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    The 2017 Outlook on Tobacco

    What to expect as cigarettes, cigars, smokeless and vapor roll into the year.

    By Renee M. Covino, Convenience Store News

    NATIONAL REPORT — There is no doubt that tobacco is a more complex endeavor for convenience stores these days, thanks to legislation and regulation. But the overall category and its varied segments still reign as a major key to c-store profits. And so far, the outlook for 2017 is cautiously positive.

    Convenience store retailers “will welcome what comes out of a Republican Congress and this Republican president,” according to political commentator and reporter David Gregory.

    Still, tobacco industry experts are advising retailers to keep active in the year ahead, encouraging them to get behind an emerging federal proposal to help ease the Food and Drug Administration (FDA) deeming regulations — or more specifically, the Cole-Bishop Amendment to the House Agricultural Budget Bill, which would ease FDA application requirements for newly deemed products, such as electronic cigarettes, vapor and cigars, brought to market after 2007.

    The amendment would move the so-called “predicate date,” or cutoff point, for new products to undergo the onerous FDA application process from Feb. 15, 2007 to possibly Aug. 8, 2016. If passed, the measure would grandfather in many products, especially those in the vapor category, providing them with a less-complex path to FDA approval. The industry awaits this vote in 2017 under a new president who some hope might even repeal the FDA’s authority over vaping products.

    “One might argue that it is unlikely that an administration would completely repeal an agency regulation that is already in force,” Boston University School of Public Health Professor Michael Siegel stated in his online tobacco blog this November. “However, President-elect Trump does not seem timid about threatening to completely repeal other health statutes and regulations, so I don’t see any reason why he would be reluctant to do that with the FDA’s ill-advised e-cigarette regulations.”

    Also on the tobacco watch list for 2017, retailers are strongly advised to focus on proposed ordinances at the state and local levels. Anti-tobacco efforts are increasingly being felt at the small-town level to create precedent for larger campaigns. Groups have been pushing raising the legal age to buy tobacco products to 21, banning flavored products, and restricting business permits for tobacco retailers.

    Such ordinances are only expected to get harsher in the coming year, according to Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO).  In 2015, there were 450 local tobacco ordinances proposed across the country. “[For 2016], if the numbers hold, we are looking at almost 650 — that’s 200 more than just a year ago,” he noted.

    NATO started its “Local Project” — an effort focused on helping retailers fight local legislation against tobacco — in 2012 because “we saw a shift in the anti-tobacco strategy,” explained Briant. Now, with the anti-tobacco efforts exponentially worse, the Local Project has become the thrust force of NATO.

    In 2017, NATO is hoping more local retailers at the c-store level will reach out for help. The association has simplified the process for retailers to call and email their elected officials to express an opinion on a tobacco proposal; testify at local and state hearings on tobacco legislation; or encourage customers to stand up and be heard when an excise tax increase or other tobacco restriction is proposed.

    The Outlook for Cigarettes

    In the cigarettes category, solid pricing and increases are expected to offset expected cigarette volume deceleration in 2017. In November, several cigarette brands followed Altria Group Inc.'s lead, after it hiked the prices of its Philip Morris USA portfolio by 8 cents per pack.

    Reynolds American Inc. (RAI), ITG Brands LLC and Liggett Vector Brands took wholesale list price increases of 8 cents per pack — an increase equal to approximately 2 percent to 3 percent — on their key cigarette brands. ITG Brands took a 16-cent-per-pack increase on its other brands, according to Bonnie Herzog, managing director of tobacco, beverage and convenience store research at Wells Fargo Securities LLC. These list price changes were effective starting Nov. 11.

    The pricing moves also follow the passage of Proposition 56 in California, which increased the state's cigarettes excise tax by $2 per pack. Known as the California Healthcare, Research and Prevention Tobacco Tax Act of 2016, the proposition will also place an equivalent tax increase on other tobacco products and electronic cigarettes containing nicotine. Three other states had proposed similar moves, but they were rejected on Election Day.

    "These price increases are positive, indicating the industry’s pricing power and its ability to offset any volume declines associated with the coming tax increase in California” and with the overall decelerated cigarette volumes expected for fiscal 2017, Herzog stated.

    This coming year will see some convenience store operators get more aggressive with private label and control-label cigarette brands. Circle K, a division of Canada-based retailer Alimentation Couche-Tard Inc., is a proponent of both, recently focusing on the latter with its Traffic brand, which is now featured in the backbar of its convenience stores in 40 states.

    The consumer products division of U.S. Tobacco Cooperative Inc. (USTC), Premier Manufacturing of Chesterfield, Mo., is supplying the cigarettes to Circle K. Traffic is a control-label cigarette brand for Circle K vs. private label, according to USTC, which retains ownership of the brand.

    Circle K already carries its own private-label cigarettes, Crown, which parent company Couche-Tard launched across its retail brand in 2012.

    The Outlook for Smokeless

    Smokeless tobacco continues to lead the other tobacco products (OTP) category in the convenience channel with nearly a two-thirds share of dollar sales, according to recent industry data.

    As with cigarettes, list price changes are affecting the smokeless segment. Altria recently announced a 7-cent to 12-cent increase per can on most of its core smokeless tobacco brands, and a 77-cent-per-can list price decrease on certain Skoal tobacco blends. These list price changes were effective with shipments on or after Dec 6.

    “We expect other smokeless tobacco manufacturers — RAI, Swedish Match, etc. — to follow suit with similar list price changes,” Herzog said. “On balance, we believe the list price changes reflect the industry’s continued strong pricing power, which remains a critical driver of revenue and earnings growth.”

