The Backbar of the Future
This past summer, Philip Morris International CEO Jacek Olczak said the company will “absolutely” end the sale of traditional cigarettes within the U.K. This aligns with a government plan that calls for the United Kingdom to go smokefree by 2030.
“We can see the world without cigarettes,” Olczak stated at the time. “And actually, the sooner it happens, the better it is for everyone. With the right regulation and information, it can happen 10 years from now in some countries.”
In September, Swedish Match initiated preparations for a separation of its cigar business, announcing it was looking to exit the manufacturing of combustible tobacco products so that it can focus on smokefree lines, such as nicotine pouches and snus.
“This announcement is another milestone toward achievement of our aspiration to become an entirely smokefree organization with a clear leadership position in oral reduced risk products, including ZYN,” said Swedish Match President and CEO Lars Dahlgren.
With more and more tobacco manufacturers shifting focus away from combustibles, the convenience store tobacco business of the future can be a fuzzy picture for retailers. To help sharpen their vision, Convenience Store News recently consulted with industry experts about what the next decade will hold for one of the convenience channel’s most important — and challenging — product categories.
The experts we spoke to relay some caution — but also positivity and opportunity — for the c-store backbar a decade into the future, provided that retailers stay on the pulse of what’s already happening. Here are some of their key 2032 predictions:
Combustibles Will Not Be Extinct
“Old habits don’t die, they slowly rust out,” quipped Cadent Consulting Group Managing Director Don Stuart, who added, more seriously, that his Wilton, Conn.-based firm projects combustibles will still represent 50 percent of tobacco sales for c-stores 10 years from now.
“While traditional cigarettes will not approach extinction over the next 10 years, there will be a dramatic falloff in unit sales,” he acknowledged. “Related categories, such as pipe tobacco and cigars, will also continue to decline.”
Don Burke, senior vice president of Management Science Associates Inc. (MSA), a Pittsburgh based company focused on analytics and informatics, forecasts that traditional cigarettes will represent about 30-40 percent of the tobacco category in unit sales come 2032, roughly half of the current level. Nevertheless, cigarettes “will remain a strong component of a c-store’s tobacco business,” according to Burke.
“Obviously, cigarette sales have been in decline for decades, but the fact is that during this period, cigarettes have remained an important part of c-store profits and margins. It is not unrealistic to expect the cigarette space to continue to contract; however, there is still a significant demand that will not be going away overnight,” echoed Karen Saber, vice president of business analytics for Jacksonville, Fla.-based Swisher, a manufacturer of cigars, moist tobacco, oral nicotine products, and more.
Saber pointed out that the tobacco space is constantly transforming and diversifying into new segments, which she expects will continue 10 years out.
Non-Combustible Options Will Ignite
About 10 years ago, Goldman Sachs Managing Director Bonnie Herzog forecasted that consumption of reduced risk tobacco products would surpass combustible cigarettes within the next decade. Today, she admits that she was “a little off on my timing,” but Herzog still maintains that she is not off in her prediction.
“I continue to think consumption for reduced risk products will surpass combustible cigarettes,” she told CSNews, noting that she foresees combustibles continuing to decelerate “similar to the declines we’ve seen in the category for decades.”
With advanced public health goals and industry innovation, Herzog envisions “much more backbar space allocated to reduced risk products” a decade from now. These products, such as modern oral nicotine, e-cigarettes/e-vapor and heat-not-burn products, are already embraced by consumers for different times and occasions, and are already replicating and replacing combustible cigarettes, she said.
From a retailer perspective, the positive for reduced risk items is that the margin profile is higher and more attractive, so “it’s a smart business decision as well,” said Herzog, who views the future of the backbar as a delicate balancing act, whereby c-store retailers start allocating more space to tobacco alternatives now.
They are going to have to be “flexible and bold,” she said.
Expressing a similar viewpoint, Burke foresees a 2032 backbar where nicotine items not containing anything from the tobacco leaf, except possibly the nicotine, generate the greatest share of tobacco sales.
He believes the c-store backbar a decade from now will become “the location for many often purchased, regulated consumer products: tobacco; nicotine with no tobacco; cannabis, CBD and other cannabinoids; and possibly, mushroom products and other ‘herbacueticals.’”
U.S. retailers need to start thinking today about how their backbar will evolve 10 years from now, Stuart urged. “It won’t be primarily combustibles, but it may be both tobacco-derived nicotine and synthetic nicotine-based products that serve both real and perceived benefits for consumers,” he said.
Legal Cannabis Will Become a Convenience Sector Staple
Provided there is federal legalization, and manufacturers can deliver a soothing and legal experience, cannabis has tremendous potential in the convenience sector, experts agree.
“C-stores could enter the cannabis business with bud, vaping and edibles,” stated Stuart, who added that edibles may also offer a new way to consume nicotine and related products. Currently, edibles are very popular with THC, and could continue to grow as nicotine offers perceived focus and relaxation benefits, he added.
With proper regulation, Herzog also foresees cannabis playing a bigger behind-the-counter role. And Burke, too, envisions “cannabis and other herbal items” being part of the c-store backbar offering of 2032.
Expect a More Visually Captivating Backbar
Category management will be more important than ever in 2032 as offerings and selections will be “overwhelming,” according to Swisher’s Saber.
“Optimization, strategic planograms, creative and engaging POS [point of sale], and true partnerships will define success,” she said. “Retailers will have to leverage data and insights in constructing planograms and merchandising structures.”
The tobacco spaces of the future will need to be both modern and captivating to successfully communicate the various evolving products and offerings. “A planogram is technically a visual merchandising tool and as technology and store layouts change, so will the need for fresh and engaging tobacco sets,” Saber noted.
