Smoke Gets In Your Aisles
Regulations, mergers, new products are lighting up the tobacco and e-cig landscape.
At first glance, it might seem that the tobacco and electronic cigarettes categories are performing well. Sales are up and manufacturers are announcing new products. Also, new rules that the U.S. Food and Drug Administration (FDA) announced last year are not yet fully implemented, giving companies time to prepare for important changes.
Still, industry experts say the smoking and vaping businesses are facing some challenges. According to IRI, a Chicago-based research firm, for the 52 weeks ending June 11, 2017, sales of cigarettes in U.S. supermarkets, drugstores, mass market retailers, military commissaries and select club and dollar retail chains totaled more than $15.08 billion, up 4.54 percent compared to the same period the previous year. Volume was flat, increasing only 0.4 percent. The average price per unit was $11.05, up 48 cents.
Meanwhile sales of electronic smoking devices totaled more than $129.8 million, up 3 percent. The average cost of an e-cigarette product was $9.12, down 27 cents. Volume sales totaled more than 14.2 million, up 6 percent. That rate of growth is much lower than during the early years of e-cigarettes, when sales were doubling each year.
Industry experts say there are several reasons for flat cigarette sales, and a projected slowdown for e-cigarettes.
In May, Nik Modi, tobacco analyst for RBC Capital Markets equity research, participated in a webinar in which he presented an update of the tobacco category. Modi pointed out several reasons for the slowdown in cigarette sales, including higher gas prices in first quarter 2017, above average precipitation on the West Coast, a delay in IRS tax refunds and geopolitical uncertainty.
Modi predicted that cigarette volume will revert to the “normalized decline rate” of -3 percent to -5 percent. One event that Modi said will likely not create much big picture change is an upcoming acquisition. In January, Winston-Salem, N.C.-based Reynolds American Inc. (RAI) announced it was entering an Agreement and Plan of Merger with British American Tobacco (BAT) to become a wholly-owned subsidiary of BAT. RAI planned to hold a meeting on July 19 for shareholders to vote on the plan. The London-based BAT already has an ownership stake in RAI, and the merger has been approved by a Transition Committee and by Japanese antitrust authorities, according to RAI. (Tokyo-based Japan Tobacco International sells Camel, a brand of RAI, outside the U.S.)
As for e-cigarettes, Modi said, performance will remain lackluster and regulations will remain burdesome. Last year, the FDA announced the final regulations deeming e-cigarettes, vape pens, e-cigars and other Electronic Nicotine Delivery Systems (ENDS) to be products subject to the Federal Food, Drug and Cosmetic Act (the FD&C Act). The rule went into effect in August 2016, but certain provisions are being implemented over time. For example, there are several upcoming deadlines for manufacturers to submit ingredient listings, health documents and premarket applications for new tobacco products.
Working to be compliant
Manufacturers and retailers have long known that these rules were coming, as some rules were proposed as far back as 2014. Manufacturers say they are working to make sure they are compliant, helping retailers be compliant and, at the same time, launching products and gaining distribution.
E-Alternative Solutions, based in Darien, Conn., a sister company of Swisher International, last year launched Cue Vapor System, an e-cigarette device that is rechargeable and uses a pre-filled, disposable cartridge. Jacopo D’Alessandris, president and CEO of EAS, says the company is working to expand distribution. “This product has a unique business model,” he says. “It is not only distributed at retail, but is also sold online and via infomercials.”
D’Alessandris says the infomercial campaign airs mostly at night. “We think that online and the infomercial is perfect for trying the kit,” he says. “There is a lot of education that is delivered through the television commercial and also online.” He adds that when people buy online, they tend to buy large quantities because they are paying for shipping.
Once adult consumers have the kit and they need to buy more cartridges, which can be ordered by phone, online or purchased in a retail store. Buying a cartridge from the grocery store makes sense to this audience, D’Alessandris says, because they are used to going to the store to buy a pack of cigarettes. He adds that the multiple outlet strategy is working, and that EAS is seeing repeat purchase percentages that are three times higher than other e-cigarettes.
“The ultimate goal is to try to drive them to retail,” he says. “For us, brick-and-mortar is the foundation of our business.”
Others agree that the new rules present a challenge to the industry. Ryan Coalson, director of sales operations for Fontem US, based in Charlotte, N.C., says the rules are causing confusion among retailers, who do not know which products will go through the review process and which companies will remain viable.
Fontem, which makes blu e-cigarettes, is dedicated to helping retailers handle the changes. “Fontem is undergoing an initiative to ensure compliance with FDA guidelines across all of our current assortment of fixtures,” Coalson says. “We will meet all of the deadlines and reduce the potential of trade partners being out of compliance with the FDA relative to the newly required warning labels.” He adds that retailers that are succeeding in the category are the ones that put e-cigarettes in a visible place, as many adult consumers are new to the category and are investigating the space.
Coalson says another confusing issue is the various state, local and municipal taxes. “That drives up prices and makes e-cigs less attractive to adult smokers considering integrating them into their lifestyle,” he says.
The brand launched Glacier Mint disposables, which Coalson says have met great success. “Fontem/blu will continue to support current products and bring new products to life that are attractive to your adult smoker shoppers,” he says.
Another way to boost sales is with periodic promotions, says Jessica Fratarcangelo, marketing director for Cheyenne International, LLC, based in Grover, N.C. “The promotions are often supported by manufacturers who can assist with in-store merchandising.” she says. “Using regular communications, such as promotional emails to qualified adult consumers, is also a great way to stimulate category growth.”
More insights on the tobacco category can be found in the August Grocery Headquarters here.