OTP may not have the same sales power as cigarettes, its tobacco counterpart, but it is still a top sales driver at 7.41% of in-store sales in 2021, indicate data from the NACS State of the Industry (SOI) Report, which ranked OTP as the fifth-largest inside sales contributor.

But savvy retailers know the value of the other part of the tobacco set.

“While cigarettes tend to have smaller margins, margins for OTP are generally much better,” said Jayme Gough, NACS research manager. “They increased year over year from 29.96% to 30.22% in 2021. Gross profit increased 8.1% year over year to a total of $4,369 per store, per month in 2021.”

OTP has also shown resilience. While both cigarettes and OTP sales grew between 2019 and 2020, CSX monthly data show OTP has continued to grow in 2022, with all months of the first three quarters of 2022 showing higher sales than 2021. “Unlike cigarettes, OTP sales have just continued to grow post-pandemic,” Gough said.

Still, the category remains susceptible to the same pressures facing cigarettes.

“Like all consumers, OTP consumers are impacted by rising prices and inflation,” said Matt Domingo, senior director of external relations at R.J. Reynolds Tobacco Company. “These forces can shape purchasing behaviors and decisions, as consumers become more budget sensitive.”

We are seeing demand for products with higher nicotine content."

“We are seeing demand for products with higher nicotine content,” added Kraig Knudsen, tobacco category manager for the Circle K Heartland Division. “Decreased consumption frequency could explain this.”

Regulatory pressures are also impacting how—and where—OTP consumers shop. Lonnie McQuirter, director of operations at 36 Lyn Refuel Station, has seen this firsthand in Minneapolis, where convenience retailers cannot sell flavored tobacco products, but adult-only retailers can.

“It used to be if you carried any kind of cigar or dip, the customer would buy it,” he said. “We’re starting to see customer preference take precedent: If you don’t carry what they want, they will go someplace else.”

This stressor varies greatly depending on a retailers’ region. Ray Johnson, operations manager at Speedee Mart, is allowed to sell flavored products at his Nevada stores and anticipated a big market for shoppers from neighboring California now that flavors are banned.

“We’re waiting to see how much those visitors are going to try to bring home when they visit Las Vegas,” he said.

Here’s a look at the economic, regulatory and regional trends happening within the fourth-largest driver of in-store gross margins.

SMOKELESS: MODERN ORAL OFFSETS MST DECLINES

Smokeless remained the largest OTP subcategory in terms of sales in 2021. The segment accounted for 38.7% of category sales (down 1.1%) and held gross margins of 25.36%, up 0.96 point from the previous year per NACS SOI data.

NielsenIQ painted a generally positive picture for 2022, with all-channel smokeless dollar sales up 4.9% and volumes up 2.2% for a total of $8.5 billion in sales year over year for the 52 weeks ended December 3, 2022.

Like every other category, the best thing that a retailer can do is carry the products that the consumers want—give them options."

For several years in a row, the success of the smokeless segment has been attributed to the popularity of modern oral nicotine products, and 2022 was no exception.

“We observed continued growth from the nicotine pouch segment that was offset by declining MST volumes,” said Altria spokesperson Jennifer Kelly. “Like adult smokers, we believe macroeconomic conditions have impacted adult oral tobacco consumers,” Kelly said.

“We can’t sell Grizzly Wintergreen or Skoal Wintergreen, so our sales are skewed a little,” added McQuirter.

“Grizzly Wintergreen used to be our No. 1 seller—now we can’t sell Grizzly Wintergreen, [but] we’ve seen some growth in alternatives like ZYN.”

The top-selling modern oral brands continued to see growth last year: NielsenIQ had ZYN up 41.7% in dollar sales and 39.3% in unit sales; on! up 84.7% and 114.2%, respectively; Rogue up 77.1% and 52.5%, respectively; and Velo up 31.1% but down 11.2% in units.

Knudsen saw this in his stores, reporting that modern oral pouches have performed well over the past three years and continue to grow each month. “I believe that this trend will continue, at least in the short term,” he said. “The products are affordable and can be consumed very discreetly.”

To succeed in this space, retailers and manufacturers agree it’s as simple as following the best practices used throughout the tobacco set. “Like every other category, the best thing that a retailer can do is carry the products that the consumers want—give them options,” Knudsen said. “You then must be in stock and priced appropriately.”

