Driven mainly by smokeless tobacco and electronic cigarette growth, sales of other tobacco products (OTP) at convenience stores stayed strong in 2018. “According to NACS State of the Industry data, OTP was the No. 4 contributor in 2018 to both in-store sales and in-store gross margin, making it a critical category for retailers,” said Jayme Gough, analyst for NACS.

Recent legislative efforts on the local, state and federal levels to ban flavored vape products have certainly had an impact on the category, which had seen exponential growth in e-cigarettes for the past several years. The category’s overall rosy numbers can in part be attributed to innovations, such as tobacco heating systems and nicotine pouches, etc. “With these new forms of nicotine consumption, customer interest in the category remains high,” she said. “Many customers have begun dual nicotine usage, where they are supplementing their primary tobacco consumption with a secondary nicotine ingestion method.”

Tobacco firms still view convenience stores as ideal places to launch products and connect with customers. “Convenience stores currently represent the vast majority of all tobacco/nicotine sales, which includes moist, snus, vapor and modern oral,” said Matt Domingo, senior director of external relations for RAI Trade Marketing Services Company. “I would say that convenience stores are definitely helping to shape the OTP industry.”

Positive Sales

According to NACS State of the Industry (SOI) data for 2018, OTP gross margins averaged 28.8%—roughly twice that of cigarettes, making it a profitable category for retailers. The category generated 6.7% of in-store sales and 5.7% of in-store gross margin for 2018.

Tobacco has long been a sales generator for convenience retailers. OTP sales at Pitstop Convenience Stores, a chain of 20 locations headquartered in Macomb, Michigan, are “certainly at an all-time high, igniting a battle for space and market share among the brands,” said Mahero Jawad, operations and development manager.

However, not every retailer has the same optimistic outtake on the category. Sales of OTP at Little George’s Convenience Store in Westminster, Maryland, are “flat to a little bit down,” according to owner Mickey Bajaj. He attributed the decline to the recent opening of a major c-store chain down the road from his store. “We compete in the category on price, but our foot traffic is down at the moment,” he said.

The category is “hit or miss” at Sonny’s Convenience Store in Ladson, South Carolina. “This particular location doesn’t do as well for OTP, but I think the category sells better at other area convenience stores,” a Sonny’s clerk said.

In 2018, sales of e-cigarettes climbed 147.8% year-over-year.

Vaping Profits

Despite the legislative movement to tighten access to e-cigarettes, the subcategory grew to the second-leading contributor to sales in 2018, according to NACS SOI data. “E-cigs passed cigars as the No. 2 sales contributor within other tobacco products, which shows continued growth for retailers, despite those challenges,” Gough said.

In 2018, sales of e-cigarettes climbed 147.8% year-over-year, up $20,220 per store, according to NACS SOI data. “Vapor products continue to grow both in share and volume and represent the second largest segment behind traditional cigarettes,” said Domingo.

Over at Pitstop, “the unease of regulatory restrictions has spiked immediate demand in vape products,” Jawad said. “Vape sales are probably 70% of OTP for us currently.” He pointed out that a “good chunk” of cigarette smokers have switched to vaping, pushing sales of that subcategory skyward.

However, Little George’s has seen e-cig sales “substantially drop off” after Maryland raised the tobacco buying age to 21 in October 2019. “It definitely impacted our e-cig business,” Bajaj said, adding that he still views the category as a viable one for his store and expects sales to stabilize soon.

The correct SKU assortment is critical to driving sales in this category because the trends change very quickly.

Trending Up

Smokeless tobacco sales remained steady as manufacturers brought new nicotine-delivery products to market. Sales grew 5.5% and gross profit dollars rose 6.8% year-over-year in 2018, according to NACS SOI data. “Strong margins for smokeless tobacco helped these sales increase, with smokeless tobacco the top contributor to OTP sales in 2018,” Gough said. Behind smokeless tobacco and e-cigarettes was the cigar category, which represented 23.7% of category sales in 2018. Cigars remain an important subcategory within other tobacco products and saw increased sales and gross profit dollars per store in 2018.

At Pitstop, customers are snapping up smokeless tobacco products. “Moist is still a thing for us as well,” Jawad added.

RAI Trade Marketing Services sees the snus segment as “trending up this year with plenty of room to grow,” Domingo said. Last year also saw the emergence of a new category—modern oral, which includes tobacco-derived nicotine in a consumable product. “This new segment is thriving as consumers are looking for products they can use anytime/anywhere,” he said.

“We have seen the emergence of nicotine-on-demand products for adult consumers,” Victor Cavanaugh, senior category manager for Swisher International, pointed out. “These products in pouches, tablets, gum and lozenges allow customers to enjoy nicotine where they want, when they want and are generally tobacco-free.”

Merch Power

Even though OTP has to be merchandised behind the counter or register, retailers still should direct focus to the category. “Retailers can drive sales of OTP by taking advantage of manufacturer programs across different segments,” Domingo said. He recommended that retailers have adequate space and a competitive price for the moist and snus categories, while dedicating space on the backbar for an innovative fixture to house vapor and modern oral products. “Impactful retail presence will continue to play a critical role in driving consumer awareness of emerging categories,” he said.

Pitstop is one retailer following that advice—and has seen a sales boost as a result. “We use multipack offerings displayed on countertops as a key selling point,” said Jawad. “We also execute the merchandising options given by suppliers in a personalized format, giving better visibility and space to the best sellers.”

OTP gross margins averaged 28.8%—roughly twice that of cigarettes, making it a profitable category for retailers.

Another key component is tweaking the in-store mix of other tobacco products. “This very valuable retail space needs to go through a formal planning process to produce the profits retailers are looking for. The correct SKU assortment is critical to driving sales in this category because the trends change very quickly,” Cavanaugh said. “Recent years have seen a big push into seasonal items for many manufacturers, and dedicating space on racks to these items is critical.”

Little George’s Bajaj keeps a close eye on the section to make sure he’s stocking what his customers want in OTP. “We try to carry a little bit of everything and bring in customer requests to keep the category fresh,” he said.

Retailers should also use point-of-sale signage and materials to highlight their OTP category. “It is important to draw attention to new or promotional items with appropriate point-of-sale signage,” Cavanaugh said.

Bajaj refreshes the category’s POS materials on a regular basis. “We see this as a growing category, and we’re focused on it, but we only use in-store signage to create attention for it,” he said.

Sonny’s Convenience Stores highlights OTP with signs that hang from the ceiling to give customers a quick look at what brands and products the store carries in a limited space.

A Rosy Future

Despite legislative uncertainty about electronic cigarettes, these suppliers and retailers think the category is bright. “As adult tobacco consumer preferences continue to shift and evolve, the industry will continue to provide them with innovative products that can meet these changing preferences,” said Domingo.

“The future of the OTP category remains strong,” Cavanaugh agreed. “There continues to be innovative steps being made that keep the consumers engaged in order for the category to continue to be a very strong, profit-generation section at retail.”