C-store operators will need to strike the correct balance in terms of form vs. function. These two components have always been at the forefront of capturing adult consumer awareness, but even more so in the future, convenience stores will need to help the tobacco consumer cut through the “noise.”
“The key will be to provide your consumers with an engaging experience that speaks to them,” Saber told CSNews. “As technology evolves, there will be a variety of ways to incorporate this in terms of digital communication and visualization, holograms, multisensory experiences, etc. The days of plain cardboard signage will be history.”
Stuart agrees that there will be “more technology” in merchandising and marketing, but warns that there will also be “more plain packages and warning labels” come 2032.
The Future Will Be Led by Both Large & Small Manufacturers
It’s of no doubt to Burke that the Big Tobacco organizations will continue to play “a large role” in the c-store backbar business through the next decade. He even envisions these companies providing a broad range of products in addition to tobacco, such as “CBD and other cannabinoids, cannabis, and other herbal items.”
Smaller tobacco manufacturers, Burke said, will continue to play a role, too, providing items with regional preference, and possibly contributing to product innovation that is outside of tobacco, yet still part of the behind-the-counter business of the future.
Cadent Consulting’s Stuart points out that Philip Morris International has been “a key spokesperson” and is committed to deriving 50 percent of its sales from non-combustibles by 2025, while pulling out of combustibles completely in the U.K. market over the next 10 years.
“Keep in mind, this is more of a test, as the U.K. represents less than 1 percent of the 1.2 billion adult smokers worldwide,” Stuart said. “Big Tobacco, in combination with innovative startups including Puff Bar, developing natural and synthetic products and new delivery methods to satisfy the needs of tomorrow’s consumers — as well as those that follow — will set the stage for the backbar of the future.”
It is Saber’s hope that the climate continues to allow for all levels of competition within the tobacco space. She is cautiously optimistic that this will be the case; however, she acknowledges that it is becoming more and more challenging to compete given legislative requirements and guidelines.
A future scenario that just allowed for Big Tobacco “would limit inventiveness and diversification which, in turn, would benefit no one,” Saber reasoned, noting that she’s hopeful this message will fall on legislative ears.
Unfair Legislation Will Still Be the Major Hurdle
Unfortunately, the same fears expressed today regarding unfair legislation are part of the future tobacco picture envisioned for the convenience channel.
“My greatest fear of the future is that regulation will inhibit the development of equally satisfying and less-harmful tobacco items so that this category, enjoyed by so many consumers, is not able to evolve successfully,” Burke said.
Regulation of the nicotine industry and actions by the Food and Drug Administration (FDA) will continue to be one of the greatest unknowns for the backbar of the future, according to Herzog. Any wins the industry has over the next decade, such as menthol perhaps being allowed to stay on the market, should help keep hope alive, she said.
The way Saber sees it, unfair taxation and legislation have become “an expected part of doing business,” and will indeed be part of the future picture as well.
“Every year, new localities introduce proposals and constraints upon retailers, distributors and manufacturers alike. The impact to retailers is of particular concern,” she said. “We need to partner together to better understand and monitor these changes so that we can ensure a more equitable business environment for the future.”
Competition Will Heat Up
To date, the convenience channel has done well maintaining its tobacco business despite the product category being added at many dollar stores, according to Burke. Some of this success is due to the superior convenience of c-store locations compared to dollar stores, as well as the greater product selection offered at convenience stores.
In the future, these advantages will likely be more difficult to maintain given that it’s probable there will be ubiquitous near-immediate product delivery available to home and work for Americans. “The challenge for c-store operators will be to figure out how to be more convenient than a shopper picking up the phone and ordering tobacco items for delivery,” Burke said.
He sees drive-thru product pickup, mobile solutions and meaningful loyalty incentives all being “necessary tools” for convenience retailers to maintain a strong tobacco business in 2032 and even sooner.
Destination trips, whether brick-and-mortar or online, will become the greatest threat to the convenience channel, according to Stuart. “No longer will tobacco or related purchases simply be an afterthought or a convenience trip. Consumers will stock up. Online merchants will develop ways to ensure that all products are legally purchased by adults,” he said.
Out of necessity, c-stores largely will be invested in omnichannel solutions, such as curbside pickup, by 2032, Stuart believes. He points out that these solutions are already popular at cannabis dispensaries. “We anticipate seeing more marketing on app-based ordering platforms, which will allow for a full on-premise experience remotely,” he told CSNews. “C-stores will need to be stringent on age restrictions, of course.”
Global Influences Will Foster Diversification
European tobacco companies are seen as the thought leaders in terms of the global tobacco market and their influence will surely be felt in the future, industry experts say.
“They are known for driving scientific advancements, innovation, and sustainability within manufacturing practices,” Saber explained.
She pointed out that it is clear European tobacco companies have a mission to migrate adult
cigarette consumers to new products with their innovation portfolio.
“These initiatives will only further foster diversification, growth and development of the overall category,” she told CSNews.
Still, the U.S. Will Be the One to Watch
At the same time, Herzog believes it will be the U.S. market that will shape more advancement in modified risk products. And there are many eyes on future regulation in the United States.
Recognizing that nearly all the major tobacco firms will have a global presence into the future, Burke agrees with Herzog’s outlook. “The U.S. market will remain unique and will not likely be as impacted by global influences as other countries given the pervasiveness of federal, state and local tobacco regulations,” he said.
The U.S. is made up of 50 different major markets (at least), all of which have varying product restrictions, taxation levels that strongly influence pricing, etc., according to Burke. So, the ability of any organization to bring a global strategy to the U.S. is, and will be, somewhat minimized by this range of regulation, he concluded.