Though not yet the size of the cigarette category, OTP has continually managed to do something many categories (backbar or not) struggle to do: Post continued growth in sales with steady margins.

The NACS State of the Industry (SOI) Report® of 2023 Data showed the OTP category averaged sales of $16,978 per store, per month and monthly gross profit dollars of $5,007 per-store. That represents a 6.5% increase in sales and a 7.3% increase in gross profit dollars versus 2022, making OTP the third-largest driver of in-store sales (7.5% of total in-store sales) outside of the foodservice categories and the fourth-largest driver of in-store gross margins (5.9% of total in-store margins) excluding foodservice.

The numbers for 2024 are shaping up to be even more impressive: Data presented for the first half of the year from the NACS CSX Benchmarking Database had OTP sales up compared to the first half of 2023.

“Smokeless (including modern oral) and e-cigarettes are likely to continue to dominate the category,” said Emma Tainter, a research analyst for NACS. “OTP sales are highly influenced by those two subcategories, and they are the ones driving the growth.”

Smokeless: Pouch Growth Still in Double Digits

Smokeless remains the largest segment of the OTP category, contributing 37.0% of OTP sales in 2023. It had modest declines last year, with monthly per store sales of $6,297 (down 2.7% year over year) and monthly per store gross profits of $1,490 (down 0.67%). Average margins were 23.66%, slightly below the category average of 29.49%.

But those SOI figures do not include the biggest driver of backbar growth: modern oral nicotine (also known as nicotine pouches). Those fall into the “other tobacco” segment of OTP. In 2023, “other tobacco” saw monthly per store sales grow 63.37% ($2,083) and gross profit per store, per month contribution grow 93.01% (from $318 to $614) with an average gross margin of 29.45%. The growth bumped up the “other” subcategory to 12.3% of OTP sales—meaning the smokeless and “other” subcategories drew nearly half (49.3%) of all OTP sales in 2023.

It’s no surprise that retailers and suppliers alike remain enthusiastic about the potential of pouches.

“We’ve definitely seen the pouch business grow and in a really big way,” said Robert Wade, the category and supply chain manager for ExtraMile Stores. Wade noted that the recent shortages of a leading modern oral product evidenced just how strong the demand for these products have become.

“Modern oral is continuing to grow at a significant rate for a variety of reasons, including flavor and convenience,” said Cory McDade, Reynolds American Inc.’s senior director of trade marketing development. “We expect the segment will continue to grow, eventually reaching the same size as all other smokeless products.”

Brick and mortar retailers have been disproportionately affected by cigar flavor bans.

That’s already come to fruition in parts of the country: The modern oral segment launched primarily in the West Coast, with test markets happening in Denver and other West Coast cities in 2015. Since then, the availability and popularity of products has expanded east. But the West Coast’s pouch market remains more mature: Wade reported that pouches now outsell MST products in his West Coast stores.

“In the East Coast, we still see that traditional MST outsells nicotine pouches,” he said. “The East Coast is still a relatively new market and is developing modern oral.”

Which means, despite double digit growth in 2023, there’s room for modern oral to grow even more in 2024 and beyond.

E-Cigs: Illicit Disposables Cramp the Legal Market

Electronic cigarettes overtook cigars as the second-highest selling OTP segment several years ago and remained the second-most-sold subcategory in 2023—but its percentage of OTP sales continues to decline. SOI data had e-cigarettes at 31.6% of OTP sales in 2022, dropping to 28.1% in 2023. Sales and margins were also down last year: The segment averaged monthly per store sales of $4,764 (down 5.44%) and monthly per store profits of $1,581 (down 9.24%). Gross profit margins remained higher than the OTP average, at 33.18% in 2023.

Retailers don’t think the numbers reflect an actual decline in vaping—but something more harmful.

“One of the biggest things that we’ve seen in recent years is poly-usage,” said Wade, noting that pouches and vapor products benefit most from poly-usage. “The problem is that we don’t capture the full benefit of all the sales because of all the vaping products out there that are technically not legally allowable … but being sold at other retailers.”

Wade is referring to the increasing problem of illicit, flavored, disposable vapor products. Technically, the FDA has banned the sale of any flavored vaping product—including pod/rechargeables, disposables and synthetic nicotine—unless said product has submitted a premarket tobacco product application (PMTA) that’s currently under review by the FDA. Yet the market remains flooded with flavored options, often ordered directly from manufacturers in China.

Sales of these illicit products are not reflected in NACS State of the Industry or CSX data. “Retailers in this channel work hard to be in compliance with the FDA,” Tainter said.

To date, the FDA has only approved four menthol flavored vaping products. Every other e-cigarette product its approved has been tobacco flavored. Chris Howard, executive vice president of external affairs and new product compliance at Swisher, said the growing gray market of flavored disposables has been created by the lack of granted orders for flavored products.

“Consumer choice is obviously limited, but it appears to be made up for by illicit products,” he said.

The situation is not only penalizing manufacturers who have submitted the costly PMTAs, but also retailers who are trying to follow the law.

“We see bleeding in the vapor category because we don’t participate,” Wade said of these illicit flavored products. “Some competitors don’t necessarily view it that way. Because the fines are so small and there’s such little enforcement, the opportunity costs offset the risks.”

Both Howard and McDade noted that the FDA’s efforts to date—which include warning letters, fines, customs seizures and the launch of a multiagency joint task force with the Justice Department—have done little to stop the proliferation of illegal flavored e-cigarettes.

“While the FDA has taken steps, the real issue lies in the lack of robust enforcement,” McDade said. “Reynolds continues to call on regulators to exercise their full authority to intercept and seize these illicit products.”

Cigars: Struggling With Local Bans

Cigars account for 13.9% of OTP category sales. In 2023, same-store sales decreased by 3.98% to $2,365 per month and gross profits were down 5.01% to $796 per month. Cigars, however, had the highest average profit margin of the top three OTP segments: 33.64%.

Though the FDA’s rule to ban characterizing flavors in cigars was put on hold in April of 2024, the segment has still been pressured by state and local actions.

“State and local flavor bans have had significant effects on the cigar industry,” said Howard, noting that while some consumers will switch to a non-flavored option in the wake of a ban, many will instead seek flavored products from nearby areas without bans or through online purchases. “Brick-and-mortar retailers have been disproportionately affected by flavor bans.”

Wade has experienced this in California, where flavored cigars were banned in 2022.

“In one county or city, you’ll see that ‘sweet’ is not allowed because they consider it a flavor where other areas will allow sweet cigars,” he said. “We’re just trying to figure out what’s okay to sell and what’s not—it really varies by city and county in a lot of cases. As of today, California still has not produced a list of items allowable for sale and that causes local governments to use their own standards that are not consistent or contain any actual evaluation or empirical evidence.”

As with vapor products, a black market for flavored cigars has started to emerge.

“Some geographies have seen increased illicit flavored cigar sales as consumers turn to unregulated channels to obtain banned products,” Howard said. “Overall, flavor bans have disrupted traditional sales channels and led to industry adaptation, but they also highlight the need for a balanced regulatory approach that considers public health goals while addressing economic impacts.”

For now, retailers in non-flavor-ban areas are left in limbo as to whether the FDA will move forward with its nationwide ban on flavored cigars. With upwards of 60% of the segment having some form of characterizing flavors, a ban has the possibility to upend the third-largest OTP segment.