CIGARS: IMPORTANT YET IN DANGER

While SOI data showed the cigar subcategory continues to lose ground on its share of convenience OTP sales (22.2% of sales in 2021, down 1.3 points from 2020), cigars had the third largest margin in the OTP category at 33.76%, which increased from 32.80% in 2020.

December NielsenIQ data reported mostly flat sales: The cigar segment netted $3.99 billion, with dollar sales up 0.5% and volumes down 1% year over year.

“Where cigar dollar volume is smaller than that of MST, vapor or MON, it is still an important subcategory,” Knudsen said. “In certain geographies, such as the Southeast, cigars play an even more important role.”

McQuirter is one such retailer where regionality (and regulations) makes cigars a key category.

“Cigars are definitely selling more than smokeless after the flavor ban,” he said. “We’re getting some requests on little cigars, and Backwoods cigars are our top-selling OTP SKU. It’s interesting.”

Where cigar dollar volume is smaller than that of MST, vapor or MON, it is still an important subcategory."

Unfortunately, more retailers may soon find themselves in this “interesting” place without flavors: The U.S. Food and Drug Administration (FDA) has proposed a rule to ban all flavored cigar sales. Such a move would certainly upend the cigar category. The Cigar Association of America estimates flavored cigars make up 37-47% of the market and net $4 to $5 billion in annual retail sales.

“An FDA regulatory ban will force these products out of the legal, regulated market and into illegal markets with no regulatory oversight or underage prevention measures,” said Kelly of Altria. “The economic impact of this rule will be severe: Legal businesses losing out to illegal sellers, employees losing jobs and government losing hundreds of millions in excise tax revenues.”

The FDA is reviewing thousands of comments on the proposal, with no timetable on when (or if) it will move forward with the ban. But it has retailers like Johnson—who says flavors make up over 50% of Speedee Mart’s cigar sales—more than a little concerned.

“[FDA] scares you: What’s their longterm game?” he said. “Generally, when the government does something, it takes the average person 24 hours to figure out how to beat it.”

ELECTRONIC CIGARETTES: SLOWLY REBUILDING

For a subcategory that’s now the second-largest driver of OTP sales (31.6% in 2021, down 0.3 point from 2021, according to SOI 2021 data) and the second-largest gross margin contributor for OTP subcategories (34.17%), electronic cigarettes have been a source of stress and frustration for many retailers in the wake of changes on a seemingly daily basis of what is—and isn’t—legal to sell according to the FDA.

In 2022 alone, the agency required retailers to remove any synthetic nicotine products from manufacturers that had not submitted premarket tobacco product applications (PMTAs) for them by May 14, issued a marketing denial order that would ban the sale of all JUUL products (then quickly backtracked on that ban, for now) and issued plenty of decisions on e-cig product applications but has yet to approve a single flavored product.

Still, the subcategory started to normalize and grow amid the regulatory chaos in 2022.

“E-cigarettes, which have had a bit of a rough road, saw increased sales on a monthly basis compared to 2021,” said Gough of NACS.

Whatever takes off in smoke shops is what I switch to. It changes constantly.”

NielsenIQ data for the 52 weeks ended December 3, 2022, had total rechargeable e-cig sales at $5.54 billion (dollar sales up 7.9% and units down 5.5%) and disposable e-cig sales at $1.65 billion (dollar sales up 12.8% and units down 6.6%).

Some retailers have seen even bigger growth, albeit with small players. While Johnson says his e-cig business from “the majors” is down between 10-30%, the category overall is “out of sight in sales. It’s all the ones you’ve never heard of,” he said, adding that he uses a local supplier that also distributes to smoke and vape shops. “Whatever takes off in smoke shops is what I switch to. It changes constantly.”

NielsenIQ data support this: Of the top-10 disposable e-cig brands, only three had over a 1% market share as of December 2022—none of which clocked in at more than 4%.

Instead of brands, retailers say flavors, sizes and puff counts are driving consumer preference.

“The variety of flavors and size options of disposable units are much greater than what was previously available,” Knudsen said.

For vapor—and all of OTP—major manufacturers agree that it is important retailers remember that variety is key, even under regulatory challenges. “We continue to believe that no single product is likely to satisfy all adult smokers,” said Kelly.

“It is critical to provide your customers with access to non-combustible products,” said Domingo of Reynolds. “By providing a wide variety of products, you will be assisting your customers with choices to meet their nicotine preferences now and in the future.”