous negative impact on our business,” Harder says.

Despite the challenges, the category has seen some wins over the past year. Work-from-home and social-distancing measures put in place due to COVID-19 have meant that tobacco and nicotine is much easier to smoke at will, Goldman Sachs Managing Director Bonnie Herzog wrote in a report on the results of the New York-based company’s fourth quarter of 2020 retailer survey.

Innovation, like modern oral nicotine, has spurred growth. Spitless tobacco was up nearly 67% in c-store dollar sales for the 52 weeks ending on Dec. 27, 2020, according to Chicago-based market research firm IRI. It was up about 68% in unit sales during that time.

“This pandemic … has influenced everything from how much they buy, to how they buy, to when they buy.”

Cigarette dollar sales even took a positive turn. They were up 1.1% in c-store dollar sales for 2020, compared to a 1% decline the previous year, according to IRI. Unit sales for the subcategory, however, remained negative.

The constant evolution of the category is what Cory Robinson, director of marketing at E.J. Pope & Sons’ Handy Mart c-stores, likes most about it.

“There is never a dull moment in tobacco and nicotine. Products and programs are constantly evolving, so you have to be agile and versatile to be successful,” Robinson says. “I also believe that engaging our suppliers and distributors is critical to success. When there is buy-in from all parties, it allows us to get creative with some of the things we are able to accomplish.”

Robinson, who manages the Mount Olive, N.C.-based chain’s nearly 40 stores, says his category management philosophy includes three steps: Be continuously and constantly improving, seek out new and better opportunities for the category, and focus on progress, not perfection.

The pandemic changed the category in many ways, he says, and he expects many to stick.

Basket Size

Handy Mart stores served fewer customers in 2020 but benefited from higher average basket sizes. Customers were also more commonly trading up to multipacks of tobacco products, especially at the start of 2020, which Robinson attributes to consumers trying to limit the number of trips needing to be made outside of their homes due to COVID-19. 

“This pandemic has extremely impacted consumer behavior to its very core, in a very short timeframe,” Robinson says. “It has influenced everything from how much they buy, to how they buy, to when they buy.”

The result? Retailers are scrambling to accommodate consumer demands in any way they can, he says.

One way they might be able to do this is through the modern oral nicotine (MON) segment. While these products are in their infancy, Robinson has carried Richmond, Va.-based Swedish Match’s Zyn for more than a year and it is doing fantastic, he says. He also recently started selling On from Richmond, Va.-based Altria Group, which is so far having very good results, he says.

Sean Carroll, category and PDI program manager at G&M Oil Co., Huntington Beach, Calif., plans on continuing to make MON a focus for 2021.

G&M’s more than 170 stores—which include the Chevron Extramile, Chevron Food Marts and G&M Food Marts brands—sell Zyn and On to give consumers nicotine alternatives, Carroll says.

Vapor Reality

The modern oral nicotine segment and others, though, are threatened by regulation, Carroll says.

“We are at such an interesting period with this category,” Carroll says. “We’ve seen unbelievable innovation over the last five to 10 years and just as unbelievable regulation and restrictions. The category requires great vision and constant review.”  

Carroll, who has worked in c-stores for 20 years, the last four of which have been in his current position, says his biggest challenges today are local tobacco flavor bans and federal regulation.

In February 2020, the FDA banned the sale of flavored cartridge-based electronic-cigarettes, except for tobacco and menthol flavors. Flavored vaping products could come back on the market legally if they submitted a PMT application by Sept. 9 and the FDA authorizes it. The organization has thousands of applications to sift through, though, so retailers won’t know anytime soon.

States have also enacted flavor bans. Massachusetts’ flavored tobacco ban took effect in June. California’s governor approved a flavored tobacco ban in August; however, opposition collected enough signatures to place the move on a statewide ballot. A referendum is expected to be put in front of California voters in the November 2022 election.

“I’ve always been a proponent of letting consumers decide what they want to use,” Carroll says. “Prohibition was tried in our country and didn’t work.”

The regulation has taken a toll on the electronic-cigarette category. Vape cartridge sales took a dive in 2020, down 9.8% in shipments to retail through third-quarter 2020, according to data from Pittsburgh-based Management Science Associates Inc. (MSA). However, flavored disposable e-cigarettes, which were allowed to remain on the market, saw shipments to retail rise nearly 97% during the same time frame, MSA said.

“We’ve seen unbelievable innovation over the last five to 10 years and just as unbelievable regulation and restrictions.”

Herzog of Goldman Sachs has said she’s cautiously optimistic about e-cigarettes but was more bullish on them a couple of years ago when regulation was more limited.

Meanwhile, cigarette sales declined at a slower rate than many expected during the pandemic. However, retailers and manufacturers who responded to Goldman Sachs’ fourth quarter 2020 survey said they expect volumes to return to historical decline rates in 2021.

This was primarily due to tougher e-cigarette comparisons; a return to normal behavior as people return to offices and therefore, fewer opportunities to smoke; and a shift to alternative nicotine products. About 20% of those surveyed said they expect smokers to seek alternatives, primarily modern oral nicotine options, as well as e-cigarette products.

On the other hand, another 20% of respondents said cigarette volumes will continue to grow in 2021 as consumption habits developed over the pandemic.

Carroll is interested to see how e-cigarettes perform. In particular, he’ll be watching Vuse Alto from Winston-Salem, N.C.-based R.J. Reynolds Vapor to see if it can build to a strong second to Juul. According to retail shipment data from McLane, Vuse Alto was the top vapor starter kit distributed in 2020. Juul Classic Menthol Pod 0.7 milliliter four-packs were the top vapor e-liquids shipped by McLane in 2020.

Carroll says through the pandemic, he’s been connecting with category captains virtually to stay in touch. This year he added additional areas of partnership relating to loyalty with Altria, R.J. Reynolds and Juul.

Robinson, of E.J. Pope & Sons, also keeps in close contact with his captains, using their analytics to help determine if any changes he makes are benchmarking properly against the industry. He’s even worked with them to install new fixtures together over the past year.

Looking forward, Robinson hopes to continuously improve and work on store-specific category plans along with chain-wide category plans, keeping in mind that not all stores are the same.

Whether the world is in a global pandemic or not, tobacco is ever-changing, he says.

“The constant evolution of the category, new items, new programs, new regulations [makes me most passionate about the category],” Robinson says. “There is always something going on with tobacco.”

*Click here to review complete category sales data.

Click here to view the complete Category Management Handbook.

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