Tobacco: A Seismic Season

What tobacco did on its summer vacation

Summer was a busy season for the tobacco industry. The federal government closed the commenting period on its tobacco deeming regulations; Logic rocked the sales boat by moving into the No. 1 spot for e-cigarette unit share and the No. 2 slot for dollar share, according to Nielsen’s July numbers; and a seismic deal between Reynolds American and Lorillard Inc. is set to change the industry as we know it today.

At the store level, retailers are focused on finding the perfect product mix for sales success among the segment’s patchwork of subcategories, all while warding off local and federal legislators eager to continue the game of regulation Whac-a-Mole.

What follows are product trends and legislative issues percolating in the tobacco category.

Vape Update

It was only last year that retailers were finally getting a handle on electronic cigarettes, pegging e-liquids and high-priced vaporizers (or tanks) as “not for the c-store channel.” Fast-forward to 2014: Tanks and liquids are all the rage, leaving retailers scrambling to catch up with the thousands of vape shops popping up across the country.

It begs the question: What’s the next big trend in vaping?

Not surprisingly, this was asked of Management Science Associates senior vice president Don Burke during the annual CSP Tobacco Category Review Meeting in August.

“Noncombustible actual tobacco products: vaporizers that can be used to heat tobacco, but not make it combust,” Burke responded without missing a beat. “That flavor provides the closest to the actual experience of smoking.”

Burke’s sentiments echoed those of Philip Morris International execs, who in January announced a ¤500 million (about $680 million) investment in two Italian manufacturing plants dedicated to producing such heat-not-burn tobacco products. Like e-cigarettes and liquid vaporizers, these next-gen cigarettes generate vapor, not smoke. Unlike e-cigs and vaporizers, they use actual tobacco instead of liquid nicotine.

During a conference call with investors, New York-based Philip Morris International CFO Jacek Olczak boasted, “[An e-cigarette] is not a product which is very close to the conventional cigarette and I think consumers are looking for something which is at least similar.”

Big Tobacco is far from alone in exploring this heat-not-burn technology. Last spring’s NATO Show showcased several products that vaporize loose tobacco, such as the Pax and modelTwo from San Francisco’s Ploom, or allow consumers the option to vape tobacco, e-liquids and even waxes with one unit, such as The Happy Cig by Cigalectric or Trifecta by White Rhino.

“They’re also used for other purposes sometimes,” Burke noted, coyly referencing the newly legalized marijuana business in Colorado and Washington. “But they’re gaining in popularity.”

Indeed, several retailers attending the Tobacco Category Review Meeting who aren’t located in Colorado or Washington could testify to the selling power of these newer options, especially when it comes to Ploom.

Despite the fact that Ploom products retail quite a bit higher than the standard e-cig starter kit, Richard Shortt of Erwin Oil Co. said he’s been impressed with Ploom’s sales.

“We had to find an attractive offering in the topical $20 range,” says Shortt, retail sales operations manager for the Durham, N.C.-based company. “We partnered with Ploom because they did offer more in-store marketing and guaranteed sales or would pick up the merchandise. I was skeptical because of a $40 ring but quickly learned customers will pay for quality. In fact, I’m wondering if I can’t offer a more expensive option.”

Only time will tell if other manufacturers—and, more important, more consumers—will take this heat-not-burn concept from trend to “must-have” technology. But, Burke advised, “If you’re looking for a trend, I’d keep an eye on this.”