This interview is brought to you by Xcaliber International, a NACS Hunter Club member.

Fourth-tier cigarettes are growing in a shrinking category. What’s the reason for that from your perspective?

Joe Nicolaus: In a word? Price. We’re seeing customers rapidly shift toward cheaper cigarette options. We all felt inflation rates hit multidecade highs in 2022–2023, raising the cost of essentials like gas, groceries and housing. While the rate of inflation has relaxed, prices on those things haven’t changed much. We saw large-scale downtrading to fourth-tier brands in 2023—sales jumped nearly 36% year over year, while premium brands witnessed a roughly 4% decline. There’s no getting around the fact that customers are prioritizing affordability above all.

Another interesting note is that the available data suggests that once a customer switches to an affordable brand, they stick with it. As NACS Magazine reported last December, even as inflation has started to cool off, most retailers reported no reversal in downtrading—customers keep buying lower-tier cigarettes even after seeing some relief at the gas pump. Once smokers switch to a cheaper brand, they realize they’re getting much better value for their hard-earned cash and keep listening to what their wallets are telling them.

Within the Xcaliber portfolio, are you seeing any interesting trends?

Nicolaus: I think we’re seeing a seismic shift in customer perceptions of cheaper brands. In our discussions with retailers at the store level, they’re telling us that the typical smoker today is less influenced by social status or image and more by saving money or outright financial necessity. The old idea of premium brands as a status symbol is fading rapidly, especially as smoking itself has become just one of many ways to consume nicotine.

The social incentive for smokers to stick with high-priced, “aspirational” brands is eroding in this era of internet-savvy frugality. We’ve even seen customers taking pride in finding the cheapest high-quality brand—it’s like discovering a hidden gem. Modern customers are online, swapping tips about which store has the lowest prices or which discount brand “is actually pretty good for the price.” This organic sharing of information has helped our fourth-tier brands gain followings well beyond traditional advertising. And for us, it’s passive, organic adoption.

In our discussions with retailers at the store level, they’re telling us that the typical smoker today is less influenced by social status or image and more by saving money or outright financial necessity.”

What can retailers expect to see from fourth-tier cigarettes in the next couple of years?

Nicolaus: One of the core tenants of our company is that we don’t want to tell retailers how to run their businesses. Having said that, if a retailer is seeking my advice about the future of the cigarette category, I’d tell them, “You simply can’t ignore the writing on the wall or you risk falling behind to the store down the street.”

A Goldman Sachs survey in 2024 found that, by and large, convenience retailers plan to reduce space for higher-priced premium packs and boost space for deep discounts because higher prices are driving demand to fourth-tier products. In that same survey, 40% of retailers reported customers switching from premium to fourth-tier cigarettes—a higher rate than those switching to e-cigarettes (24%) or nicotine pouches (17%). The study also found that retailers are seeing margin profiles for deep discount brands improving rapidly. Fourth-tier cigarettes not only led in sales growth but also saw gross profit margins nearly double year over year in 2023 vs. 2022.

Xcaliber has invested in in its own manufacturing facilities. How does that benefit retailers?

Dr. Jesse Phillips: Investing in our own manufacturing facilities has been a part of our vertical integration strategy. With our own ISO-certified laboratory and tobacco-processing plant, we have both more control over our products and the ability to consistently offer high-quality cigarettes for a lower price. We have also significantly enhanced our agility in product development and innovation.

Through our facilities, we can do testing more readily, more consistently, and it allows us to monitor our product, just to ensure that we keep everything at the highest quality. In the past, testing was cost-prohibitive, so we had to rely on the tobacco providers to tell us that the product they sent us met our standards. Now we’re able to test the moment tobacco comes in.

You mentioned building an ISO-certified laboratory. What does that mean?

Phillips: ISO 17025 is an international standard that analytical testing labs are held to in order to ensure that the data that comes out of those labs can be fully trusted. We built a standalone facility and went through an extensive certification process that required rigorous development of internal testing protocols, staff training and infrastructure upgrades.

What does the addition of tobacco-processing mean for Xcaliber and retailers who sell Xcaliber products?

Phillips: The recent development of Xcaliber’s tobacco-processing plant further strengthens this integrated approach. Having our own tobacco-processing capabilities means greater oversight of raw material quality and consistency, from leaf selection to finished product. For retailers, this translates to a reliable supply of high-quality cigarettes that consistently meet consumer expectations.