CHICAGO — Typically, when talking about behind-the-counter segment performance, the headline is about how a smaller, newer segment grew … and how much the key segment of cigarettes declined. But 2020 was not a typical year: Virtually every segment, including cigarettes, saw dollar sales increase. According to Nielsen data ending Dec. 26, total tobacco dollar sales in the convenience channel were up 4.2% compared to 2019. How?
“People were consuming more nicotine overall,” says Don Burke, senior vice president of Management Science Associates (MSA), Pittsburgh. “In 2020, total U.S. nicotine consumption in the U.S. was up 3.2%. So clearly the pandemic had an impact on the overall total nicotine delivery category.”
So what happens to those consumption patterns after the pandemic?
“The pandemic has upended consumer purchasing behaviors, some more temporary than others,” says Renee Duszynski, vice president of sales for Teaneck, NJ-based JTI USA. “The most interesting part will be to understand how routines have drastically changed during the pandemic, what will hold and how retailers prepare for the future.”
4.2%: Total growth in dollar sales for the tobacco category in c-stores in 2020, according to Nielsen
According to some, the best opportunity for the future lies in a bevvy of new, noncombustible alternative products.
“Thirty-three percent of tobacco consumers age 21 to 29 are exclusive noncombustible product users, the highest percentage of exclusive use across age cohorts,” says George Parman, director of communications for Altria Group Distributing Co., Richmond, Va.
Products like modern oral nicotine/nicotine pouches and other discreet, noncombustible options managed to grow in a year when consumers faced fewer limits on when they could smoke. That bodes well for the future of behind the counter.
“I do think the overall trend to modern oral products—and some other alternatives within the nicotine delivery category—will somewhat abate the decline in nicotine consumption in the U.S. and will, longer-term, benefit the category,” Burke says.
Here’s a look at what’s going on in all the major behind-the-counter segments ...
Cigarettes: Strength at the top and bottom
Overall, 2020 was an impressive year for the all-important cigarette segment: Nielsen data shows c-store dollar sales were up 3.3% vs. 2019, while units were down 3%. MSA data, which tracks shipments to retail, shows units declining in the first half of the year but up in the second half. “This is a really good performance because cigarettes typically decline 3%-5% range each year,” Burke says. Not surprisingly, the premium cigarette subsegment—which accounts for the vast majority of cigarette sales—drove much of the market, up 1.8% annually as of Q3 2020. But it was actually super-premium cigarettes (up 5%) and deep discount cigarettes (up 10.6%) that saw the largest jump.
“It would appear some consumers dropped down from the discount category to the deep discount category,” Burke says, as the discount subsegment dropped 5.4%.
A February Goldman Sachs tobacco retailer survey showed 75% of respondents were seeing this kind of downtrading toward the end of 2020, crediting economic stress for the shift.
Mark Schueller, director of marketing for Raleigh, N.C.-based U.S. Tobacco Cooperative, says the downtrading phenomenon is not unique to the pandemic, but has been happening for years. He specifically cites premium and midtier cigarette price increases that happen multiple times a year and increasing options in deep discount.
“Retailers sometimes think one size fits all,” he says. “However, a thorough evaluation of their present cigarette programs may provide some startling revelations in regards to meeting their customer needs and wants in addition to their company’s goals.”
Duszynski acknowledges that the “premium tier still commands a large segment of the category” but encourages retailers to capitalize on growing interest in super-value brands by giving the segment secured space on the backbar and supporting it with signage. “Now’s the time for spring cleaning the fixture,” she says, “moving out SKUs that won’t move for ones that will.”
Looking to 2021
Because 2020 was a relatively positive year for cigarettes as a whole, many retailers are dubious for 2021, comparatively.
“We saw a very positive year for cigarettes, which we expect will continue at least a little bit into 2021, until we get out of this greater pandemic situation,” Burke says.
Respondents to the Q4 2020 Goldman Sachs tobacco retailer survey largely anticipated that, as the country returns to a new normal post-pandemic, so will cigarette declines. Bonnie Herzog, managing director at Goldman Sachs, outlined factors called out by the survey respondents:
- Tough comps in 2021 vs. 2020’s strong performance.
- “Back-to-normal” behavior meaning fewer smoking opportunities vs. working from home.
- Shifting to alternative nicotine options: Respondents predicted 20% of the cigarette declines will be due to consumers moving to alternatives like modern oral products.
“(Some respondents) expect cigarette volume levels to return closer to historical decline rates as vaccinations allow people to return to work while the category also deals with potential unfavorable regulatory measures, including local flavor bans, higher taxes and minimum price requirements, which could pressure volumes further,” Herzog wrote in a research note.
