For more than a decade, recapping the cigarette category has meant trying to put a positive spin on declining sales and an increasingly difficult regulatory environment. The positive spin was desperately needed given how crucial the category is to convenience. Cigarettes remain the single greatest contributor to in-store sales—30.48% in 2019 per NACS State of the Industry (SOI) data.

Yet that same year, SOI data showed cigarette sales declined by 1.9% (largely offset by price increases), and gross profits were down 5.9%, compared with 2018. This is more or less in line with what happens every year with cigarettes. Chuck Maggelet, chief adventure guide for Maverik Inc., described the category as “a bit of a melting ice cube for us” at the 2020 SOI Summit Virtual Experience.

Then came COVID-19.

Like virtually every category, cigarettes had a bit of spike in March as state and local governments issued shutdown measures and consumers stocked up for an indefinite quarantine. Though April looked a little more normal (as smokers presumably smoked through that inventory), sales were back up in May. And June. And even as summer came to a close.

“Our CSX data show cigarette sales up about 4.4% through the end of August,” said NACS Research Manager Jayme Gough. “By comparison, cigarette sales were down 0.6% from January to August 2019.”

Here’s a look at what is happening with cigarettes in 2020—and whether or not it will continue into 2021.

The Whys

When it comes to the success that the cigarette category has enjoyed during the COVID-19 pandemic, retailers and suppliers pointed to a wide variety of factors, including:

• Work From Home: Gough pointed out that the millions of office workers who switched to home offices no longer faced limitations of where or when they could smoke. “If you’re already a cigarette smoker and can now smoke throughout the day without having to go outside, you’re probably going to do that,” she said.
• More Money to Spend (for Some): Billy Gifford, CEO of Altria Group Inc., added that working from home—and limitations on businesses like restaurants, movie theaters and concerts—also has helped the category. “Tobacco consumers reduced purchases from non-tobacco discretionary items like gas, transit and entertainment, contributing to an increase in available discretionary income,” Gifford said in a company earnings call.
• The Essential Designation: Ray Johnson, operations manager for Speedee Mart Inc., saw huge gains when convenience stores were deemed essential—smoke shops and liquor stores had to temporarily close. “Our customers we kept, and all the customers from those closed businesses we gained,” he said.
• An In-Person Purchase: The legal reality that cigarettes must be purchased at brick-and-mortar stores—versus services like InstaCart and Drizly—also benefitted the industry. “While online shopping and delivery has exploded, adult smokers need to come into your store,” said Renee Duszynski, vice president of sales for cigarette manufacturer JTI USA.

But perhaps the biggest reason the category has fared well in a tough year is the fact that while people may be pantry-loading, cigarettes are an item that can be consumed a lot faster, especially in times of stress (similar to beer and wine or sweets and snacks).

“The more you have, the more you smoke,” Johnson said. “It’s not like stocking up on Tide or toilet paper.”

While online shopping and delivery has exploded, adult smokers need to come into your store.

The Whats

In terms of what pack sizes and subcategories are driving this growth, the simple answer is everything.

Though NACS data do not track pack sizes, Nielsen showed carton sales were up $959 million, and single packs were up $1.2 billion as of August 2020 (unit sales also were up in both cases). Some retailers saw even more impressive growth in cartons. Johnson said Speedee Mart’s carton sales doubled. “That was a huge jump for us.”

Anna Bettencourt, senior category manager for VERC Enterprises, operates stores in the heavily regulated Massachusetts market, as well as in the more regulatory-friendly (and Massachusetts border state) New Hampshire. Her numbers have been better in New Hampshire; however, cartons were even up slightly in Massachusetts at the start of COVID-19—despite high taxes and a menthol ban that went into effect in June. “It’s really about people wanting to make fewer trips out,” she said.

The news was equally good when looking at the types of cigarettes being purchased in the pandemic. CSX data for January to August 2020 show sales in virtually every subcategory were up (only fourth tier and imports were down; however those subcategories account for less than 1% of convenience cigarette sales). Premium cigarettes were up 4.5%, branded discount were up 3.9% and sub-generic-private label were up 7.5% during the eight-month period.

“We have seen a great deal of consumers trading down to deep discount brands,” said Jessica Fratarcangelo, marketing director for cigarette maker Cheyenne. “It coincides with other time periods where consumers have traded down in a recession.”

