Downtrading, illicit market activity in e-cigarettes and flavor bans are several factors weakening consumer demand for tobacco products, according to Goldman Sachs' latest Nicotine Nuggets survey.
“The outlook remains cautious as retailers & wholesalers expressed concerns about consumers shifting away from cigs or leaving the category as higher costs, regulations and more competition in smoke-free options drive consumers to downtrade or exit the category,” said Bonnie Herzog, a managing director at the New York-based company.
The fourth-quarter 2023 survey represents about 67,000 retail locations across the United States. According to the survey, retailers and wholesalers also noted that decline in cigarette volume accelerated in the fourth quarter—down 6.6% year-over-year versus 6.2% in the third quarter.
“Retailers point to illicit disposable vaping products and modern oral as the categories taking the most share from traditional cigs,” the survey said.
Most retailers said the illicit market activity in e-cigarettes is a growing concern and negatively affecting cigarette volumes, adding that most retailers are “pessimistic that FDA enforcement will improve in the near term” Herzog said.
Retailers and manufacturers also said it has now become essential to participate in the fourth-tier cigarette category as consumers are looking for lower retail value products.
A few retailers in the survey even mention the possibility that "downtrading will dip into the fifth-tier cig market,” Herzog said.
Respondents also expressed concern about the proliferation of black-market activity in flavored e-cigarettes.
Overall, 83% of retailers believe the situation is getting worse with the impact felt strongest in urban areas and in states with the strictest flavor bans.
“Retailers don’t believe the situation will change without more enforcement and are broadly pessimistic given the ubiquity of the offering, tracking/enforcement difficulty and relatively light penalties reducing deterrence,” Herzog said.
The expected publication date for final rules on banning menthol cigarettes and flavored cigars, which has been pushed to March, has also contributed to shifts in this category and consumer spending. Retailers who do operate stores in areas with flavor bans report very significant negative impacts with some reporting 30%-50% declines in nicotine sales.
“The looming decision by the FDA on a federal menthol ban on cigs has also led many retailers to take a wait-and-see approach on carrying gray market vapor products, which are higher margin and more affordable for consumers,” Herzog said.
On a positive note, retailers and wholesalers remain optimistic about the smokeless nicotine segment and said volumes increased 10.2% year-over-year in the fourth quarter. Respondents said Zyn grew 28% in volume in the fourth quarter and On grew 21% for the quarter. Velo, from R.J. Reynolds Vapor Co. also grew 3% in the fourth quarter.
Want to learn more about the tobacco category? Check out our event CRU in Nashville Feb. 28-March 1, 2024. Sponsors can gain 15 one-to-one meetings with qualified retailers.
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