But all is not lost for the category that continues to be the greatest contributor to in-store sales (more than 30%, per NACS State of the Industry data): Some retailers believe that pandemic purchase behaviors may be more permanent.
“Roughly 20% of (tobacco retailers surveyed) expect cigarette volumes to continue to grow in 2021,” Herzog said. “Many expect consumption habits developed over the pandemic to prove sticky, even as people return to an office setting.”
Time will tell.
E-cigarettes: Adapting and rebounding
Unlike cigarettes, electronic cigarettes had a rough go in 2020.
“For the first time since 2015, we saw a decline in the overall vapor category,” says Burke. “The category was down approximately 4% in 2020.”
The declines came from factors almost entirely independent of the pandemic: namely, the focus on youth vaping and THC-vaping lung disease in late 2019 and the FDA action in early 2020 that banned all flavored cartridge products.
“We saw cartridges decline by 12% in 2020,” Burke says. “That was for many years the strongest growth subcategory within vapor.”
“A lot of flavored pod products took the brunt of that beating, and the availability of those products evaporated in most cases,” says Matt Domingo, senior director of external relations at Reynolds American Inc., Winston-Salem, N.C. “Consumers had to make decisions: either go to vapor products that were still available or revert back to something they were using before.”
100%+: Growth of disposable vape pens in c-stores in 2020, according to MSA
As it turns out, many did choose to go to vapor products that were still available: namely disposable e-cigarettes, which were not subject to the FDA’s flavor ban. MSA data shows disposables grew by 70% across all channels in 2020 and enjoyed over 100% growth within convenience.
Much of that growth came from new players within vapor.
“To take advantage of the flavor ban for the pod-type systems, we did see that many new manufacturers did enter the disposable market with flavored products,” Burke says. “In terms of major players, we did not see many that reentered.”
Though 100%-plus growth is impressive, disposables still account for only 14% of the vapor category, according to Nielsen data. And the boom may be plateauing, especially as the FDA begins cracking down on the disposable market. Last July, the agency issued 10 warning letters instructing manufacturers like Puff Bar to remove flavored disposable products from the market because they did not have proper premarket approval.
“While the refill market recovers, the much smaller e-cig disposable market has begun to contract as the FDA go after non-compliant market participants,” Herzog wrote in a February research note, adding that disposable sales were down 2.9% for the two weeks ending Feb. 20, 2021. During that same time period, the overall e-cig category grew by 19%, which Herzog credits to refillable products—approximately 82% of category sales.
Tobacco retail survey data by Goldman Sachs suggests that retailers are largely positive that the category will continue to recover—albeit perhaps not to the double-digit growth it has typically enjoyed. Herzog noted that respondents expect e-cig volumes to grow by 5.9% in 2021 (vs. just 2.7% growth predicted in the October 2020 survey).
“One respondent noted that e-cigs were their strongest category in 2020, both in terms of dollar sales and volume,” Herzog said. “That said, while most respondents expect e-cig momentum to continue, some noted that they have reduced shelf space on e-cigs to improve merchandising of oral nicotine products, which continue to demonstrate significant growth.”
Falling somewhere in between the cigarette and e-cigarette category is the new heat-not-burn segment, which to date in the U.S. consists of New York-based Philip Morris International’s IQOS portfolio (which is distributed by Altria Group distribution Co.). The IQOS system heats the proprietary Marlboro HeatSticks instead of burning them like traditional cigarettes. Unlike electronic cigarettes, the HeatSticks use compressed tobacco, and not a nicotine solution.
While Philip Morris first launched IQOS in select Asian markets more than five years ago, the technology only first showed up in the U.S. after the FDA granted market authorization in April 2019, with the first IQOS store opening in Atlanta that October. Since then, Altria Group has expanded into Richmond, Va., and Charlotte, N.C., though the rollout has admittedly been hampered by the pandemic. IQOS stores in Atlanta and Richmond temporarily closed last March, and the Charlotte launch was delayed because of stay-at-home orders.
During a September presentation for the National Association of Tobacco Outlets, Herzog said the pandemic and the fact that the FDA had not yet approved the latest IQOS 3 products had likely slowed down the progress of heat-not-burn growth.
“It has been more of a slow rollout and that has a lot to do with the fact that the technology that has been approved in the U.S. is older technology of IQOS,” she said. For context, Nielsen showed HeatStick unit sales in the Atlanta, Richmond and Charlotte markets were down 0.4% in the two weeks ending Feb. 20, 2021, flat over the previous four weeks, and up 2.2% over the previous 12.
