By Scott Orr
If you drew a graph of America€™s cigarette consumption over the last 100 or so years, you€™d see a steady rise to a peak in 1981, then a persistent decline that shows no sign of slowing. In fact, if trends continue as expected, consumption will soon be half of what it was 30 years ago.
And 30 years from now, who knows?
The reign of cigarettes as the king of convenience stores€™ in-store sales is not likely to end any time soon, but with consumption declining year after year, many retailers are wondering how far cigarette sales can fall.
"In the convenience store sector, we€™ve seen the numbers for sales and margin decline slowly over the years. This trend is likely to continue and, as an industry, we€™ve got to be looking for alternatives," said Corey Fitze, director of government relations for NACS. "The big question is: `What€™s next?€™" he said.
More aggressive regulation of cigarettes, the rapid proliferation of smoking bans and increases in cigarette taxes at the federal, state and local level already have led many smokers to either quit or switch to less costly and more acceptable products, leaving retailers to ponder how to replace the lost sales.
Sale of snuff, snus, e-cigarettes, lozenges, gum and a wide range of other smokeless products (OTP) are on the rise, but so far no worthy product has emerged that will take the place of cigarettes. For smokers, it seems, cigarettes are more than just a nicotine delivery system.
In 2011, cigarettes remained the top category in the convenience industry, delivering 18.2% of all in-store margin dollars, according to NACS State of the Industry (SOI) numbers. Sales totaled $53.7 billion and the average convenience store sold $624,768 worth of cigarettes in 2011, down 1.1% over the year before. At the same time, gross margin dollars per store dropped 2.6% to $91,188.
NACS SOI numbers make clear that retailers should be preparing for the days when cigarettes are no longer the sole go-to product for nicotine users. If you need another signal, take a look at Big Tobacco€™s race into next generation tobacco and nicotine delivery products.
"I don€™t think anyone€™s found the magic smoke-free product," John R. Nelson, Altria Group€™s executive vice president and chief technology officer told the Wall Street Journal recently. If not, it€™s not for lack of effort and investment.
Lorillard, the third-largest U.S. tobacco company and the maker of Newport cigarettes, this year spent $135 million to acquire blu eCigs, which it called "the leading brand [of electronic cigarettes], offering the best consumer experience and unique social networking features, in the rapidly growing e-cigarette category."
"Electronic cigarettes offer many of the benefits of other smokeless products, but do so in a way that is familiar and enjoyed by current adult cigarette consumers," said Murray Kessler, the company€™s CEO.
At the same time, Nu Mark, a subsidiary of Altria Group Inc., makers of Marlboro, is launching a non-dissolving, lozenge-shaped nicotine disc called VERVE as an experimental smokeless product. VERVE doesn€™t contain tobacco, but rather nicotine derived from tobacco, which could allow it to escape the harsh healthwarning labels required for cigarettes and other tobacco products, including smokeless.
"Based upon our research, we believe that approximately 30% of adult smokers are interested in innovative types of spit-free tobacco product alternatives to cigarettes. We created this product in response to that interest," said Altria€™s Nelson.
Reynolds American is also betting on OTP, hoping the category will boost its net income by 35%, according to the Winston-Salem Journal. CEO/ President Daniel Delen revealed few details during a talk with analysts, but he did say that the company would debut products in vapor (like electronic cigarettes), nicotine extract items (like lozenges) and nicotine-replacement therapy by the end of 2012.
Delen recently told the Wall Street Journal that the retail price of cigarettes is causing smokers to consider new alternatives. "Where do they mostly buy their tobacco? It€™s gas and convenience stores. If there€™s sticker shock at the pump, when they walk inside to buy their cigarettes, they are in a price-sensitive moment of the day," he said.
"We have about a 30% margin on cigarettes and about 50% on smokeless, so there are benefits that way. But it€™s not just about the bottom line. You start looking at long-term sustainability," Delen added.
To be sure, nicotine in itself is not a healthy substance. It has been linked to cardiovascular problems, high blood pressure and diabetes. Unlike tobacco, however, it has never been linked to cancer and that€™s a pretty significant distinction.
This puts some anti-smoking activists in an awkward position when it comes to their opposition to nicotine delivery systems that do not produce smoke. There is no second-hand exposure and, even for the user, there is no doubt that nicotine alone carries a fraction of the health risks of smoking. This would seem to be a sensible alternative, as the places smokers can light up become fewer and fewer and the costs of tobacco products, especially cigarettes, become greater and greater.
In 2009, the federal excise tax on cigarettes increased by 158%, raising the price of a pack of smokes by 62 cents. In addition to federal excise taxes, every state collects its own tax and many of those taxes have increased as well. The national mean cigarette excise tax among all states increased from $1.34 per pack in 2009 to $1.48 in 2011.
These stressors are not just pushing smokers toward other products; they also are pushing them away from convenience stores and other retailers and into illegal black markets.
