High Expectations for Cigarettes

While there are those who would like to see cigarettes go up in smoke, c-store operators can rest assured that this critical category will continue to be ablaze with activity.

“Among the trends I see for 2012 is that there is going to be continued or heightened competition among the second tier brands,” said Bonnie Herzog, managing director for beverage, tobacco and consumer research for Wells Fargo Securities in New York. “We’ve been sort of indicating that the ‘battle of the brands’ among the second tier should continue.”

Included among the brands Herzog and other tobacco analysts place into that second tier are Pall Mall, L&M, Maverick, Marlboro Special Blend and Newport Red. “That core group of brands will be fighting it out with increased promotional activity and attention behind those brands throughout the year,” she said. “That’s what we’ve been seeing most recently.”

The top tier, Herzog said, is still a place for which convenience store operators need to allocate space.

“That will help to drive foot traffic into the stores,” he said.

Pricing throughout 2012, Herzog suggested, will remain consistent.

“I think the gaps between these different tiers will need to stay narrow given that many consumers are still facing financial pressures, most likely through the end of this year, and that certainly puts some pressure on this category,” he said.

Thus, c-store operators might see some modest price movement or an increase in promotional activity.

“But the gaps between the different tiers will stay narrow to prevent down trading,” Herzog said.

One area of continued growth, Herzog said, will be in the smokeless category. “It’s an interesting category that seems to be attracting more cigarette smokers,” Herzog said. “I think that as a c-store operator you should be allocating a significant amount of space—enough space to permit the category to continue to grow as it should.”

Dealing with Regulations
Lawmakers at both the federal and state level will continue their assault on tobacco. “It’s an ongoing thing, and it will be when you look at issues like taxes,” Herzog said. “This being an election year, I don’t expect sharp tax increases. The one to watch as far as a proposed tax increase is in California. But if you look at taxes, some modest increases are a possibility, but I don’t expect anything significant.”

The number of Americans smoking cigarettes has remained fairly constant. “I think you have individuals continuing to quit, and I certainly think you have individuals starting,” Herzog said. “When you look at the smoking prevalence in the U.S. market it’s still in the low 20% range.”

Innovation will continue to bring excitement to the category, Herzog concluded. “Look for different cigarette line extensions this year. Overall, I think this is a category that can still be quite profitable.”

Who’s Still Smoking?

The Centers for Disease Control and Prevention (CDC) found that 21.5% of adult men and 17.3% of adult women are cigarette smokers, according to a national survey in 2010, the last full-year for which the agency has 12-month results. Other CDC insights about today’s smokers include:

Smokers by Age
• 20.1% of adults aged 18–24 years
• 22% of adults aged 25–44 years
• 21.1% of adults aged 45–64 years
• 9.5% of adults aged 65 years and older

By Race/Ethnicity
• 31.4% of American Indians/Alaska Natives
• 21% of Caucasians
• 20.6% of African-Americans
• 12.5% of Hispanics
• 9.2% of Asians (excludes Native Hawaiians and Pacific Islanders)

By Poverty Status
• 28.9% of adults who live below the poverty level
• 18.3% of adults who live at or above the poverty level

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