Tobacco products have historically been at the heart of c-store inside sales. Even after years of decline, they remain a leading sales driver. Excluding foodservice, the cigarette category still ranks first for in-store sales, generating $44,765 per store, per month according to preliminary numbers from the NACS State of the Industry Report® of 2023 Data.
However, cigarettes’ long-held reign will eventually go up in smoke. Tobacco usage is declining as fewer Americans smoke, while looming FDA bans on menthols and flavored cigars—though in April, the Biden Administration again delayed a decision on the ban until at least after the November election—could cut billions of dollars of sales out of the tobacco market in just a few years. Cigarette sales in c-stores were down 4.3% over the last year, according to the latest NACS CSX data, while cigar sales were down 2.4%, according to NIQ.
Smokeless tobacco was the only segment to have growth in the past year, increasing from 11% of tobacco sales two years ago to 14% over the last 52-week period, according to Kretek International, an importer and distributor of premium tobacco products. “There is a big shift in share of total tobacco dollars going from cigarettes to smokeless,” said Jorge Gonzalez, senior business intelligence specialist at Kretek.
If the FDA enacts its ban, it will further eliminate a huge chunk of already dwindling combustible product revenue. Menthol smokers make up 32.5% of all cigarette smokers, according to the CDC, and flavored cigars are 51% of the cigar segment, which includes cigars, cigarillos and filtered small cigars.
In dollars, it’s not small change. Eliminating these two products would cut almost $24 billion in sales from c-stores.
In the face of these two converging trends, retailers have a problem—how to optimize the backbar as tobacco usage evolves.
In a Kretek study, 56% of current menthol smokers said they would buy a non-nicotine menthol smoke if their current brand were banned.
Kretek says retailers likely have three choices: 1) shrink the backbar to a smaller selection of higher velocity items; 2) expand the breadth of product choices to offer consumers a wider range of options; or 3) redesign the front of the store without the backbar.
“We aren’t saying we think one of these is necessarily the best way, but broadly, we foresee that one of these three options, or some hybrid of these three, will likely arise as the new standard going forward once the FDA puts policies into effect,” said Benjamin Winokur, brand manager of emerging brands at Kretek.
1 Shrink the Tobacco Section
An obvious answer to a reduction in usage and dwindling legal inventory will just be to downsize the tobacco section. “There’s going to be too much floor space for a shrinking tobacco-centric audience,” said John Geoghegan, a consultant for Kretek with over 30 years in the tobacco industry.
Based on store photo audits and customer feedback, Geoghegan estimates that there will be around eight million slot facings to be filled, rearranged or reassigned. “That will be more new products than the FDA has time to give market authorizations for.”
Some retailers will try to fill those slots with slower moving items they otherwise wouldn’t have considered. “If I were a store owner, I wouldn’t want that. I would want the most bottom-line, velocity-driven tobacco section inventory that serves the most of my customers,” he said.
With up to half of cigars and cigarillos set to be removed under the flavor ban, focusing on products with better margins will also help bolster tobacco sales. “Moving flavored cigar smokers to a premium product could help recoup some sales—the cigars are better, the margins are better and when properly presented, they can help upgrade the overall customer experience,” said Albert Jose, senior vice president of sales and marketing at Kretek, which also imports Cuban Rounds premium cigars.
Persuading smokers of flavored machine-made cigars to upgrade will take some customer education and retail focus by marketers, but it’s a reset that “will be worth it,” Jose added.
2 Expand the Breadth of Product Choices
A menthol ban will likely lead to a 15% reduction in overall smoking, Georgetown University oncology professor David Levy predicted in 2021.
If Canada and Europe—which banned menthol cigarettes two years ago—can provide any insight into the potential outcomes of a ban, half of smokers might switch to other cigarettes. Of the other half, those who don’t quit will search for a menthol-flavored alternative. In consumer surveys conducted by Kretek, 59% of menthol smokers ranked taste as their motivating factor, compared to only 24% who said nicotine was most important.
For some menthol smokers left with a void, smokeless tobacco products and new nicotine-free flavored smokes will replace their menthol cigarettes, so retailers would benefit from expanding the inventory offered for these polyusers.
Mint and menthol flavors now account for 13% of moist snuff and snus smokeless products after a 62% year-over-year growth spike, further validating consumers’ loyalty to the flavor.
Moving flavored cigar smokers to a premium product offers c-stores a chance to recoup some sales lost to the flavor ban.”
“It indicates that menthol smokers in California and Massachusetts [which have state-wide menthol cigarette bans] are changing their source of menthol rather than switching to non-menthol cigarettes,” explained Geoghegan.
About 12% of smokers said a ban would prompt them to switch to e-cigarettes or other nicotine alternatives, according to an article in The New York Times. An independent Attitude & Usage study of 600 menthol smokers conducted for Kretek showed that 35% already use vape, cigars, nicotine pouches or snus. According to NACS CSX data, the OTP category (which includes smokeless tobacco, cigars, and alternative nicotine products such as pouches and vaping products) was up 6.9% for in-store merchandise sales and 7.9% for gross profit, driven entirely by smokeless tobacco.
For another segment of smokers, a non-combustible won’t replace their menthol cigarette as it doesn’t provide the same ritual that the act of smoking does. It’s one of the reasons Kretek is coming up with nicotine-free, menthol and cooling-flavored smokes to fill this niche void. Based on the company’s research, around 20% of menthol smokers’ level of nicotine dependency was low enough to make the switch to a nicotine-free smoke.
“If I were a store owner facing 30 or 40 empty tobacco slots and I wanted to sustain my tobacco sales dollars, I would transition to premium cigars and smokeless products, and set up a small section for nicotine-free, non-tobacco smoking alternatives. Alternative nicotine would also be part of the mix, but longer term, these products are also on the FDA’s radar screen,” said Geoghegan.
3 Reinvent the Tobacco Section
The third option would be to move the tobacco section to another area of the store.
“It won’t be right for everybody, but retailers in low-smoking areas could begin considering the idea,” said Geoghegan. Over the next three years, he said c-stores can expect another 10% decline in tobacco use.
Where licensing allows, the new section could be combined into a section with wine, beer and hard liquor, or moved to be adjacent to snacks or packaged beverages that align with tobacco purchases.
Moving the tobacco section wouldn’t come without challenges though. One is that retailers would need to dedicate an attendant to the section. Another is that the store might not have adequate square footage to create a store within a store for tobacco. Plus, the process of remodeling sections of the store could be disruptive and costly.
“No one is going to make any moves until their hand is forced, so which of these options is the right play is yet to be seen,” said Winokur, especially when there is no clear timeline on when the FDA will enact—and then enforce—its bans, which were first proposed over a decade ago. “There is plenty of time to get ready for this and figure out what to do.”