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    Competitive Environment Heats Up Around Cigarettes

    Premium brands see strong volume trends during the third quarter.

    NEW YORK – Retailers across the United States are seeing an increasingly competitive environment surrounding cigarettes. During the third quarter, 73 percent of convenience stores indicated a more competitive environment compared to only 54 percent during the second quarter, according to Wells Fargo Securities LLC's latest Tobacco Talk survey, which polled tobacco retailers and wholesaler contacts representing more than 40,000 c-stores.

    "Survey results also indicated cigarette volume declines moderated, likely resulting from increased discounting, driven by strong volume trends in premium brands as consumers shifted away from discount brands," said Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities.

    Industry-reported volume is anticipated to be down 4.5 percent during Q3 -- an improvement from Q2, but below the long-term industry decline rate of minus 3 percent to minus 4 percent, according to the survey.

    Lorillard Tobacco Co.'s recently launched Newport Gold received positive comments from retailers, with Wells Fargo predicting it may "fill a void" in the Newport franchise. Newport Menthol volume and promotions also held steady during the third quarter in the face of increased promotions from competitors. Philip Morris USA's (PM USA) Marlboro also saw strong volume.

    "Based on our survey results, we continue to believe PM USA is innovating and achieving a better balance between growing Marlboro profitably and maintaining strong brand equity," Herzog said.

    The outlook for electronic cigarettes remains strong, with 70 percent of retailers reporting that the segment accelerated during Q3 over Q2, with annual growth still topping 30 percent.

    "Retailers continue to be positive on e-cigs and still credit blu with driving awareness and growth to the entire category with its investments in advertising and promotional efforts," Herzog said. "We believe consumption of e-cigs will eclipse consumption of traditional cigs over the next decade as e-cig technology improves and conversion continues to accelerate."

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