Rising Natural Gas Prices Affecting Core Tobacco Consumers: Goldman Sachs Survey

According to a recent survey by Goldman Sachs, the rising cost of natural gas is also affecting core tobacco consumers.

In New York, the tobacco industry is facing headwinds. According to a nicotine survey conducted by Goldman Sachs in the second quarter, higher natural gas prices and inflation have started to affect low-income/core tobacco consumers.

According to Bonnie Herzog, managing director at Goldman Sachs, overall our contacts are becoming more cautious and are highlighting that in the second quarter, the increasing pressure on low-income consumers is forcing them to make trade-offs, leading to a decrease in cigarette consumption and downward pressure.

The Nicotine Nuggets investigation reached out to representatives of retail and wholesale contacts, representing approximately 75,000 retail points of sale in the United States, accounting for half of the total distribution channels.

According to the quarterly survey, cigarette consumption in the second quarter of 2022 has accelerated its decline, reflecting an increase in the pressure for low-income consumers to make trade-off decisions. This has resulted in a decrease in the frequency of tobacco purchases, reduced spending on shopping and travel, as well as a decrease in the expenditure of each store on tobacco/nicotine products.

Herzog stated that during a period of three months, downward trading pressures intensified, with over 70 respondents saying this was in response to the increase in natural gas prices.

In addition, as consumers purchase less tobacco, manufacturers' pricing power has weakened. Approximately 65% of retailers have indicated that today's manufacturers have less pricing power compared to a year ago, representing a significant shift from our previous survey.

Looking at the specific market segments, it is evident that there is still a strong demand for nicotine consumption without smoking, as demonstrated by brands like ZYN, the leader in oral nicotine products.

Herzog stated that regarding electronic cigarettes, they remain "largely stable, reflecting the growth of flavored disposable e-cigarettes and an increase in the number of people quitting smoking.

Additionally, contacts for Goldman Sachs retail and wholesale businesses did not report the FDA's marketing refusal order and subsequent legal suspension in late June, which had a negative impact on JUUL.

She added that in fact, the majority of respondents stated that JUUL's short-term sales increased after the ban.

However, according to the survey, respondents are still concerned about potential nicotine regulations and associated unintended consequences. Yet, according to Herzog, they believe that changing their tobacco strategy now would be premature, given that the policy may take several years to implement.

She added that consumers are largely unaware of the proposed policy.

On June 21st, the FDA announced that it will establish a proposed product standard to set a maximum nicotine level for traditional cigarettes. This rule aims to reduce the use, addiction, and death caused by tobacco among minors, according to the agency.

According to Herzog, concerns over inflation and rising natural gas prices (especially among low-income consumers) have contributed to a significant decline in cigarette consumption. This has been further fueled by regulatory tightening and ongoing uncertainty surrounding e-cigarettes.

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