An Update on Tobacco News and Trends
A lot has happened in the tobacco category over the past few months. From major manufacturer news to additional regulatory stress, this summer was a busy one for tobacco.
Read on to find out how the category fared in c-stores, and how the supplier and retailer communities are dealing with all the volatility—all the lows, but especially the highs.
Summer Sales Review
As Labor Day and the fall season loomed, the tobacco category experienced largely positive sales trends. For the four weeks ending Sept. 5, Nielsen reported cigarette and smokeless sales grew in c-store, food, drug and mass. The trends were not as positive in the electronic-cigarette segment, where dollar sales declined and unit sales growth decelerated.
Cigarette dollar sales increased 3.4% during this time frame, up from 3.1% the previous month and the same time last year, when sales decreased 1.5%. The numbers were driven by a 3.8% pricing increase and a 0.4% decrease in unit sales, according to Nielsen. Year to date, cigarette units were down only 0.6%, a vast improvement from the 10-year average of 3% to 4% declines.
“Given these favorable trends, we remain constructive on U.S. volumes for 3Q15 and the full year, benefiting each of Altria, Reynolds and Imperial,” Vivien Azer, analyst with New York-based Cowen and Co., wrote in a research note.
In terms of the major manufacturers, Reynolds’ cigarette dollar sales were up 4.9% year over year, Altria’s sales were up 2.7% and Imperial’s sales were down 0.9% (vs. a 1.5% decline the previous month and a 7.4% decline a year prior). Also, Reynolds managed to grow its newly acquired Newport brand (about 37% of the company’s cigarette sales) by 6.2%.
Smokeless dollar sales grew 5% in August, due to strong performances from leading brands. Reynolds’ Grizzly was up 6.3% and Altria’s Copenhagen up 7.3%. Altria retained its leading dollar share position, a 57.1% share, followed by Reynolds (a 34% share) and Swedish Match (a 6.8% share).
80.4%: The percentage of c-store cigarette sales that are premium offerings --Nielsen
E-cigarette dollar sales fell 7.6% year over year (vs. a 12-week trend of 3.2% declines), with average unit pricing down 15.9%. Unit sales were up by just 9.9%, a deceleration from the 18.2% 12-week growth trends.
“Year-over-year growth continued to be fueled by the national launches of Vuse and MarkTen,” Azer said. Excluding the two brands, “dollar sales and volumes fell 24.0% and 18.3%, respectively.”
As for the leading performers, Reynolds’ Vuse remained the No. 1 player in both dollar and unit sales, but it lost dollar share (down 0.2% to 33.3% of category dollar sales). Meanwhile, the second and third best-selling brands made sequential gains: Imperial’s blu gained 0.2 points in dollar share (to 23.7%) and 0.6 points in units (to 17.8%); and Japan Tobacco’s Logic was up 0.8 points in dollar share (to 15.3%) and 0.6% points in units (to 9.3%).
Retailers: Up Is the New Up
Typically, it’s not exactly welcome news when a retailer sees category sales go flat. But cigarettes are hardly a typical category. They are a crucial driver of convenience-store traffic (NACS data suggests it commands 35.9% of all in-store sales), yet the category is widely expected to decline 3% to 4% with every passing year.
But in 2014, cigarette sales did not decline by 3% to 4%. In fact, same-store cigarette sales grew by 0.1%, according to NACS State of the Industry (SOI) numbers, prompting Kevin Smartt, CEO of the Austin, Texas-based Kwik Chek Food Stores Inc., to proclaim at the April SOI Summit that “flat is the new up.”
As 2015 has progressed, an even more shocking trend has surfaced in the category: Up is the new up.
At the store level, many retailers report the same thing.
“We finished 2014 flat, right along with NACS data,” says Andrea Myers, president of Kocolene Marketing LLC, Seymour, Ind. “In spring, when gas prices started to decline, sales really started picking up. People have more money to spend.”
For others, a 0.5% to 2% increase is on the conservative side. Speedee Mart operations manager Ray Johnson says the Las Vegas-based retailer had seen its year-over-year cigarette sales increase by 5% as of July.
Even retailers in notoriously anti-tobacco states are noticing this phenomenon. Despite operating in a state with the second-highest excise taxes in the country, cigarette sales at Cumberland Farms are up, says Anne Flint, senior category manager for the Framingham, Mass.-based operator.
“In the state of Massachusetts, you’d have to take a second mortgage on your house to buy a carton of Marlboros,” Flint says. “But I am seeing growth (even in carton sales), which is surprising.”
“We’re definitely seeing much-better-than-expected volumes,” says RBC Capital Markets tobacco analyst Nik Modi. “I don’t think there are new consumers coming into the category. What’s probably happening is we’re seeing people buying cartons or multiple packs at a time.”
Myers says premiums are the big benefactor of this cigarette renaissance, and numbers from Nielsen back her up. The company reported premium cigarettes accounted for 80.4% of c-store cigarette sales and were up 0.4% in 2014. By contrast, branded-discount sales were flat and subgeneric/private and fourth-tier cigarette sales declined.
“People are trading up,” Flint says. “They go up to premium because they can buy a Marlboro now, whereas they couldn’t before.”