CHICAGO — In a few short months, a series of regulatory developments dramatically altered the tobacco and vaping landscape. The most monumental included an increase in the federal minimum age to buy tobacco products from 18 to 21 and the U.S. Food and Drug Administration (FDA) essentially pulling flavored vaping cartridges off the market.
Also, at least nine states moved forward with new restrictions on flavored vaping, including Massachusetts, which banned not only vaping products but also menthol cigarettes.
Frustration is the main reaction retailers are having, says Kraig Knudson, tobacco category manager for Circle K’s Heartland division, Lisle, Ill., and CSP’s 2020 Category Manager of the Year for tobacco, vape and other tobacco products (OTP). To comply with the restrictions on flavored vape, store operators had a short window of roughly 30 days to remove product from shelves, he says.
“It’s extremely difficult to put together a plan or a strategy for compliance that didn’t have a strong economic impact on your bottom line,” Knudson says. “Everybody’s feeling the hurt from that enforcement action.”
For Kole Olinger, category manager for Jacksons Food Stores, Meridian, Idaho, the hardest part has been the confusion and uncertainty around the changes. “It was a whirlwind, and all we wanted was clarity and an even playing field,” he says. “We’re in a good spot now in that most of the dust is settled and we’re hoping to have stability … and less of a knee-jerk reaction [from regulators].”
Center of Revenue
Peter Lippe, vice president of purchasing for Westlake, Texas-based wholesale distributor Core-Mark, says the regulatory changes target a category that has always been the center of c-store revenue. A 41-year veteran of the industry, Lippe remembers when cigarettes were $2.50 a carton vs. $50 today. “The cigarette category continues to decline, although we have seen significant growth in alternative categories like vape and modern oral the last few years,” Lippe says of tobacco, which still represents 68% of sales dollars at c-stores in the Core-Mark supply chain.
Total c-store sales for the tobacco category rose by 2.7% in 2019 to $72.2 billion, according to IRI. However, cigarette volumes for the 52 weeks ending Dec. 29, 2019, fell 4.3%.
The category has had momentary bright spots, Lippe says. For a while, cigars and moist snuff offered promise, although sales have since flattened. In 2019, cigar unit volume fell 1.3%, with chewing tobacco and snuff also falling 1.6%, IRI reports.
In the past few years, vaping had gained traction, even showing signs of recovery when the FDA initially targeted flavored products in late 2018. Customers appeared content to shift from an array of flavors to the remaining options of mint, menthol and tobacco. IRI reported a 59.1% increase in unit sales of electronic smoking devices in 2019.
Then last fall, San Francisco-based Juul Labs bowed to public pressure and FDA scrutiny and took its mint-flavored pods off the market. “That was 70% of Juul’s business,” Lippe says. “Juul is optimistic that it will come back, but I’m not sure I share that optimism.”
Amid that uncertainty, retailers such as Peter Frattarola, senior category manager for The Wills Group, La Plata, Md., which operates the Dash In c-store chain, must constantly hunt for alternative products to fill the emerging gaps.
Speaking on a panel at the Tobacco Plus Expo (TPE) in Las Vegas earlier this year, Frattarola was enthusiastic about the growing category of nicotine pouches. He has had product in his stores since July 2019, and sales have sometimes doubled month to month. He started with the Velo product from Winston-Salem, N.C.-based R.J. Reynolds and is now rolling out Zyn pouches from Swedish Match, Richmond, Va.
“It’s extremely difficult to put together a plan or a strategy for compliance that didn’t have a strong economic impact on your bottom line.”
“It has opened [customers’] minds to a less risky product [than combustibles], and it’s also the ability to customize, have a variance of milligrams, a nicotine percentage,” Frattarola said. “Millennials want to customize.”
Both Olinger and Knudsen are also interested in the emerging subcategory.
“The nicotine pool is a huge segment … that’s not necessarily shrinking,” Olinger says. “It’s the method of delivery [that’s changing].” For Olinger, developing a game plan means “figuring out market dynamics, customer demographics, what works here, what works there … what’s going to be successful and marrying that with your store strategy.”
