The cigarette category is not one that retailers often associate with big changes. Cigarettes have long been a leading driver of in-store sales … while simultaneously experiencing predictable usage declines over multiple decades (excluding years in which a historic pandemic occurs).

2023 was no exception. Cigarette sales per-store-per-month declined 4.2% in 2023 according to the NACS State of the Industry (SOI) Report® of 2023 Data, dropping from $47,233 in 2022 to $45,232. Cigarettes remained the top driver of in-store sales (excluding foodservice) but dropped from 22.11% of in-store sales in 2022 to 20.29% in 2023.

“As expected, cigarettes show a slow and steady decline,” said Emma Tainter, research analyst for NACS. “Smoking rates continue to decline, and excise rates continue to increase.”

What was different in 2023 was just how close the next-biggest driver of in-store sales got to cigarettes. In 2023, packaged beverage sales grew over 8% to account for almost 18% of in-store sales.

When presenting the category breakdowns at the 2024 State of the Industry Summit, Annie Gauthier, CFO and co-CEO of Y-Not Stop and St. Romain Oil, said it was only a matter of time before pack bev overtakes cigarettes for the top spot.

“There are more options than ever before,” Gauthier said, pointing to innovations in vapor and smokeless as putting additional pressure on the cigarette category.

Here’s a look at how this top category is performing, what’s driving the change and what’s in store for 2025.

Cigarettes by the Segments

In 2023, cigarettes accounted for 20.29% of in-store sales and 7.96% of in-store margins. NACS SOI data breaks the category into five subcategories: premium, sub-generic/private label, branded discount, fourth tier and imported.

The premium, sub-generic/private label and branded discount subcategories all saw declines in both sales and margins: premium cigarette sales declined by 3.96% with margins basically flat (up 0.48 points), sub-generic/private label sales declined 5.8% with margins down 1.69 points and branded discount sales declined 9.5% with margins down 0.82 points.

Imported and fourth tier cigarettes both experienced growth: imported sales were up 4.56% with margins up 0.34 points, while fourth tier sales grew 35.98% with gross profit margins nearly doubling (up 91.55% from 2022).

“The importance of the convenience channel within our industry and to the adult nicotine consumer cannot be overstated.”

But context is important. Imported cigarettes and fourth tier cigarettes made up just 2.2% of cigarette category sales in 2023.

“The premium subcategory still accounted for 75.6% of cigarette sales and steers the overall category data,” Tainter said. “The small increases in two of the smaller subcategories were not enough to reverse the decline in premium cigarettes, which drove the overall category to decrease in both sales and profit.”

Relief at the Pump, Not the Backbar

Though lower-priced options like fourth tier cigarettes remain a small part of the pie, retailers, manufacturers and analysts of the category all pegged downtrading to lower-cost options as a continuing phenomenon. This is happening even as inflationary pressures are lessening, most notably with fuel prices going down. As of late October, AAA had the national average fuel price at $3.16 per gallon, down over 10% from October 2023.

Bonnie Herzog, managing director of consumer staples stocks at Goldman Sachs, saw this play out in the Q3 “Nicotine Nuggets” survey of tobacco retailers.

“Despite easing prices at the pump, most respondents (88%) aren’t seeing a material improvement in purchase behavior with downtrading continuing,” Herzog said in a research note.

With premium cigarettes accounting for over 75% of category sales and fourth tier having just 1.5% in 2023, it’s clear consumers aren’t just downtrading to lower-priced cigarettes. Forty percent of respondents in the Goldman Sachs survey reported smokers trading down to fourth tier options, but 24% listed e-cigarettes and 17% listed nicotine pouches.

“We continue to see buying patterns and behaviors across our categories consistent with that of a price-sensitive consumer,” said Cory McDade, senior director of trade marketing development for Reynolds American Inc. “Within these trends, we see adult nicotine consumers switching from their normal brands and instead opting for products at a lower price point. Of note is the migration of customers to new category products including vapor, snus and modern oral products.”

Herzog pointed to continued manufacturer price increases as another reason for downtrading: 66% of “Nicotine Nuggets” survey respondents said that manufacturers have less pricing power with consumers (up from 54% in the Q2 2024 fielding of the survey).

“The premium subcategory still accounted for 75.6% of cigarette sales and steers the overall category data.”

“Retailers reiterated that manufacturers have less pricing power today, despite seeing ongoing price increases,” Herzog said. “Much of this stems from increased competition from alternative forms, which seems to be the main driver diluting pricing power of cigarette manufacturers. This appears to have also continued to fuel the shift to fourth tier options in the market, applying pressure to the premium cigarette category.”

Though fourth tier remains a small piece, retailers surveyed by Herzog expressed confidence that this shift will continue. Respondents said they plan to increase space for deep discount cigarette brands by 1% next year while decreasing space for premium cigarettes by 1.6%.

“One respondent [said] that once consumers shift to fourth tier, shifting back up to premium brands is unlikely—even when gas prices ease,” Herzog said.

Regional Shifts

Besides downtrading, cigarette sales declined more dramatically in certain regions in 2023, and the category was overtaken by packaged beverages in both the Southeast and South Central regions.

The Southeast region averaged in-store cigarette sales of $43,407 per store, per month in 2022, dropping to $41,365 in 2023 (a 4.94% decrease). Packaged beverage sales averaged $46,708 per store, per month in the Southeast region last year.

Cigarettes fared even worse in the South Central region, averaging $28,346 monthly sales in 2022 and declining by 12.8% to $24,718 in 2023. It marked the second year in a row that packaged beverage was the top sales driver for the South Central region (bringing in an average of $34,449 monthly sales per store).

On paper, it may seem surprising that the Southeast and South Central regions were the first to see cigarettes drop below packaged beverage. The states and cities in these areas aren’t known for the kind of tough tax and regulatory actions that further drive up prices or ban the sale of certain products altogether. But these regulations don’t happen in a vacuum: they are passed on a city-by-city or state-by-state basis, allowing many smokers to simply go to another nearby area to purchase their product of choice.

“As seen with Maryland’s recent tax increase, they’ve experienced substantial volume drop versus their baseline, and the surrounding states are significantly outperforming,” said McDade.

“Once consumers shift to fourth tier, shifting back up to premium brands is unlikely—even when gas prices ease.”

Indeed, the Northeast and Midwest regions are home to some of the strictest tobacco states (including Massachusetts and Minnesota)—yet those regions have reported lower declines than the national average. Last year, SOI data showed Northeast cigarette sales declined by 1.98% and Midwest sales declined 2.92%.

“Cigarettes remained the top-performing category in the Northeast and Midwest regions, but sales still decreased slightly year over year,” said Tainter.

Cigarettes Remain Key

Though sales will almost certainly continue to shift and decline, cigarettes remain a very important category for the convenience channel—in part because of how important the convenience channel is to the cigarette category.

“Year after year, the convenience channel remains the number one location where adult consumers purchase our products,” said McDade. “The importance of the convenience channel within our industry and to the adult nicotine consumer cannot be overstated.”

Management Science Associates (MSA) data shows 84.1% of nicotine sold in the United States is sold in the convenience channel. Every other channel, including drug, dollar and tobacco shops, fights over the remaining 15.9%.

Despite the many changes and challenges, cigarettes still hold the number one spot as the top selling in-store category as of today.

“It is true that sales are declining,” said Tainter. “But [cigarettes] remain the number one seller in in-store merchandise.”

At least for now.