But there are lots of reasons for optimism around IQOS, including:
- As of July 2020, the FDA granted permission to market IQOS as a modified risk tobacco product.
- As of December 2020, the FDA approved IQOS 3, which offers technological improvements, including longer battery life, to the original.
- Altria and its subsidiary Philip Morris USA is expanding IQOS availability greatly in 2021: IQOS and HeatSticks will be sold statewide in Georgia, Virginia, North Carolina and South Carolina by April and expand into the next metro market (Northern Virginia) in Q2 with plans for an additional three metro markets in the second half of the year.
“PM USA is maximizing its first-mover advantage with IQOS, responsibly expanding its availability and the availability of Marlboro HeatSticks to densely populated metro areas, and then expanding outwards as the user base grows,” says Altria’s Parman.
However, perhaps more than accessibility, it’s the ability to market IQOS as a lower-risk alternative to cigarettes that will be key to the success of this new category.
“Based on our research, approximately 40% of smokers would be interested in switching to a product based on an FDA-authorized reduced-exposure claim,” Parman says. “We believe smokers’ understanding of the harm-reduction benefits of noncombustible products relative to cigarettes will be an important factor in their decision to switch.”
Retailers have been a little more muted. As of September, 17% expected to have IQOS in their stores by the end of the year, 17% expected to have it by Q1 2021 and more than half didn’t know when they’d be offering IQOS or HeatSticks.
Herzog is still optimistic, predicting that by 2025, IQOS will account for as much as 12.2% of Altria’s volumes. “It’s probably still a little too early, but I expect to hear more behind IQOS as we move out of this pandemic,” Herzog said.
Cigars: Go big or …
In many ways, the cigar category was not hugely affected by the pandemic, at least when it comes to what’s selling and what’s not.
“In the overall cigar category, there’s a real dichotomy: Cigarillos, what we call large cigars, continued very strong growth in 2020 and were up about 13%; little filtered cigars declined by almost 10%,” says Burke. “Those trends are very similar to what we’ve been seeing over the past several years.”
In the convenience channel specifically, large cigars were up 16% last year, reaching an all-time high of 9 billion units, according to MSA data.
“Cigarillos are a bright spot for this category,” Burke says. “They have been for several years.” Which isn’t to say cigarillos weren’t at all impacted by the pandemic. Many retailers reported production delays or access problems with cigarillos specifically last year.
16%: Sales increase of large cigars in c-stores in 2020, according to MSA
“There were production issues in 2020 for several of the cigarillo manufacturers, but despite that, the growth continued,” says Burke.
As those issues resolved, large cigars/cigarillos grew further. MSA data shows large-cigar units within convenience were up more than 25% year over year as of Feb. 27, 2021.
“It is widely understood that these growth trends will normalize at some point in time as purchase patterns more readily resemble prior years,” says Saber of Swisher. “However, volume levels are still expected to increase in the near future.”
As to which large cigars are selling, Teller of Swedish Match called out rolled-leaf cigars as a hot spot. Nielsen shows rolled-leaf volumes are up 43% over the past six months. Teller says this is good news for the c-store industry, as the most popular rolled-leaf products come in five-packs, a higher-priced and more profitable option than traditional, prepriced homogenized tobacco leaf (HTL) cigarillos.
“This is a years-long consumer shift away from HTL cigars that is only picking up more steam,” he says. “The category has been dominated by prepriced products for years, so it is great for the trade to see huge growth coming from rolled-leaf products.”
Saber agrees that moving away from prepriced products will be an important shift for the future of the industry, especially as costs continue to rise for both retailers and suppliers.
“Prepriced within the large-cigar category has been a challenge for retailers and manufacturers alike for over a decade,” she says. “It is estimated in the near future, more and more organizations will need to move away from the prepriced model and migrate toward a nonpriced model.”
Smokeless: Strong and modern
Before getting into the smokeless category overall, it’s important to address the increasing gray area about one of the most exciting product categories within behind the counter. While everyone can agree that modern oral products like ZYN, on! and Rogue are all the rage, there’s little agreement on where these products belong. MSA, Goldman Sachs and Altria all categorize them as smokeless, or “overall oral,” products. Others, including Nielsen, categorize them as “alternative tobacco,” putting them in the same company as e-cigarettes. There’s even some disagreement on what the segment is called, with Joe Teller of Swedish Match noting it really should be nicotine pouches, a segment that has been around for over four years and is not “so modern anymore.”