Besides economic anxiety, director of operations at 36 Lyn Refuel Station Lonnie McQuirter credits growth in discount anxieties over being able to find some of the more niche brands. Shoppers “have the concern of not being able to get their smoke of choice,” he said. “When they see them in, they buy out the inventory.”

Gifford of Altria said the increase in the lower tiered segment may actually predate COVID-19 as the year started off with an increase in smokers older than age 50 who returned to combustibles after trying e-vapor. “This demographic has a greater tendency to purchase discount brands than younger adult smokers, which increased discount segment share,” he said.

The continued economic uncertainty and growing number of jobless claims could further benefit discount options. “Consumers have to make choices,” said Fratarcangelo. “Purchasing a discount brand that still delivers the taste they’re looking for can be a good alternative.”

Regulations Stall…for Now

Besides new consumers and growing sales, the lockdowns offered another net positive for the cigarette category: Every level of government was busy dealing with the pandemic, pausing the new cigarette taxes, flavor bans and other regulations that the industry has come to expect.

At the federal level, the U.S. Food and Drug Administration (FDA) extended the premarket tobacco product application (PMTA) deadline for electronic cigarettes and vapor products from May to September and postponed the effective rule date of its graphic warning label rule to October 16, 2021. The COVID-19 pandemic was cited as the sole reason for both moves. “There’s a lot of stuff being pushed back,” Gough said.

I think we’ve won over quite a bit of customers, especially female customers. Smoke shops are not female-friendly; they aren’t 24 hours; they aren’t convenient. We are.

At the state and local level, retailers like Bettencourt had to deal with regulations that were enacted pre-pandemic but went into effect after—namely Massachusetts’s mint and menthol flavor ban, which took effect in June. “In the month of June, Massachusetts lost over $8 million in tax revenue,” she said, adding that cigarette sales in her New Hampshire stores have been up 198% compared with last year. “All they’ve done is send people over the border and dumped millions of dollars into another state’s pocket.”

That said, even regulation-happy regions like the Northeast have been quiet this year. “I haven’t seen anything pop up in the towns where I operate so far,” said Bettencourt.

“Everyone seems to have forgotten about cigarettes, vape and all that,” Johnson added. “Not even up for discussion, that just went away.”

But 2021 is looming, with many states facing massive budget deficits.

Surprising few in the industry, cigarettes are already being targeted to make up some of those deficits. In August, New Jersey Governor Phil Murphy unveiled a budget plan that would take the state’s excise tax from $2.70 to $4.35 per pack (a $1.65 increase). Though New Jersey lawmakers ultimately nixed the tax, retailers and suppliers expect other cash-strapped governments will move forward with similar plans.

“If they haven’t done it yet, I’m sure it’s going to be a thing soon,” Bettencourt said.

Can It Last?

There’s little doubt around the fact that cigarette taxes and other regulations will likely return to normal in 2021. The bigger question for the industry is whether the growth the category has seen this year will continue—or is it just a COVID-19–related blip?

“What we saw before the pandemic was that cigarette smoking was on the decline in the long term,” said Gough of NACS. “It’s hard to say what things will look like in the next 12 months, two years. That’s the million-dollar question.”

In the more near term, Altria was confident enough to adjust its projected cigarette volume declines from the 4% to 6% predicted at the start of 2020 (in line with previous years’ declines) to 2% to 3%. “The cigarette category has demonstrated resilience,” Gifford said of the change.

Johnson was more optimistic about long-term gains in his stores because of the new customer base they’ve found. It’s not just people smoking more while working from home, but more people coming into his stores during the shutdown phase … people who continue to come into his stores now that the restrictions have lifted.

“I think we’ve won over quite a bit of customers, especially female customers,” he said. “Smoke shops are not female-friendly; they aren’t 24 hours; they aren’t convenient. We are.”

Whether or not cigarettes continue this upward trajectory into 2021 and beyond, there are ways retailers can—and should—leverage the current situation, however long it lasts.

“Make your store a destination for all products including pantry items, fresh foods and cleaning supplies,” Duszynski of JTI said. “Adult smokers will make your store a one-stop shop when purchasing [cigarettes], driving your market basket sales.”

The Power of CSX Data

CSX, the engine behind category metrics and NACS State of the Industry data, provides current and customizable tools for financial and operational reporting and analysis in the convenience industry. Retailers can measure their company by any of the myriad metrics generated via our live database. Contact Chris Rapanick at (703) 518–4253 or [email protected] for a complimentary executive walkthough.