Up In Smoke… and Vapor

The tobacco and electronic cigarette categories are facing some possible changes in federal rules, and some definite changes in consumer preferences. The Food and Drug Administration’s proposed deeming rule, which would give the FDA the authority to regulate electronic cigarettes and cigars, is currently being reviewed by the White House Office of Budget Management. Meanwhile, manufacturers are facing the more immediate task of keeping up with—and responding to—consumer demands for new flavors and features. 

With all that is going on, industry observers say this is an interesting time for the tobacco category at grocery. 

“The tobacco segment can be challenging for any retailer due to constant-changing legislation, but the category still presents ample opportunity for profit if managed correctly,” says Jessica Fratarcangelo, marketing director for Cheyenne International, based in Grover, N.C. “It is important to partner with manufacturers who can be just that—a true partner that is focused on your success.”

Fratarcangelo adds that consumers are savvier than ever. “They realize that sometimes when you buy a high-priced product, you’re only paying for the brand name. They realize that quality products with great taste are indeed offered at affordable prices,” she says.

Cheyenne recently launched a line extension of its cigar brand with the Cheyenne Limited Edition Tropical Cigar style. Fratarcangelo says the new style was chosen by adult cigar consumers. They selected the top three styles and voted for their favorite in the 2015 Save Your Fave Sweepstakes campaign. “There is no better demand than that of the consumer voice,” she says. 

Consumers are brand loyal, says Jane Green, vice president of marketing at Swisher International, based in Jacksonville, Fla. That can help grocery stores that sell other tobacco products. “Tobacco consumers value a retailer that appreciates their business,” says Green. “While grocery may not be a destination stop for many OTP shoppers, catering to your clientele will keep them loyal to your store and increase frequency of those visits.” 

In March, Swisher added to its Swisher Sweets Limited Edition cigarillos with Swisher Sweets Cherry Dynamite. “Cherry is a favorite taste and we have had many consumers ask, ‘Why don’t you offer a cherry cigarillo?’” says Green.  

While price is important, consumers also want quality and consistency. Green notes that Swisher’s “2 for 99-cents” cigarillo pouches are very strong sellers. “Everyone loves value,” she says. 

Price is a big consideration for adult smokeless tobacco consumers too, says Dave Savoca, president of Smokey Mountain Chew, based in Sandy Hook, Conn. “The smokeless tobacco category has really segmented over the last twenty years,” he says. “For some consumers, price is not as important as the product itself. That is why both value brands and premium brands do well in the marketplace.” 

Savoca adds that as the segment expands, adult consumers are exposed to new flavors and cuts. Smokey Mountain is launching a citrus flavor extension to its herbal snuff line of tobacco- and nicotine-free smokeless alternatives. The citrus flavor was well received during the pre-launch period. “The citrus flavor worked very well with our base, and we feel it will be an incremental addition to our line and the entire category,” he says. 

According to IRI, a Chicago-based market research firm, for the 52 weeks ended Feb. 21, the smokeless tobacco category was flat, with sales totaling more than  $679.6 million, down 0.3 percent. Unit sales totaled more than $93.94 million, down 3.8 percent. 

While chains, such as CVS drugstores, are excluding tobacco from their sets, and others are making tobacco less visible,  some retailers are still participating in the category. “There are grocery chains that do very well with tobacco,” says Savoca. “I believe that grocery stores are more segmented, and they understand their consumer base and the markets they serve. Their store sets will absolutely be a reflection of all of that.”

These are valuable consumers for grocery, Savoca says, as they are likely to buy other items while shopping for tobacco. 

Electronic cigarette users are also valuable consumers. However, after a meteoric rise sales in the category have settled a bit. Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities, wrote in Wells Fargo’s Tobacco Talk Fourth Quarter 2015 U.S. Retailer Survey, that growth in the vapor category is moderating due to consumer disillusionment, so continued innovation is critical.

Manufacturers are aware of the need for innovation, and are ready and willing to roll out new products to reinvigorate growth. “We believe the industry is facing a step-up in growth as the development of reduced risk/vapor products should accelerate combined profit pool growth over the next decade,” Herzog wrote. 

IRI reports sales of electronic smoking devices totaled more than $126.3 million, down 11.8 percent. Unit sales were flat, at approximately 13 million, down 0.2 percent. 

