Electronic tobacco sales continue to grow at an impressive clip, positioning convenience stores as a top destination for e-cigarettes and accessories.
By John Lofstock, Editor
The decline in cigarette volume is ongoing, c-stores continue to take tobacco share from other retail channels, and e-vapor consumption could surpass that of combustible cigarettes in the next decade, according to research findings presented at the fourth annual NATO Show last month in Las Vegas.
Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities in New York, offered tobacco retailers a host of sales data and consumer trends that can help c-stores maximize sales in tobacco and related products. Among them:
Total cigarette retail sales volume, which now stands at approximately $85 billion, is declining around 3-4% annually. Premium brands’ share is declining and now represents around 70% of total industry volume, down from 91% in 1984. In addition, the top four brands account for about 70% of total industry volume, up from 29% in 1984. “The other tobacco product (OTP) category and e-vapor should provide opportunity for growth,” Herzog said.
Convenience stores continue to take tobacco share from other channels. Leading drug store chain CVS to recently announced it would stop selling tobacco products, and other drug chains may follow. This will only strengthen the industry’s position as the top source for tobacco products and accessories.
The numbers make it clear that price increases are hurting retailers. Respondents to Wells Fargo’s “Tobacco Talk” survey said price increases didn’t have much positive impact on gross profit margins for retailers.
The Electronic Revolution
Herzog maintained that e-cigarette growth continues to gain momentum at an impressive rate. A majority of survey respondents continued to be very excited about the e-vapor category.
“We think consumption of e-vapor could outpace combustible cigarettes over the next decade,” Herzog said. She and her colleagues also feel that e-vapor is to tobacco what energy drinks are to beverages: “Profitable and quickly growing in volume and shelf space at retail, and increasingly gaining consumer acceptance.”
The size of the retail e-vapor market, according to Wells Fargo estimates, is $2.2 billion. While e-cigarettes are continuing to grow, like energy drinks, that meteoric growth rate is decelerating. Annual growth is estimated to be approximately 15%.
E-cigarettes, however, are three times more profitable to retailers than combustible cigarettes, Herzog indicated. “We expect retailers to continue to embrace e-vapor since cigarette gross-profit margins for retailers remain on a downward trend.”
As a result of this profit potential, e-cigarettes are gaining share and shelf space from combustible cigarettes.
Retailers appear to be divided on what they consider the best way to merchandise e-cigarettes. “Convenience stores continue to want a separate e-cig section to merchandise effectively, preferably near conventional cigarettes, but the lack of counter space remains a challenge,” Herzog said.
Approximately 50% of respondents favored keeping c-cigarettes a separate category, while 30% choose to merchandise them together with traditional cigarettes. Another 20% favored placing them on their store’s front counter.
Vapors/tanks are “overwhelmingly” taking e-cigarettes’ share, according to 90% of respondents in the Wells Fargo tobacco survey, who said they consider the transition to vapors a natural one. The growth of the vapors/tanks sub-segment is expected to accelerate in 2014. In addition, the average vapor/tank consumer’s weekly spend is about 30% less than that of the e-cigarette consumer’s.
One other key finding Herzog reported is that “vape shops” are impacting e-cigarette sales. “Vape shops have been opening up around the country, and although they are not yet a threat for c-store retailers, these new shops are definitely on retailers’ radar screens.”