Vapor Sales an Open Question After ‘One-Two’ Punch of Regulation

CHICAGO — What the state of vaping will be in the next year is the million-dollar question—and one convenience-store retailers may not have the answer too soon.

There are ways tobacco category managers can prepare, though, for vaping’s future, even without knowing yet what flavors and products will be legal.

Experts in the field who spoke to CSP said that while the category may never go back to the skyrocketing growth it once saw—before the THC vape crisis of 2019, before Tobacco 21, premarket tobacco product application (PMTA) process and the U.S. Food and Drug Administration’s (FDA’s) flavor ban—that doesn’t mean vape products aren’t a valuable segment.

“It is going to be a growth category in the tobacco industry, but not nearly as strongly as it has in the past,” Don Burke, senior vice president of Pittsburgh-based Management Science Associates (MSA), said. “But still a growth category, so still a category that retailers need to pay attention to.”

Interviews for this story, which ran in CSP’s May issue, were conducted before the FDA announced it was prioritizing efforts to ban menthol cigarettes and flavored cigars. It’s unclear yet how, if at all, this may affect the agency’s authorization of flavored vapor products through the PMTA process.

Click through to see what c-store retailers had to say on the future of vaping …

Chris Dillard, tobacco category manager at Spinx c-stores in South Carolina, said Tobacco 21 and the FDA’s flavor ban had a huge effect on his e-cigarette set.

On Dec. 20, 2019, then-President Donald Trump signed legislation to amend the Federal Food, Drug and Cosmetic Act, raising the federal minimum age for the purchase of tobacco products, including vape, from 18 to 21 years.

Then in January 2020, the FDA announced that it would be barring the sale of most flavored vape products, with the exception of tobacco and menthol, from unauthorized cartridge-based e-cigarettes. Companies that want to legally sell flavored cartridge-based e-cigarettes had to submit a PMTA for the product by Sept. 9, 2020, to be considered by the FDA.

As of press time, the FDA had yet to approve any flavored vapor products through the PMTA process.

Because vaping attracted a younger adult tobacco consumer, the age change and the FDA’s flavor ban was a “one-two punch” to the segment, Dillard said.

And with flavored cartridges out, disposable e-cigarettes started to grow, Burke said.

“While disposables prior to the flavor ban had been declining, since the flavor ban, they have been growing because if a vaping consumer has wanted a flavor the only way they could get it would be to go to disposables, in the conventional classes of trade,” Burke said.

Disposable shipments to c-stores were up more than 96% in the first three quarters of 2020, according to data from MSA tracking wholesale shipments to retail. Cartridge, starter kits and e-liquid shipments all declined in all outlets: c-stores, tobacco outlets, drugstores and dollar stores. Only disposables showed growth, up 45% in all outlets, 97% in c-stores and 235% in tobacco outlets, MSA data shows.

While many c-store retailers have embraced disposable vapor products, Dillard, of Greenville, S.C.-based Spinx, is holding off on most SKUs for now. He carries blu’s disposable products but is waiting for FDA authorization before considering more brands.

“I’m not adding any incremental items to my vapor set at this point. Not until we come out the other end of the PMTA and there’s some kind of clear direction on what’s going to make it, what’s not going to make it,” Dillard said.

The FDA’s Center for Tobacco Products Director Mitch Zeller gave an update on the PMTA process in February. At that time, the FDA had only published a list of what exemption from substantial equivalence requests (EX REQ) and substantial equivalence (SE) reports were submitted by the Sept. 9, 2020, deadline.

Most e-cigarette and vapor products, though, were submitted through the PMTA pathway, and the FDA said it will need more time to sort through those applications due to the volume. As of press time, the FDA said it had processed PMTAs for more than 4.8 million products from 230 companies.

The THC vaping crisis is another ongoing threat to the category, Burke said. On Sept. 6, 2019, the U.S. Centers for Disease Control and Prevention (CDC) held a press conference to discuss an outbreak of dozens of lung illnesses in 33 states, including at least three deaths, tied to the use of vaping devices. The CDC later said the outbreak was likely tied to illicit sources of product made with tetrahydrocannabinol (THC), the psychoactive element in marijuana, and a compound called vitamin E acetate. By then, e-cigarette companies like Juul had already suspended the sale of their flavored vaping pods.

