Tobacco: A Year in Review
CHICAGO — The year 2020 saw many changes—good and bad—for the tobacco category. As the COVID-19 pandemic forced people to work from home, more opportunities for smoking arose, driving sales. At the same time, however, fewer people were on the road, requiring fewer stops at convenience stores.
The category also faced regulatory hurdles. The U.S. Food and Drug Administration (FDA) banned most flavors of e-cigarettes, local municipalities initiated their own tobacco flavor bans and the premarket tobacco application (PMTA) deadline passed, leaving questions in its path.
Here’s a look at this year’s significant episodes in the tobacco and nicotine category ...
FDA Bans Flavored Cartridges
Two days into the new year, the FDA barred most flavors, including fruit and mint, from unauthorized cartridge-based e-cigarettes until products go through the PMTA process. Companies had 30 days following the Jan. 2 announcement to comply or risk enforcement from the FDA, the agency said at the time.
The move aimed to balance public health concerns with the needs of adult cigarette smokers trying to cut back, the FDA said. The rule only applied to cartridge-based electronic nicotine-delivery systems (ENDS) involving a cartridge or pod that holds liquid that is aerosolized when the product is used, a product type typically sold in convenience stores. Products could come back on the market if authorized through the PMTA process, which required tobacco and vape manufacturers to submit an application for FDA review of deemed tobacco products introduced into the market between Feb. 15, 2007, and Aug. 8, 2016.
This ban followed a tumultuous fall for flavored vaping products, as 2019 saw an outbreak of lung illnesses and deaths related to vaping and the use of vitamin E acetate, sometimes used as a thickening agent in products containing tetrahydrocannabinol (THC), products seldom sold in c-stores. The Centers for Disease Control and Prevention (CDC) in January sent out a news release citing a report published in the New England Journal of Medicine that called the outbreak of lung-illnesses that began in summer 2019 and peaked in September 2019 “distinct” from the ongoing epidemic of e-cigarette product use among U.S. youth.
COVID-19 Shakes Up Category
With more people working from home amid the COVID-19 pandemic, there were more opportunities for people to use tobacco. The nicotine category is expected to grow across all markets in 2020, according to Don Burke, senior vice president of Management Science Associates Inc., Pittsburgh.
An informal survey of CSP readers conducted in late March, when panic buying and stay-at-home orders started, showed tobacco was the No. 1 answer when retailers were asked which categories were dramatically up in dollar sales.
Murphy USA Inc., El Dorado, Ark., said during its second-quarter 2020 earnings call that strong tobacco performance led to higher overall merchandise margins than expected previously.
“Our multipack and carton cigarette offers have become a destination trip for consumers, and second-quarter results compare strongly against the already impressive high-single-digit contribution gains we put up last year,” President and CEO Andrew Clyde said, noting Murphy USA’s tobacco business is entirely uncorrelated with fuel traffic, which has been down amid the pandemic.
Aside from cigarettes, vapor and alternative nicotine products are also delivering a substantial margin uplift, Clyde said.
There were some drawbacks to the category due to the coronavirus, however.
Many retailers have said that although demand is high for cigars, supply is low. Some cigarette manufactures, like Altria Group Distribution Co., the marketer of Marlboro cigarettes, temporarily suspended operations due to an employee testing positive for COVID-19.
One congressman also asked the FDA to temporarily clear the market of all e-cigarettes for the duration of the pandemic in response to a study that suggested COVID-19 is associated with youth use of e-cigarettes and dual use of e-cigarettes and cigarettes.
“If we reduce the number of vapers in America, we will reduce the unnecessary stress we are putting on our testing system,” U.S. Rep. Raja Krishnamoorthi (D-Ill.) said. “People should not have to wait weeks for COVID-19 test results. Removing the risk posed by vaping will help.”
Health Warning Delayed
In May, a Texas court postponed the date new cigarette health warnings will be required by the FDA.
Initially on March 17, the FDA issued the rule requiring 11 new health warnings on cigarette packs, cartons and ads, consisting of text warning statements and graphic color images.
Winston-Salem, N.J.-based R.J. Reynolds Tobacco Co., along with several other manufacturers and five retailers and the FDA jointly asked the court on May 6 for a 120-day extension of the effective date of the warnings because of the disruptive effects of the COVID-19 outbreak on manufacturers, retailers and the FDA.
Cigarette manufacturers then had until Oct. 16, 2021, to comply with the new rule, which has been challenged by several lawsuits. The new warnings previously were required before June 18, 2021.
In December, however, that deadline was pushed back again to Jan. 14, 2022.
PMTA Deadline Extended, Passes
The long-awaited PMTA deadline passed on Sept. 9, 2020, after a court extended the deadline from May 12 due to the COVID-19 crisis.
In mid-October, the FDA received applications for about 2,000 deemed products, of which about 40% had been resolved, said Mitch Zeller, director of the FDA’s Center for Tobacco Products (CTP), Silver Spring, Md. The administration said it would release a public list of the deemed new tobacco products that were subject to the Sept. 9 deadline, were on the market as of Aug. 8, 2016, and for which a premarket application was submitted by the deadline.
Before making that list, however, the FDA needs to ensure the publishing of any information complies with federal disclosure laws and regulations, officials said. The agency gave no timeline on when the list would be released, leaving tobacco retailers unsure which products might need to be removed from store shelves.
The FDA and NACS recommend retailers check with their tobacco suppliers and ask for proof that they’ve filed their PMTAs on time.