Electronic cigarette manufacturers say they are integrating the latest technology into their products to meet consumer demands. “We are on a quest to deliver the level of satisfaction adult smokers demand from an e-vapor product,” says Wayne Jones, senior vice president of sales operations at Fontem US. Last year Fontem Ventures, which is based in The Netherlands and has U.S. headquarters in Charlotte, N.C., acquired blu eCigs. Jones says the company will push its blu PLUS to the forefront of blu’s product lineup in 2016. The product is “affordably priced and fine-tuned to provide the level of satisfaction that smokers have been seeking,” he says. 

The fine-tuning includes a design that provides an easy transition for adults in search of a viable alternative to traditional cigarettes. The product’s improvements include longer battery life, enhanced vapor production and flavor delivery. The blu Plus employs a closed tank system, which offers the convenience of being pre-filled. The blu Plus Tanks have been redesigned to hold more e-juice than the original cartridges and reengineered to use all of the e-liquid within the cartridge. 

Jones adds that quality, not price point, is what will make the segment thrive. “Some manufacturers have chosen price deflationary tactics over product quality as a source of generating and maintaining their consumer base. In the short term this might look attractive for shareholders, retailers and consumers, but if the category is to survive, manufacturers have to deliver brands, with retail and manufacturer margins, that sustainably deliver,” says Jones.

Grabbing Grocery?

Still, grocery is a challenging channel. “The electronic cigarette category in grocery is good, not great,” says Todd Millard, COO of Charlotte, N.C.-based Ballantyne Brands, which makes Mistic Electronic Cigarettes. “The retailers have limited shelf space for the category and most retailers are not fully invested in the category. They don’t jump all the way in to make it successful.”

As a result, some e-cigarette consumers shop at vape shops, but many are still shopping at food, drug, mass and convenience stores. Mistic recently launched Haus Craft Collection, which Millard says is a “vape shop” style hardware line that features high-end e-liquids and is available in the drugstore and convenience store channel. “The goal is to transition consumers out of vape shops and back to national retail,” he says. 

Consumers want the convenience of these retailers, the quality of vape shop products, and competitive prices. The Haus Craft Collection starter kit retails for $49.99. At a vape shop, Millard says, the same setup costs $100 or more.

Another factor that is affecting the tobacco and e-cigarettes category is the drugstore chain CVS’s decision to stop selling tobacco products. The move resulted in consumers shifting their purchases to other stores. According to a survey by the e-cigarette brand V2, 39 percent of smokers said they are buying cigarettes from gas station convenience stores now that CVS stopped selling the items. Twenty percent said they are buying cigarettes from Walmart, and 20 percent said they are buying them at Walgreens. Also according to the February survey, 48 percent said that CVS’s decision had little impact on their cigarette purchases, and that they did not purchase cigarettes frequently enough from CVS to be affected. 

Grocery can benefit if stores adapt to certain consumer demands, says Adam Kustin, vice president, marketing for Miami, Fla.-based VMR Products, which makes V2 e-cigarettes. “Virtually every human being of age who’s using electronic cigarettes is a current or former smoker,” he says. “If you want to get consumers to explore new products, you have to accommodate them.” 

That means making it easy for them to find and buy the products. Kustin says e-cigarettes and combustible cigarettes are merchandised in the same place, which is usually behind a service desk counter. Shoppers ask for the product by pointing and hoping the cashier or attendant pulls out the correct item. “If they can’t figure out in seven seconds they want V2, or any other product for that matter, another customer is behind them saying, ‘Come on, I’ve got to get my lottery ticket,’” he says. 

The customer might then buy the same product they have been buying for years, and thus not try a new item, or they might get frustrated and shop elsewhere. While stores are not going to make tobacco and e-cigarette shopping as easy as, for example, shopping for cereal, they can merchandise the items by bringing them slightly closer to shoppers, and by using signage and other information, the way some stores do in their wine sections. 

“If grocery stores want to embrace this category they need to find new merchandising solutions,” says Kustin. “There are certainly opportunities out there for grocery stores that are able to engage consumers in a way that is distinctly different from how convenience or drugstores engage them. It presumes you have a conversation with somebody. Many supermarkets do have a footprint that would permit a store within a store.” 

Later this year, V2 plans to launch a micro e-cigarette that will have improved performance, improved aesthetics and longer battery life. There will be better yield on the cartridges, and the cartridges will be less expensive. Also, the new e-cigarette will have a flat edge so it does not roll off the table. “That may be the most important thing for some people,” says Kustin.

Related: Smoking Out Tobacco, Spotlight On: Cheyenne International, Spotlight On: Smokey Mountain;Vape ‘em if you got ‘em