“Retailers are seeing the impact from that continuing today,” Burke said. “It typically takes that a year or two to sort of abate. That happened in fourth quarter 2019; [by the] fourth quarter 2020 I do think we started to see a little bit of improvement in the vaping category at that time, and it will continue to improve.”

Changes to the Prevent All Cigarette Trafficking (PACT) Act could also affect retailer’s vape sections moving forward, said Sharan Kalva, COO of C-Store Master, a Huntsville, Ala.-based distributor that works with nearly 3,000 c-stores.

As part of the COVID-19 relief bill signed into law on Dec. 27, Congress amended the PACT Act with the Preventing Online Sales of E-Cigarettes to Children Act. This modifies the definition of cigarette in the PACT Act to include electronic nicotine delivery systems (ENDS), or vape products.

The change requires online cigarette sellers to verify the age of customers for all purchase, an adult with an ID to be present for delivery, shipping package labels to show they contain tobacco and that they comply with all state and local tobacco tax requirements.

Kalva said retailers need to make sure their distributors have a plan to still provide c-stores with their vapor products, even with the PACT Act changes, which could affect vapor supply.

“The PACT Act impacts every single player in the market, every manufacturer, every distributor out there,” he said. “There is a significant impact.”

Despite the challenges vape products face, category managers are finding ways to have a profitable category.

Distributor Kalva said tobacco category managers need to take a close look at the e-cigarette brands they’re working with and ask important questions.

“How far is the brand going toward meeting the commitments set forth by the FDA? Are they going above and beyond what the FDA is recommending? How proactive is the company in trying to mitigate any regulatory risk? Or how well are they compliant to the FDA rules?” Kalva said.

It’s important to not carry too many vapor brands, he said. Pick a few and try to grow them. That reduces complexity and allows retailers to make sure they’re compliant with the brands they carry. 

Kalva also recommends c-stores carry disposable products because that’s what’s growing.

“We try smaller brands and see which are the up-and-coming brands. We, as a smaller, more agile company, can experiment with it. As long as they have the right credentials and legal and they're compliant, we will try them out,” Kalva said.

Burke agrees, saying that retailers should have a reasonable level of disposable SKUs that appeal to vapor customers who are still seeking flavors. While cartridges aren’t doing as well, c-stores still need to maintain their cartridge offer, too, since that is really the bulk of the vapor business.

For Dillard of Spinx, the key is being flexible. He invested heavily in his backbar shelving and fixtures so he could change things up if needed. For example, he has vape shelves that could be adjusted from 3 feet long to 1 foot, and vice versa.

“We’ve got ways to be flexible in a very quick manner with the physical merchandising on our backbar,” Dillard said. “So that’s something we have done to try and get ready for what may come out on the other side with vapor.”

He’s also investing in products outside of vape, like modern oral nicotine (MON), which includes nicotine pouch brands like Zyn, Velo, Rogue and On. Margins for the pouches are good, Dillard said, and he’s seeing complementary usage in the category, so it’s not hurting another segment.

“That’s where I see a lot of my incremental growth coming from in 2021,” Dillard said.

Dillard’s e-cigarette category is still showing volume and share growth, but he said it has slowed down a bit in the first quarter of 2021, he said. He thinks it will continue to grow, but at a slower pace.

One thing helping e-cigarettes is good promotions and brand extensions. Dillard pointed to R.J. Reynolds Vapor Vuse products. The company recently expanded its selection to include four-pod packs nationally in Vuse Alto Golden Tobacco 5% and Alto Menthol 5%.

“The quad pack is just dominating out of the gate for Alto,” Dillard said.

He also said c-store promotions for vape tend to give discounts on the vapor devices, but he is investing specifically in vapor pods, placing promotions on those to grow sales.

Even with some success in the category, Dillard is playing it safe when it comes to vaping. He said he had to pay restocking fees when he had to pull flavored cartridges last year, and that’s something he’s not willing to risk losing money on again.

In what sounds like a wise strategy, he summarized, “We’re poised to take advantage of whatever comes out of the other side.”