In September 2018, the FDA unexpectedly announced potential new regulations for electronic-cigarettes and certain flavored tobacco offerings, and since then, all attention has been focused on those key products in the other tobacco products (OTP) category.

FDA Commissioner Scott Gottlieb proclaimed that the agency is considering prohibition of flavored e-cig sales by all retailers other than adult-only tobacco and vape shops (Internet sales are still allowed, however). The concern, he told the news media, is that underage consumption of e-cigarettes is widespread and growing, and much of that growth can be attributed to flavored vaping products.

Industry insiders say such a restriction would violate the Tobacco Control Act of 2009. The Act, which gave the FDA the authority to regulate the tobacco industry, states: “In general, no restrictions of this law may prohibit the sale of any tobacco product in face-to-face transactions by a specific category of retail outlets.”

The agency is also considering a ban on menthol cigarettes and flavored cigars; although, it would not restrict convenience stores from selling menthol and mint-flavored e-cigarettes.

I don’t believe they’ll be able to ban menthol, but then again, I have seen crazier decisions that made no sense.

The Washington Post quoted Commissioner Gottlieb as saying, “Our aim is to make sure no kid can access a fruity flavor product in a convenience store,” adding that any retailer that wants to sell fruit-flavored e-cigarette products “needs to age-restrict completely or have a separate room that is age-verified. A curtain or a partition won’t cut it.”

“Their aim is to prevent sales of certain products in convenience stores, and it’s a strong possibility that someone would challenge this in court,” said Lyle Beckwith, NACS senior vice president of government relations. “We believe we should be able to sell legal products responsibly on a level playing field. The commissioner’s proposal to only allow certain products to be sold in age-restricted locations is clearly aimed at un-leveling the playing field.”

FDA Commissioner Gottlieb is a medical doctor who sat on the board of directors for Kure, a franchise-based vaping retailer, until his FDA appointment was imminent, according to Vaping360, a vape store trade publication. 

“Sound regulation should ensure that e-cigarettes are sold responsibly,” said Beckwith. “If enforcement shows that businesses are not following the law, then existing penalties should be imposed.”

Menthol Ban?

While no one wants to predict what action the FDA will take regarding e-cigarettes, some in the tobacco industry doubt that a nationwide ban on menthol cigarettes will be implemented.

OTP represented 5.4% of in-store sales in 2017 and 4.7% of in-store gross margin.

“I don’t believe they’ll be able to ban menthol, but then again, I have seen crazier decisions that made no sense,” said Doug Nolan, vice president of Smokers Choice, a chain of more than 60 tobacco shops in New York and Pennsylvania. “It would have an impact because Newport is huge here on the East Coast. It’s 42% of our menthol business; however, it only makes up 4% of our gross sales.”

He believes menthol fans would simply switch to regular tobacco and then add their own “flavoring drops” to create the product they want.

Mark Schueller is director of marketing for Premier Manufacturing of Chesterfield, Missouri, which markets and sells value-priced and private-label tobacco products and programs. He, too, is skeptical about the FDA banning menthol cigarettes. “I don’t think it will go through on a national level,” he said. “There would be too many people saying ‘Hey, I’m a consumer. I’m an adult. I have the right to make my own decisions.’ Various municipalities have banned menthol, including several in California. It just diverts sales of those products to outside of the city limits or across the county line.”

Speaking on behalf of NACS, Beckwith said that there is an existing market for menthol cigarettes and banning them will only move those sales to the black market. “Black market sellers of tobacco products do not check the ages of their purchasers, do not pay taxes on their sales and sell more than just menthol cigarettes,” Beckwith said. “NACS urges the FDA to implement a plan to stop the current black market and prevent a new one before prohibiting a product that we know will result in large numbers of new black market sales.”

Other OTP Offerings

Despite e-cigarettes being challenged by potential regulations, the overall OTP category has continued to be a bright spot for retailers, according to Jayme Gough, NACS analyst.

The OTP category, which includes everything from smokeless tobacco, cigars and rolling paper to pipes and loose tobacco, has benefited from smokers switching from cigarettes to nicotine alternatives. “OTP represented 5.4% of in-store sales in 2017 and 4.7% of in-store gross margin,” she said. “That same year, OTP had a gross margin of 29.98%, bringing in $30,840 gross profit dollars per store.”

Smokeless tobacco makes up the largest percentage of category sales (57.1%) according to NACS State of the Industry data, Gough said. Online market researcher Statista states that an estimated 3.6% of U.S. adults between the ages of 18 and 34 use smokeless tobacco products, the largest share of any age group.

We believe we should be able to sell legal products responsibly on a level playing field.

The second most successful subcategory is cigars at 28.7% of OTP sales—an area to watch. Hot on its heels are e-cigarettes (with 11.5% of category sales), which have gained significant traction, enjoying 51.1% sales growth and 21.0% unit growth in 2017. “E-cigarettes is a growing category,” Gough said. “The sales growth is huge. It would be a real problem for c-stores if we couldn’t sell e-cigarettes.”

With so many OTP options and limited store real estate, it can be challenging for retailers to choose the right offerings to boost sales and keep customers satisfied. Schueller believes store operators should provide good filtered cigars as a consumer’s alternative to cigarettes. “If you’re going to add something [to your product mix], add a filtered cigar,” he said. “It’s easy to carry, takes up less merchandising space and the margins are good.”

Lisa Dell’Alba, president and CEO of Square One Markets, a nine-store convenience and fuel retail chain operating in northeast Pennsylvania, feels that the moist subcategory is critical to her OTP offerings. “Grizzly, Copenhagen and Skoal,” Dell’Alba said. “Moist is number one, and we see that across all of our stores, which operate in very different neighborhoods.”

When it comes to mandatory OTP, the management team at Smokers Choice is sold on vaping products. “All the new cones and wraps are great for pulling consumers into the store to buy other items,” said Nolan. Meanwhile, the FDA is looking into the sales and marketing techniques of the vape industry, and the commissioner has publicly discussed suspending sales of most flavored e-cigarette pods in stores and prohibiting product promotion on social media.

“It’s hard to say what’s going to happen,” said Dell’Alba, whose stores sell vape product based upon the size and customer demand of each store in the Square One chain. “But vapor products do have a place.”