For the sake of this report, modern oral nicotine products will be included with smokeless and largely referred to as modern oral nicotine, or MON for short.
In looking at smokeless as a whole, which includes moist, snus and MON, MSA shows the category was up 6.5% in 2020, specifically:
- Moist products sales up approximately 1%.
- Snus down 2.5%.
- Modern oral up more than 162%.
Burke of MSA says it’s important to remember that modern oral in total sales is roughly the same size as the snus segment, so much smaller than the moist segment. But still, the segment is “driving that 6.5% growth in overall oral nicotine category. It’s the No. 1 growing category within tobacco/nicotine.”
Nielsen data shows convenience modern oral unit sales grew by 90% in the six months ending Feb. 6, 2021, with dollar sales up more than 100%.
“The OTP category is still growing (unit volume was up 5% the last six months), with nicotine pouches accounting for 73% of that total category unit growth,” says Teller, director of category management for Richmond, Va.-based Swedish Match, which manufacturers ZYN.
162%: Growth in sales of modern oral nicotine products in 2020, according to MSA
In terms of what’s driving consumers to switch to modern oral products like ZYN, on!, Velo and Rogue, most agree that these products offer three key points of differentiation:
- They’re spitless and thus more discreet than moist smokeless.
- They’re noncombustible and so more discreet and a perceived health advantage to cigarettes.
- They come in flavors, unlike many e-cigarettes, cigarettes or other smokeless options.
“As adult consumers look for nicotine products that fit their unique needs, it’s no surprise that MON products are in the spotlight,” says Karen Saber, vice president of business analytics and strategic sales innovation at Swisher International, Jacksonville, Fla. Swisher manufacturers Rogue MON. “The unique proposition is that these products come in a variety of formats, shapes, sizes and strengths so the adult consumer can choose the product that best meets their busy lifestyle.”
But where is that growth coming from? Other smokeless products are probably the answer.
“The watchout would be the traditional smokeless category: One’s much cleaner and ultimately more discreet,” says Domingo of Reynolds, maker of Velo. “We’ve seen a lot of interaction and movement between those two categories.” Parman of on! maker Altria adds that of the approximately 1 million nicotine-pouch consumers, most are coming from dippers and smokers. That means the growth in MON isn’t coming just at the expense of other smokeless products.
“Female smokers have been more engaged with oral nicotine pouches than with moist smokeless,” Parman says. “(Women) make up approximately 25% of oral nicotine pouch consumers as opposed to 5% (for moist).”
“Another thing to keep in mind in modern oral is that it offers flavors,” Burke says. “So some of the vape consumers that were strong flavor consumers have moved to modern oral because they could still get a flavor they may have particularly liked.”
With modern oral drawing consumers from virtually all parts of the back bar, many industry watchers believe merchandising is key to driving awareness of the new space.
“It’s very helpful to merchandise all nicotine pouch products together in a dedicated section, instead of the brands being scattered throughout the tobacco backbar,” says Teller. “Since the category is still new, the products should be grouped together so that consumers can see the full breadth of flavors and nicotine strengths available.”
The category merchandising could become all the more important as modern oral expands beyond nicotine pouches.
“Although currently the majority of products reside in pouch format, tablets, gums and lozenges are gaining notable traction,” says Saber.
A growing modern segment doesn’t mean retailers should sleep on other smokeless products. Nielsen data shows traditional smokeless tobacco products netted approximately $7.36 billion sales in convenience during the 52 weeks ending Feb. 27, 2021. That’s nearly twice the sales of all the tobacco alternatives Nielsen tracks, which includes modern oral and e-cigarettes.
Burke says that while moist smokeless had enjoyed a 3%-10% growth rate between 2006 and 2016, the category was mostly flat from 2017 to 2019.
“As more noncombustible products came on the marketplace and gave more options to the moist consumer, we did see that category begin to decelerate, though it remains a very strong category,” Burke says.
Then came COVID-19.
“In 2020, we saw a 1% increase in the category,” Burke says. “Probably due to the pandemic situation and consumers being able to use the product more often at home.” As for what happens post-pandemic, Burke predicts moist smokeless will remain strong, but flat as in years past. He adds, however, that the industry is only just scratching the surface with nicotine pouches and other innovation. It’s important to remember that modern oral’s triple-digit growth numbers came during a year when some of the segment’s key attributes—discreet and smoke-free—were less important because consumers were largely working from home.
“As consumers adjust to a noncombustible method for nicotine consumption, it’s highly likely that the modern oral category will continue to grow more,” Burke says.