State cigarette smuggling has increased dramatically in 2011, with smugglers taking north-south routes to unload cargo in destinations such as New York City, where the combined city and state taxes total $6.46 a pack. At the same time, Internet sales continue to undercut local store prices by skirting state taxes.
In other counties, such as Canada and New Zealand, tobacco displays have to be removed from view in retail locations, leaving many to wonder if such a move will ever occur in the United States. Legal cases are currently still pending over the FDA requirement of graphic warning labels on cigarette packaging. The regulatory future of tobacco retailing is still uncertain.
Tobacco€™s use in western civilization dates at least to Christopher Columbus€™ early encounters with Native Americans who had been using it in their religious and medical practices. Tobacco was the first crop grown for profit in America.
Cigarette smoking increased dramatically in the United States and globally well into the 20th century.
It wasn€™t until 1964 that the Surgeon General issued his famous report linking chemicals in cigarettes to lung cancer.
Over the years, the tobacco industry has toyed with genetically modifying tobacco plants to make them less addictive and carcinogenic. One result came from Vector Tobacco, a part of cigarette maker Liggett Vector Brands, which sought to market cigarettes with fewer carcinogens and lower levels of nicotine.
Ever hear of OMNI cigarettes, with less carcinogens? Or QUEST, now with less nicotine? That€™s because they were both epic flops.
The company wrote that the product line failed because the message of a healthier cigarette failed to resonate. It failed "due, in part, to the lack of success of its advertising and marketing efforts in differentiating OMNI from other conventional cigarettes with consumers through the 'reduced carcinogen€™ message."
The tobacco industry also tried going in the other direction, modifying tobacco to more than double its nicotine levels. Brown and Williamson€™s Y-1 strain of tobacco is a famous example, seized upon by anti-tobacco crusader David Kessler, who was commissioner of the FDA back in the 1990s. Later, he declared that Y-1 "represents a dramatic attempt to manipulate nicotine."
More recently Kessler said the FDA should force big changes on Big Tobacco, including setting limits on the amount of nicotine cigarettes can contain. "Getting nicotine down to levels that smokers no longer crave cigarettes," he said, "could save 200,000 to 300,000 lives a year."
Actually, though, the nicotine in cigarettes has been increasing in recent years. According to a study by researchers at Harvard School of Public Health, Division of Public Health Practice, the amount of nicotine yield per cigarette increased from 1.1% in 1998 to 1.6% in 2005.
"Nicotine yield in smoke was positively associated with nicotine concentration in the tobacco and the number of puffs per cigarette, both of which showed increasing trends during the study period," the report said. Cutting or even eliminating nicotine from cigarettes is not really the answer, as the failure of reduced nicotine brands have shown. Smokers smoke, pretty much, for one reason and that€™s to get nicotine into their systems in a way they enjoy.
Despite its widespread use over thousands of years, there are those who foresee a day when nicotine use is outlawed or declines to near zero because of health implications. "I do think nicotine is nearing the end of its 5,000-year run," said Robert Proctor, a Stanford University professor and author of Golden Holocaust, which makes a case for the abolition of cigarettes.
"In fact, I expect that fall will accelerate, once the FDA mandates removal of nicotine and once local and state governments start barring the sale of cigarettes €" which will happen sooner than most people realize," Proctor said.
If Proctor is correct that cigarettes are not long for the American consumer market, convenience stores will be facing a seismic shift in their product lines. And while it certainly isn€™t going to happen overnight, it€™s never too early to prepare.
Scott Orr is a freelance writer based in Washington, D.C.
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As heavy handed as today€™s various taxes and smoking bans may seem to American smokers, they pale in comparison to those implemented last year in the Himalayan Kingdom of Bhutan, which cracked down on violators of the country€™s total ban on the sale and smuggling of tobacco.
Bhutan first banned the sale of tobacco in 2004, hoping to make itself the first tobacco-free country and setting a healthy example for the rest of the world. But the law was hardly effective. Instead of prompting a nation of nonsmokers, it spawned a thriving black market in cigarettes and other tobacco smuggled in from neighboring India.
The government, apparently embarrassed by the failure of the tobacco ban, went back to work and in 2011 began implementing new enforcement regulations, which can land smugglers and smokers who light up in public areas behind bars for years. Among the first people to be jailed was a Buddhist monk who was nabbed trying to smuggle $2.50 worth of chewing tobacco into Bhutan from India.
Smoking is allowed in Bhutan, but it is not easy. Cigarettes must be purchased abroad, there is 100 to 200 percent duty imposed when it is brought in the country and no more than 200 cigarettes can be brought in at a time. A receipt is issued at the border, which is valid for one month and must be carried at all times by the smoker.
The law allows police to raid homes of suspected smokers, even using tobacco-sniffing dogs, and smokers are then required to show proof that the tobacco was obtained legally.
Still, smoking continues in Bhutan.