OTP Stays Modern

In a tough regulatory environment, modern oral remains a category bright spot.

OTP Stays Modern

January 2024   minute read

By: Melissa Vonder Haar

The OTP category has been a solid contributor for convenience retailers in the modern era: According to the NACS State of the Industry Report® of 2022 Data (SOI Report), 99.8% of all convenience stores sold OTP, with the category accounting for 7.51% of in-store sales.

“It’s just like a steadily climbing ladder going up year over year,” said Emma Tainter, a research analyst and writer for NACS.

The OTP average sales per store, per month and gross profit dollars per store both grew by 10% or more in 2022—and CSX data through August 2023 showed sales were outpacing 2022’s during the same period.

“That’s actually very impressive,” Tainter said.

“It’s very important,” Rick Staley, merchandising manager for Tri Star Energy, said of the category. “That’s where my focus is: the back bar.”

Here’s a snapshot of how the various segments within the OTP category are performing and what trends and challenges the category faces in 2024.

Smokeless: Modern Momentum

Smokeless has long been the largest segment of the OTP category, and 2022 was no exception: NACS SOI Report data showed smokeless accounted for 40.7% of OTP sales in 2022, with a gross profit margin of 22.65% (both of which were comparable to 2021’s figures). CSX data for the first half of 2023 also showed positive sales growth.

“If we look at the CSX data for smokeless through August 2023, it’s trending up,” Tainter said. “Smokeless’ moment is not over yet.”

That growth is especially impressive given what’s not included in the NACS SOI and CSX smokeless data: perhaps the hottest product on the back bar, modern oral nicotine pouches. Those products are currently part of the “other tobacco” segment.

In 2022, the other tobacco subcategory accounted for 8.0% of OTP sales (up from 5.8% in 2021) with a gross margin of 36.22%. Even more impressive, the average other tobacco sales per store, per month grew by 52.0% year over year.

When retailers are asked about smokeless trends, OTP trends or even overall back bar trends, it’s all about modern oral.

“Nicotine pouches, modern oral, everyone says they love them,” Staley said, adding that the products are especially popular with current or former smokers looking for an alternative.

That’s also an area of focus for major manufacturers.

“The modern oral nicotine category has been expanding from the West to East Coast,” said David Cawton, Swisher’s manager of corporate communications. Cawton noted that states in the northwest have experienced “explosive growth.”

Given that modern oral nicotine pouches have been around for as long as a decade, it’s fair to question if the products can really continue to see that kind of impressive growth. But both retailers and manufacturers aren’t seeing a slowdown happening any time soon.

“I’m still seeing huge growth, even on a brand level,” Staley said, noting that brands that started strong are still going strong—and new brands are having strong debuts.

Cawton pointed to retail shipment data from Management Science Associated Inc. that showed growth is actually increasing: Modern oral volumes grew 34% in 2022 and were on track to increase by 47% in 2023.

As such, retailers such as Staley are adjusting their planograms to put the products front and center.

“I’m putting [modern oral] more or less on the top shelf for visibility,” he said. “There’s a lot of adjustment going on right now to give modern oral more of a presence.”

E-Cigarettes: Proceed with Caution

Electronic cigarettes remained the second-largest contributor to OTP sales, accounting for 32.5% of the category in 2022, according to NACS SOI Report data. More importantly, the subcategory continues to boast a higher gross margin than smokeless (33.22%). And despite a continuous slew of regulatory challenges, average sales per store, per month grew by 15.6% between 2021 and 2022.

“The category is really holding its own,” Staley said, crediting the strength of major brands such as VUSE as well as flavored disposables.

The major challenge retailers face is that many disposable flavored products are considered illegal by the U.S. Food and Drug Administration (FDA). According to the FDA, retailers can only sell e-cigarettes that have been approved through the premarket tobacco application (PMTA) process or that have submitted a PMTA that has been accepted by the FDA for review. But there are many products on the market that the PMTA rejected … or that were never submitted in the first place.

“The uncertainty of our current regulatory system presents immense challenges [because] retailers are not certain what can legally be sold,” said Matt Domingo, senior director of external relations for Reynolds American Inc.

The popularity of these illegal brands is showing up in scan data. The September 2023 NIQ (formerly Nielsen) numbers for e-cigarettes included several disposable brands whose PMTAs were rejected (or never received) by the FDA. NIQ showed Elf Bar to be the second-highest selling brand in September 2023, accounting for nearly 5% of disposable e-cigarette sales; Elf Bar is the same brand that the FDA fined retailers nearly $20,000 per location for continuing to sell.

“No one wants to be selling products that are not compliant with the agency holding authority,” said Niraj Patel, founder and CEO of Bidi Vapor, LLC. “They wouldn’t do it with lighters or energy drinks or any other product. They want to ensure the well-being of their customers.”

So what’s a responsible retailer to do? Staley said he’s still offering a limited number of flavor options but he is also making sure the brands he’s partnering with have submitted PMTAs that are being reviewed—or, in the case of a very limited number of brands, including Bidi, that were granted a judicial stay of a marketing denial order from the FDA.

“You have to be careful there,” he said. “I’m not bringing in any wild stuff.”

Cigars: Bracing for a Ban

The cigar subcategory has remained a consistent performer for the OTP category according to NACS SOI Report data: It accounted for 15.9% of category sales in 2022 and offered retailers a healthy gross margin of 32.90%. Those figures were basically flat year over year, which is no small feat because, like e-cigarettes, cigars have faced their own slew of state and local flavor bans.

That uncertainty is only poised to grow in 2024 thanks to a possible national flavor ban. Though the final regulations had not been announced at the time this article went to print, FDA sent the final rule to ban both menthol cigarettes and flavored cigars to the White House in October, marking the last step for sign off before the bans are finalized and published.

This could be a huge blow to the segment: Swisher estimated that characterizing flavors represent 45% of the current large cigar market—and that states that have banned flavors have seen a greater decline in cigar sales than the national average.

“Adult consumers want options that align with the occasion, their mood or even just with the latest trends,” Cawton said. “That’s why offering different blends is very important.”

“We believe existing science and evidence are inadequate to support restrictions on the use of flavors in cigars,” added Davien J. Anderson, a spokesperson for Altria.

Anderson pointed to the government’s surveys that show little youth usage of cigars (flavored and non-flavored) and no evidence that cigars play a role in dependence or tobacco cessation. “Criminalizing flavored cigars may lead to serious unintended consequences,” he said.

Those unintended consequences have played out many times before as banned products move from responsible retailers to an unregulated black market.

“The FDA’s proposals failed to consider the undue economic burden placed on legal sellers who lose sales to the illicit market,” said Anna Ready Blom, NACS’ director of government relations. “These regulations do not seem to account for those losses, in particular the losses of sales of non-tobacco items that are purchased when people buy menthol cigarettes or flavored cigars.”

Retailers and manufacturers are understandably concerned. While the ban, if enacted, would not go into effect for some time, manufacturers are preparing to up their non-flavored options to try and capture the cigar consumer’s desire for variety.

“It’ll take a hit. There’s a black market out there that I’m concerned about,” Staley said. “But talking to major cigar manufacturers, they’ve all said they’ll handle it if there is a ban. They’ve got a plan.”

Melissa Vonder Haar

Melissa Vonder Haar

 Melissa Vonder Haar is the marketing director for iSEE Store Innovations.

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