The Ramifications of Reduced Nicotine

The FDA’s plan to establish a nicotine standard has industry insiders speculating about the future of c-store tobacco

By Renée M. Covino

WILL A REDUCED nicotine policy be another tobacco regulatory reality for convenience store retailers to contend with?

The Food and Drug Administration (FDA) recently announced plans to publish a proposed rule that would establish a maximum nicotine level in cigarettes and certain “other combustible tobacco products.” As of press time, it was still not clear what would fall under the “other” category.

The goal of the rule, according to the agency, is to reduce nicotine content in traditional cigarettes to minimal and potentially non-addictive levels, thereby reducing addiction and death, along with underage cigarette use.

If such a policy is implemented and nicotine levels in cigarettes are reduced substantially, several tobacco industry insiders told Convenience Store News that the impact would be significant. “We would expect cigarette volumes to decline dramatically,” Goldman Sachs tobacco analysts stated in June, when the FDA announced its intent.

Bryan Haynes, a partner with the Troutman Pepper law firm and head of its tobacco law practice, echoed that such a move would be “hugely impactful.”

“The huge potential impacts include driving consumers out of combusted cigarettes or other combusted categories to other tobacco categories or to no tobacco products at all,” he said. On the other hand, some might smoke less, but others might smoke more, trying to get more nicotine, he reasoned.

“Another issue is it will likely lead to a pretty significant consolidation of available products — many cigarette companies will not have the wherewithal to meet the standards,” Haynes said. “One could argue [the proposal] is tantamount to a ban.”

Prohibition is another term Haynes uses in reference to the FDA’s proposal, which he said has the potential to put entire categories and companies out of business.

“We would have to consider the potential for contraband trade. It’s clear to me that until the end of this administration, we are going to see activist prohibition. That doesn’t mean it will be the same under the next administration,” he noted.

Cadent Consulting Group Managing Director Don Stuart also mentioned prohibition in relation to the reduced nicotine proposal. “This will be an extremely long road, which could create widespread black market opportunities, criminal control of the tobacco business, and lost tax revenue. Prohibition 2.0 anyone?” he stated.

He also quipped: “Remember ‘Near Beer?’ Now, it’s ‘Almost Tobacco.’”

Regarding the proposal’s nicotine terminology of minimal, marginal or non-addictive levels, Stuart questions what that even means. “Doesn’t weight and tolerance matter?” he posed.

If the proposal goes through, he believes convenience store retailers may find fewer customers smoking more to get the nicotine fix they had before. “The average

“This will be an extremely long road, which could create widespread black-market opportunities, criminal control of the tobacco business, and lost tax revenue. Prohibition 2.0 anyone?”

— Don Stuart, Cadent Consulting Group

cigarette purchase size will go up, even though there will be a lower penetration or fewer cigarette buyers,” he predicts.

Delays Likely

Before the c-store industry reacts to any potential outcomes, however, timing should be considered. “My first advice is that retailers should not panic,” Haynes said.

According to the Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions, the FDA is targeting May 2023 to issue the proposed rule. “But that could always change,” Haynes pointed out.

And even if the FDA were to issue the proposed rule in May 2023, the public notice, comment period and rule finalization process will take much longer.

“Given the impact any final rule would have on the tobacco industry, it is likely many industry members will be very involved in the process and potentially challenge any final rule in court. Thus, it

will be years before any rule takes effect, if ever,” he said.

Jefferies Group analysts predict possible implementation will take “many” years — at least five years, and likely more toward 10 years. In a recent report, the investment bank and financial services company likened the nicotine rule to the FDA’s proposed menthol ban (which it doesn’t foresee implementation of until 2026 at the earliest), but called the reduced nicotine proposal even more complicated.

“Risks around illicit and vulnerable populations will be more pronounced, for example, and then the FDA needs certainty around things such as possible compensatory smoking,” the report stated.

Barclays analyst Jain Gaurav agrees with the delayed timing. “We think it will take a decade or longer for the FDA to introduce nicotine caps due to the long nine-step process at the FDA, the inevitable litigation, and then the one-year time given to retailers to get rid of excess inventory,” he said in an investor note. “The FDA will need to take into consideration inputs from scientific, legal, law enforcement, public health, industry and budgetary stakeholders, and respond to all the comments in an iterative process before it can publish a final rule.”

So far, VLN King and VLN Menthol King 95% reduced nicotine content cigarettes from Buffalo, N.Y.-based 22nd Century Group Inc. are the only cigarettes to secure the FDA’s Modified Risk Tobacco Product (MRTP) designation. As part of that designation, which was granted in December of last year, the agency requires VLN to include “Helps You Smoke Less” on its product packaging and advertising.

Both VLN King and VLN Menthol King cigarettes first launched in select Chicagoarea Circle K stores in April as part of a pilot program. In early August, 22nd Century Group CEO James A. Mish announced that the company will bring the VLN brand to Colorado in September — ahead of schedule.

“Our VLN pilot in Chicago is exceeding expectations, driving us to accelerate and expand our launch plans. The pilot and consumer studies have made clear that our approach focusing on awareness, education and trial is working with adult smokers," Mish said. sions with additional channel partners to expand the geographic and regional sales reach of VLN. To date, the company secured regulatory authorizations to sell VLN in 40 states and Washington, D.C., an increase from nine states in the first quarter of 2022. Applications are pending in all remaining states.

“Many cigarette companies will not have the wherewithal to meet the standards. One could argue [the proposal] is tantamount to a ban.”

— Bryan Haynes, Troutman Pepper law firm

Proactive Actions

Besides not panicking, what else can retailers do right now?

“In general, prior to any new regulation or market restriction, we recommend keeping existing products fully stocked until the regulation or restriction occurs,” said Leila Medeiros, senior vice president of new categories at R.J. Reynolds Vapor Co., headquartered in Winston Salem, N.C.

That said, she advises all c-store retailers selling tobacco to ensure they are fully compliant with all local, state and federal laws, rules and regulations. “Beyond that, it is critical that retailers begin talking to their customers about potentially less harmful products,” Medeiros added. “By having these conversations early, your customers will be better prepared to meet their nicotine preferences in the event of a market disruption.”

Troutman Pepper’s Haynes agrees that it makes sense for retailers to have more diverse tobacco portfolios today. “It helps meet consumer needs, and it accounts for potential regulatory changes,” he said. “It’s just prudent now.”

Stuart of Cadent Consulting added that “in-store, retailers need to solidify their position as a tobacco-related destination. It’s not just about cigarettes, it’s also about alternatives.”

Jefferies analysts believe that if a nicotine standard is implemented, the majority of smokers will switch (or will have already switched) to reduced-risk tobacco products. Therefore, retailers that are already in the game will win. CSN