Other tobacco products (OTP) has long been a bright spot for convenience, a category that enjoys consistent growth and great profits for retailers. The category accounted for 7.85% of in-store sales in 2019 (a one-point increase vs. 2018) but 6.78% of gross margin (an increase of 0.97 point vs. 2018), according to NACS State of the Industry (SOI) data.

So what happened to this steady player when the pandemic hit?

Turns out, not much.

“The category overall has grown again in comparison to last year,” said Jayme Gough, NACS research manager, with steady growth from month to month for the past three years, according to NACS CSX data. “That seems to be the trend for the category in general,” she said.

While sales, margins and growth held steady, one thing that did shift was what sold. The OTP category is broken out into smokeless, cigars, electronic cigarettes, papers, pipe, pipe/cigarette tobacco and “other” tobacco. For a long time, the category was almost exclusively driven by smokeless and cigars. Then in 2018, e-cigarettes overtook cigars are the second-biggest sales driver. “Other” tobacco has also begun to grow its share, largely due to the popularity of modern oral nicotine pouches like Zyn.

“In 2018, the top three—smokeless, cigars, e-cigs—were about 90% of category sales,” Gough said. “In 2019, it went down to 86%. I expect it will go down further as innovation in the category, currently representing ‘other,’ continues to grow.”

The combination of growth, innovation and profits has been a net positive for the industry, according to NACS Vice President of Research Lori Buss Stillman. “Retailers prefer more OTP sales because they deliver a better margin and a higher ring,” she said. “The two together are always a beautiful thing.”

Here’s a look at what’s happening in the four key segments of OTP.

Smokeless Holds Strong

Smokeless, which includes chew and dip, remains the largest segment of OTP sales, accounting for 36.8% in 2019, per SOI data. Sales were up 8.7%, and gross profits grew 9.4% between 2018 and 2019.

Those trends continued in 2020: NACS CSX data showed smokeless sales were up 7.4% in the first quarter of 2020 and 8.7% in the second quarter, compared with the first two quarters of 2019. “It looks really consistent in terms of the monthly sales,” Gough said.

What about the stock-ups other categories saw during the initial COVID-19 shutdowns in the spring of 2020?

“There was a little bit of a spike in March, so a smidge of pantry-loading,” said Gough. “Then steady sales throughout the rest of the year. It’s a product where you can use it for a little bit longer, so you don’t have to pantry-load as much, depending on your usage.”

Retailers prefer more OTP sales because they deliver a better margin and a higher ring. The two together are always a beautiful thing.

E-Cigs Inch Closer

When the e-cigarette segment—which includes all e-cigarettes, cartridges, vaporizers and e-liquids—overtook cigars in 2018, it accounted for 24.7% of OTP sales. In 2019, that percentage climbed to 31%.

“They’ve really started to edge their way toward smokeless,” Gough said. “It’s unclear how that will pan out in the next couple of years because of everything going on with e-cigs.”

That “everything going on” includes the increased scrutiny the category experienced nationally in 2019, flavor bans at the state and federal level, the U.S. Food and Drug Administration’s premarket tobacco product application deadline (September 2020) and a natural slowdown after years of triple-digit sales growth. Somewhat reflected in the 2020 numbers: In the first quarter, e-cig sales were up 16.1% compared with 2019. By the second quarter, that dropped to just 5.3% growth.

“We’re probably seeing something there that’s independent of the pandemic,” Stillman said.

Cigars Enjoy Slight Indulgence Boom

Though cigars continued to lose ground to e-cigarettes in terms of category share—accounting for just 18.4% in 2019, down from 21.5% in 2018—it may be the one OTP segment that did enjoy a bit of a COVID-19 bounce. While first-quarter cigar sales were down 0.4%, second-quarter sales grew by 11.8%.

“Cigars had something interesting going on,” Gough said. ”There was a spike, which is not typical of what the yearly curve looks like.”

While it’s impossible to know exactly why this happened, Gough believes it may have been a combination of nicer weather and the same indulgence trends seen in beer, wine and spirits.

“People like to smoke a cigar out on their porches, and they’re home a lot more,” she said.

We’re not going to fully understand what OTP flavor bans and other regulations really mean for a while.

“Other” Gets Modern

In terms of segments, “other” OTP is a bit of a mixed bag, encompassing anything not falling into the other six segments. Yet with every passing year, it’s becoming a more important part of the category, accounting for 10.1% of OTP sales in 2019.

“There’s really been some steady growth in the ‘other’ category,” Gough said. “In 2017 it wasn’t even on the radar, now it’s on the radar a little bit. It’s still a small part of the category, but there’s definitely growth.”

Gough specifically credited a subsegment dubbed by the industry as modern oral nicotine pouches. Unlike traditional smokeless products, these pouches do not require the users to spit or chew; instead nicotine is absorbed through a pouch traditionally placed under the lip. Zyn, from Swedish Match, has been the leader—but Reynolds, Altria and Kretek all now offer modern oral nicotine pouches.

Nielsen data show the modern oral category is experiencing triple-digit growth, with dollar sales up 179.7% and unit sales up 238.6% year-over-year in the 12 weeks ended August 8, 2020. Comparatively, the full “other” segment enjoyed more modest gains. NACS CSX data showed the segment up 10.1% in first-quarter 2020 and 8.5% in the second quarter.

Looking Forward

In terms of what to watch for in 2021, Gough and Stillman agreed: Regulations remain the biggest challenge for OTP. “Cigarettes have been the key highlight of regulations for so many years, and I think that spotlight has shifted onto OTP with e-cigs,” Gough said, adding that nicotine pouches may soon garner legislative attention. “You just never know what’s going to be the next target.”

Stillman described 2020 as something of a pause when it came to feeling the ultimate impact of the 2019 e-cigarette and flavor bans. “There was a collision of increased demand because other outlets that sell tobacco were closed at the same time a lot of restrictions went into place,” she said. “It delayed the ultimate impact on the category. We’re not going to fully understand what OTP flavor bans and other regulations really mean for a while.”

The reason for optimism? OTP has long faced regulatory challenges, and has long performed strongly in spite of them.

“OTP is typically a steady workhorse,” Gough said. “The past few years have seen continual growth, good margins and innovation keeping it fresh.”

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.