Many manufacturers chose to publicly announce what they have submitted. San Francisco-based Juul Labs, for example, entered the substantive review phase in August. This means the FDA will evaluate whether marketing the Juul System is appropriate for the protection of public health.
The submission includes scientific evidence for the Juul Device and Juulpods in Virginia Tobacco and Menthol flavors at nicotine concentrations of 5% and 3%, and information on measures to address underage use of Juul products.
Flavor Bans and Tobacco Sales
The year 2020 was full of flavored tobacco sales bans, spreading from Massachusetts to California.
Massachusetts’ flavored tobacco sales ban went into effect on June 1, and retailers saw negative effects on sales in the first few weeks. VERC Enterprises, Duxbury, Mass., for example, reported cigarette and other tobacco product (OTP) sales were down about 12% at its Massachusetts stores compared to the previous year.
Then on Aug. 28, California Gov. Gavin Newsom signed a similar bill into law in the West Coast state. Retailers, like David Tooley, who owns 13 Circle K-branded stores in Northern California and one in Reno, Nev., said the ban is “devastating” to c-stores.
“It’s going to have a huge ripple at the beginning of the year when it goes into effect,” Tooley told CSP.
Voters could overturn the law via referendum. Opponents, organized by the California Coalition for Fairness, received enough signatures to qualify the referendum, they announced in December. A lawsuit filed by several tobacco companies is also seeking to overturn the law.
Chicago is facing a similar challenge. The Chicago City Council voted in September to ban the sale of flavored vaping products. Retailer, Jim Bayci, a 7-Eleven franchisee owner and president of the 7-Eleven Midwest Franchise Owners Association, doesn’t see a way to recover the lost sales.
“It’s really tough to recover. You can’t sell your way out of situation like that. There’s not enough through-put to get those customers through the door and [buy] other things,” Bayci said.
Meanwhile, Florida Gov. Ron DeSantis vetoed a proposed bill in his state that would have banned the sale of flavored e-cigarette products and raised the state’s legal age to buy tobacco to 21 (a moot point since federal law already did this).
It’s clear that bans already in place, though, are hurting retail sales of tobacco/nicotine products. While tobacco sales remain strong amid the COVID-19 pandemic, flavor bans have taken a toll, Goldman Sachs Managing Director Bonnie Herzog said in an analysis of a third-quarter retailer survey the New York-based company conducted. Retailers estimated the quarter grew 4.3% in the third quarter despite the bans, and expect continued growth into 2021, Herzog said.
MON Sales Skyrocket
Nicotine pouches appear to be the next big thing in the tobacco category. Part of the Modern Oral Nicotine (MON) segment, significant brands include Swedish Match’s Zyn, Altria’s On, Swisher’s Rogue, R.J. Reynolds Vapor Co.’s Velo and Kretek International’s Dryft.
Oral nicotine pouches were up 26.3% in dollar sales year-over-year for the 52-week period ending on Oct. 3, according to a report from Goldman Sachs.
The subcategory is still small in volume and relatively new, which can account for some of its strong growth numbers.
From Juul Labs making a “significant global reduction in force” to Swisher restructuring its business lines, tobacco companies have faced many internal changes over the past year.
- Juul Labs, San Francisco, announced in 2020 it was evaluating its resources to further secure its business for the long-term and to end the era of the combustible cigarette. Part of that includes making a “significant global reduction in force,” the company wrote on its website. The move will “allow Juul Labs to continue to invest in science and evidence capabilities, access control technologies and future products in core markets that make up a vast majority of our business,” Juul said.
- Swisher International changed its name to Swisher amid a restructuring of business lines and the launch of a new platform for trade partners. The Jacksonville, Fla.-based company said the name change embraces the company’s heritage while signaling a future of broader, modern and more diverse offerings for other tobacco products (OTP).
- Swedish Match AB’s U.S. Division hired Tom Hayes as its new president in August. He took the job of outgoing CEO Rich Flaherty, who retired in October. Hayes has worked at the Richmond, Va.-based company since 2006 and was promoted to group CFO in 2018.
- Altria Group, Richmond, Va., announced in April its CEO Howard Willard was retiring about a month after he took a leave of absence to recover from the coronavirus. Billy Gifford was elected to replace him. Gifford has worked in numerous senior leadership roles during his more than 25-year career at Altria, including most recently vice chairman and CFO.
Crack Down on Unauthorized Disposables
About 1.8 million fewer U.S. youth are using e-cigarettes now compared to 2019, according to data from the 2020 National Youth Tobacco Survey.
Among those current e-cigarette users, 38.9% of high school students and 20% of middle school students reported using e-cigarettes on 20 or more of the past 30 days, while 22.5% of high school users and 9.4% of middle school users reported daily use, the survey found. The survey was self-administered to middle and high school students between Jan. 16 and March 16, 2020.
As a result, flavored disposable ENDS will be an enforcement priority for the FDA moving forward, Commissioner of Food and Drugs Stephen Hahn said.
The survey showed an “alarming uptick” in use of disposable e-cigarettes by youth, Hahn said. In 2020, 26.5% of high school e-cigarette users are using disposable e-cigarettes, up from 2.4% in 2019.
The FDA already started its enforcement of disposable e-cigarette companies that it said are appealing to youths. On July 20, the FDA issued warning letters to 10 companies, including Cool Clouds Distribution Inc., dba Puff Bar, to remove flavored disposable e-cigarettes and youth-appealing e-liquid products from the market because they do not have the required premarket authorization.