    Come 2017, smokeless tobacco sales trends are expected to continue to see a lift from brand extensions, “reflecting strong consumer acceptance of recent line extensions, but also limited ‘uptrading’ into combustible cigs,” according to Herzog. The national expansion of Copenhagen Mint earlier this year is expected to continue to “resonate,” as she put it. And Herzog expects Grizzly to gain ground with its Dark Mint style, which just launched in the third quarter.

    A recent report from the Gallup-Healthways Well-Being Index showed that the smoking rate among U.S. adults aged 18-29 has declined 12 percentage points to 22 percent over the past decade, a steeper decrease than any other age group. It reasoned that this could be related to young adults switching to non-cigarette tobacco alternatives, including smokeless tobacco, which is consumed by 5.4 percent of adults aged 18-29, higher than any other age group.

    Curiosity, appealing flavors, peer influences, high cigarette taxes, and smoking bans may be leading young adults now and in the years to come to use alternative tobacco products, market researcher Gallup and healthcare company Healthways concluded.

    The Outlook for E-Cigarettes/Vapor

    The most recent Nielsen numbers show that e-cig dollar sales are on the rise by more than 25 percent, led by Reynolds’ VUSE and Altria’s MarkTen XL. VUSE is reportedly maintaining its dollar share leadership at just over 35 percent, vs. roughly 17 percent for blu, its nearest competitor. MarkTen XL “continues to make inroads” from “distribution gains most likely driven by couponing,” Herzog cited.  

    “In a post-deeming regs environment, we expect competition to intensify,” she said. “VUSE’s ability to maintain strong volume/pricing is a testament to its strong competitive positioning. We expect further gains as new VUSE formats (VUSE Vibe and later, VUSE Port and VUSE Pro) start to hit store shelves.”

    Of course, as of Aug. 8, 2016, vapor products are considered tobacco products and officially operate under FDA control. Gregory Conley, president of the American Vaping Association, called Aug. 8 “the beginning of a two-year countdown to FDA prohibition of 99.9-percent-plus of vapor products on the market.” He says that “if we do not succeed in changing the FDA’s arbitrary predicate date of Feb. 15, 2007, the vapor industry will shrink to almost nothing beginning Aug. 8, 2018.”

    In addition to the Big Tobacco contenders, another “survivor in progress” is Mistic E-Cigs. Timing has been on the company’s side — looking to appeal to the “mass smoking population,” as well as the vaping population with an improved experience/easier-to-use device, it released its 2.0 POD-MOD in late July, in advance of the FDA deeming rule deadline (the concept was in the works for months before the news of the finalized deeming hit in May). The system is akin to the popular K-cup coffee machine experience; the Mistic 2.0 is a closed system with change-out flavor pods.

    The product “gives the experience, flavor profiles and vapor production that mod users are accustomed to, and also provides ease-of-use to cig-alike users who haven’t upgraded because they didn’t want to deal with the hassle of bottles and tanks,” according to Justin Wiesehan, vice president of marketing for Mistic. But it is the latter group this product is intentionally targeted toward.

    “In our sales data, cartridges are still our best-selling items for four years. That consumer is still out there, and they’re not as in-front of this industry as the mod users,” said Wiesehan. “They’re not on Instagram; they’re not going to vape shows. [The] demographic is primarily in the 45-70 age range and the majority of them for us are women — all they want to do is use Mistic instead of Marlboro, and they don’t make a big fuss of it.”

    He goes on to say that “everybody thinks this industry is made up of hard-core vapers that blow clouds and build big-old batteries and coils. That’s part of the market, and it’s where the negative hype unfortunately comes from. There’s still a large part that just wants to stop smoking. They use it and it works for them, and they’re not out posting it on Facebook or Twitter.” They’re also not perpetuating the bad press. Thus, Mistic is looking to tap this largely untapped market as quickly as possible.

    With 9 million vapers in the United States and 45 million smokers, “we still haven’t touched the surface yet,” Wiesehan maintains. “If we can provide product convenience that can help replace cigarettes, that’s what we’re trying to go after — to give smokers a device that actually works to help them stop smoking.”

    The Outlook for Modified Risk & More

    Expect to hear more about “modified risk” in 2017. Big Tobacco is soaring into the New Year with modified risk expectations. Philip Morris recently filed a Modified Risk Tobacco Product (MRTP) application with the FDA for its highly anticipated iQOS “heat-not-burn” tobacco product.

    If approved, the tobacco giant would be able to market iQOS in the U.S. with a health claim (i.e., as a modified exposure or modified risk product). The FDA reportedly has 60 days (at minimum) to accept the application for substantive review, and then up to one year to make a final decision (early 2018).

    “While this designation could be very powerful from a global public health standpoint, Philip Morris will need to file a PMTA [premarket tobacco application] to actually commercialize the product in the U.S. via an exclusive licensing agreement with Altria,” according to Wells Fargo’s Herzog.

    She added that Philip Morris is planning to file a PMTA in the first quarter of 2017, with a decision expected as early as July 2017. “A PMTA would allow iQOS to be marketed in the U.S. without a health claim, similar to how iQOS is currently being marketed in many countries, including Japan, with great success. We remain bullish on iQOS given the overwhelming success of the product in Japan; its strong margin profile since it is taxed 20 percent below conventional cigs there; tax benefits in other markets; growing consumer acceptance/conversion rates in other key markets; and the potential to ‘break the mold’ once again with Platforms 2-4.”

    By Renee M. Covino, Convenience Store News
    • About Renee M. Covino Contributing Editor Renée M. Covino is a veteran researcher, editor and writer with more than 30 years of experience in the mass retail sector. Her articles and columns have appeared online and in print for dozens of industry trade magazines, newsletters, metro newspapers, Fortune 500 company reports and college textbooks. Covino is a self-named “store connoisseur” who not only writes about retail, but happily supports it.

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