Cigarettes Face Local Legislators

The cigarette category remains important to total convenience store sales—and still too conspicuous for regulators to ignore.

By Howard Riell, Associate Editor

Cigarettes continue to be a c-store staple, despite the proliferation of local ordinances aimed at restricting the category.

According to Information Resources Inc. (IRI), for the 52-week period ending Aug. 13, 2017, the convenience store channel saw sales of $56.2 billion, down .08% from last year.

If sales are declining, however, the amount of legislation impacting cigarettes is increasing. For example, as of June 1, 2018, the price of a pack of cigarettes will jump to at least $13 in New York City, the highest price in the nation. The new minimum price for cigarettes and little cigars is one of several new anti-tobacco laws Mayor Bill de Blasio signed this summer.

New York is part of a growing number of local government bodies passing stricter cigarette enforcement laws.

Other regulatory steps in communities in the Empire State have included limiting tobacco retail licenses to reduce the number of stores selling cigarettes, creating a license for selling e-cigarettes, increasing the cigarette license fee, and prohibiting pharmacies and drug stores from selling tobacco products.

Jim Calvin, president of the New York Association of Convenience Stores, said in a statement that these measures will destroy the business investment of retailers who have been leading the effort to prevent youth access to tobacco products.

“The result will be lost revenue, lost jobs and an increasing number of sales in unregulated and illegal settings,” said Calvin.

BUDGET AND PREMIUM
That said, smokers continue to indulge though their preferences are often based on price.

“We are seeing a lot of people switching to budget brands, like Eagle,” said Jesse Dix, tobacco category manager for Dandy Mini Marts Inc. in Athens, Pa., which operates 65 large-scale convenience stores in New York and Pennsylvania. Indeed, he noted, consumers have reacted aggressively to the rising price of cigarettes.

“Millennials in particular seem to be concerned only with price. Eagle is flying for us.”

As a result, Dandy Mini Marts’ management has increased facings of the Eagle brand. “At $5.14 per pack it’s the lowest-price cigarette in our store so that always helps,” said Dix. Sales for the remainder of his SKUs are basically holding steady. “At the same time, we realize that cigarettes in general are down.”

In other markets, price remains a variable.

“Although packs sales decline year after year, I am seeing an increase in premium,” said Anna Bettencourt, category specialist for VERC Enterprises Inc., the family-owned convenience store, gasoline and car wash group operating 27 stores in Massachusetts and southern New Hampshire. Innovation is lacking, she added. “There is nothing new in cigarettes; all innovation is coming from vape.”

Bettencourt said she expects cigarette sales to continue to decrease while black-market sales rise in more or less direction proportion to the number of restrictions and taxes imposed, all of which can only serve to harm businesses that obey the laws. Maintaining sales as much as possible, she added, means sticking to retail basics: staying in stock and carrying the right brands.

LEGISLATIVE MATTERS
Though mounting legislation has failed to dissuade most smokers, it is having an effect. Steven Montgomery, president of b2b Solutions LLC, a consultancy that specializes in working with retailers and suppliers in the convenience retail / petroleum marketing industry, pointed out that there are a number of legislative changes the have been passed by cities, towns and states that impact cigarette sales. Two of them that promise the most impact involve raising the purchase age to 21 and legislation banning menthol cigarettes.

“There are now many states such as Massachusetts, Illinois, Missouri, Kansas, New Jersey, Hawaii and California where many cities have enacted regulations raising the legal age to purchase tobacco,” said Montgomery. “This places increased pressure on retailers to ensure the purchaser is of legal age. Sting operations now have a wider range of young adults they can employ in an effort to ensure the purchaser is of legal age.”

Menthol bans are following the same path, Montgomery continued. “Oakland banned the sale of menthol cigarettes in July 2017. San Francisco is considering doing the same, as are other cities. There is consideration at the federal level.”

Despite a federal ban on flavored cigarettes, menthol cigarettes remain legal in the U.S., accounting for 27% of overall volume sales in 2016, according to Euromonitor International.

This past July, the U.S. Food and Drug Administration (FDA) announced a new plan for tobacco and nicotine regulation that places nicotine and addiction at the center of its tobacco regulation efforts. The goal is to ensure that the agency has the scientific and regulatory foundation to implement the Family Smoking Prevention and Tobacco Control Act, and make certain that it is striking an appropriate balance between regulation and encouraging innovative tobacco products that may be less dangerous than cigarettes.

Any potential regulation relating to menthol needs to be based on science, and within the parameters of the Tobacco Control Act, Mitch Zeller, director of the FDA’s Center for Tobacco Products, said at the recent National Association of Tobacco Outlets Regional Education Seminar in Denver.

Bonnie Herzog, managing director of equity research, beverage, household & personal care, tobacco & c-stores for Wells Fargo Securities in New York, said an outright ban on menthol is highly unlikely, especially given the science and the unintended consequences. “We’ve long believed a realistic worst-case scenario is if the FDA recommends the level of menthol be reduced over a number of years.”

C-store owners in Minneapolis, this past August, for example, protested the proposed ordinance to ban menthol cigarettes from store shelves. The city council had already proposed only allowing the sale of menthol tobacco products in adult smoke shops. Banning menthol cigarettes from their shelves would mean a loss of $226,000 per store, according to the Coalition of Neighborhood Retailers.

RAISING QUESTIONS
Montgomery predicted that traditional cigarette consumption will continue to decline in 2018, even as nicotine delivery systems continue to evolve. The major tobacco companies and others have continued to roll out alternatives. “The next evolution is heat-not-burn devices. The real questions for them are if the FDA will state that they are a safer alternative to smoking.”

Cigarette smokers are fiercely loyal to their brand, however, Montgomery said.

“Being in stock at all times isn’t a nice to have, but a must have. With the increased taxes making smoking more and more expensive, c-store retailers have to be very aware of their prices versus those of their competitors.”

Cigarette sales will continue to rise slightly in key user groups, and decline in the overall adult population. A good deal depends on what happens with healthcare insurance in 2018, with many predicting a near future in which smokers are forced to pay significantly higher premiums and deductibles, if they can get insured at all.

“Over the very long term, a significant number of new users, middle and high school students and young adults, will drop the habit once they hit their late 20s or early 30s,” said Ryan Mathews, the principal of Black Monk Consulting in Royal Oak, Mich. “As taxes increase, and they will, a tier of lower income smokers—those below the poverty line and/or on fixed incomes—will simply not be able to afford to smoke.”

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