Knudsen is excited to see new products entering the market, and he recalls a time when innovation meant a new flavor of cigarillo or expansion of an existing cigarette line. But he strategizes carefully.
“You try to protect yourself from inventory liability,” Knudsen says, referring to issues of product returns and reimbursements. “Know who you’re dealing with. Some [suppliers] can be trusted; others you may need to rethink.”
During another education session at TPE, Thomas Briant, executive director of Lakeville, Minn.-based tobacco retailing association NATO, spoke in detail about several of the key regulatory requirements that the federal government will expect from c-store operators.
“Federal law supersedes state law,” Briant said, pointing out that some states, for instance, may have buying age exemptions for military personnel. The new federal minimum means those exemptions no longer apply.
“So switch as soon as possible, even if you have to go back to manually carding while you wait to upgrade your [point-of-sale registers],” he said.
The FDA realizes that retailers will require a “ramp-up”; for an undisclosed time period, the agency will use only operatives who are 18 or younger to monitor stores. In the meantime, retailers need to educate employees and customers, update their POS systems and order new signage, Briant said.
In terms of the FDA’s new Jan. 2 final guidance on pulling flavored vape cartridges from shelves, those products had to be taken off the market as of Feb. 6. The agency understands, however, that retailers need time to get product back to manufacturers and distributors, but by that February date, all product should have been packed away and not visible to customers. People must not presume that the products are for sale.
The rule does not apply to disposable e-cigarettes, e-liquids or tobacco- and menthol-flavored cartridges, Briant said.
Virtually all vaping products will have to undergo the FDA’s new-product review process, through which manufacturers must submit premarket tobacco applications (PMTAs) by May 12, 2020, he said. Manufacturers that submit PMTAs can leave their products on the market while the FDA reviews their submissions.
The determination of whether products will come back on the market will depend on the FDA’s consideration of how they will affect youth, said Dimitris Agrafiotis, executive director of the Tennessee Smoke Free Association, Chattanooga, Tenn., during a TPE educational session. Most tobacco products on the market will have to pass through those FDA criteria and health priorities.
“As a retailer, the burden is not on you,” Agrafiotis said. “But if [the product] is perceived to be marketed to youth, don’t have that product.”
In addition to the regulatory changes, the confusion surrounding what caused an outbreak of lung illnesses—first reported by the Centers for Disease Control and Prevention (CDC) in September 2019—has also hurt vaping sales, said Chris Howard, vice president, general counsel and chief compliance officer with E-Alternative Solutions, Darien, Conn., while on the panel with Agrafiotis at TPE.
“In many cases, sales were 60%-70% down,” he says. “When lawmakers, health officials and the media began talking about the outbreak of lung illnesses last September and then tying it to the longer-term issue of young people starting to vape, the larger question of the safety of the devices came into play.”
The FDA and the CDC have made stronger ties to the lung illnesses with vitamin E acetate as a thickening agent, among other factors, Howard said, so consumer concerns appear to be waning. However, the industry still did take a hit. “It takes time to build back trust,” he said.
Considering how quickly regulations can change, retailers have a hard time staying informed, Howard said. “You don’t get a hotline phone call,” he said. “Even when there’s an association, news can often come too late.”
For Knudson of Circle K, the recent regulatory changes happened quickly. “I’ve been at this for 37 years and I’ve never seen any legislative motion go through this swiftly,” he says. “Historically, you at least have six months to sell through your inventory and do system upgrades.”
Within Circle K, stores have multiple point-of-sale platforms, which complicates the age-verification process. And the issue of product returns becomes difficult when manufacturers and distributors are still negotiating terms.
Many of those issues could have been handled if lawmakers had consulted with people within the tobacco supply chain, he says. That’s why he advises other retailers to be in constant communication with their state and local lawmakers.
“You have to have that dialogue,” he says.