Analysis-Dominating US cigarette sales, a combined 7-Eleven, Circle K would face risk from vapes, cheap smokes

By Jessica DiNapoli and Emma Rumney

NEW YORK/LONDON (Reuters) – A Couche-Tard takeover of 7-Eleven owner Seven & i would position the combined convenience store chain to dominate U.S. cigarette sales and try to push tobacco companies for better prices and promotions – including on fast-growing nicotine pouches like ZYN.

Canada’s Alimentation Couche-Tard remains keen on a buyout after Japan’s Seven & i rejected its acquisition proposal as too low, and it remains unclear if the deal will go ahead. Seven & I has since moved to speed up an overhaul of its business demanded by some investors. It is set to announce quarterly results on October 10.

If the two players were to combine, the new U.S. chain’s size may offer greater bargaining power with cigarette manufacturers like Altria (NYSE:MO) and British American Tobacco (NYSE:BTI). But it would still face a major threat from illegal flavored vapes and deep-discount smokes like Cheyenne that are widely sold at independent smoke shops and bodegas. 

The market for U.S. cigarette smokers is declining after decades of warnings about health risks. But it approached nearly $60 billion in sales in the year ended in early September, according to market research firm Circana, and it is crucial to convenience, or c-store, sales.

In addition to health worries, U.S. consumers have moved away from name-brand cigarettes sold in major c-stores like 7-Eleven because of price hikes. The net price for a pack of Marlboros is up nearly 30% to $9.27 from 2019, according to manufacturer Altria. Taxes on heavily-regulated smokes can add further hefty costs per pack. 

The potential $38.5 billion deal would more than double Couche-Tard’s U.S. store footprint – through its Circle K shops – to almost 20,000, adding 12,601 7-Elevens, according to 2023 numbers from the National Association of Convenience Stores, a trade group. The shops are usually attached to gas stations. 

Circle K and 7-Eleven are the two top c-store chains by store count, meaning they likely already each capture the largest shares of U.S. tobacco sales, said Don Burke, senior vice president at Management Science Associates, a market research firm. Most convenience stores are independently owned.

Cigarettes made up 21.5% of total c-store sales in 2023, and other tobacco products like ZYN pouches and JUUL vapes were about 8%, according to Convenience Store News’ 2024 industry report.

A combined chain would be able to leverage its unrivalled size to try to cut prices on packs of cigarettes and popular, more-profitable nicotine pouches like ZYN, c-store and tobacco consultants told Reuters.

“There will be sharper negotiations between the retailer and manufacturer,” said Don Stuart, managing partner at Cadent Consulting Group, which has worked with tobacco companies. “(A combined chain) will get more attention from manufacturers, and they will invest there.”

Burke agreed tobacco companies, which rely on c-stores for sales, would seek partnerships with a combined retailer, but cautioned any pricing benefits would likely be incremental. 

Matt Domingo, senior director of external relations at BAT (LON:BATS)’s U.S. subsidiary Reynolds American (NYSE:RAI), which makes Newport cigarettes, said it offers its largest retail customers the same programs as smaller distributors – companies that sell tobacco and nicotine products to a variety of retailers. Altria declined to comment. 

Seven & i and Couche-Tard either did not respond or declined to comment. 

DECLINING MARKET

C-stores have long dominated tobacco sales, accounting for around 70% of purchases, according to market research firm Euromonitor International. Recently, some rivals including Ahold’ s Stop & Shop and Walmart (NYSE:WMT) have removed cigarettes from shelves nationally or in some states. 

Sales of cigarettes have been falling for years as smokers switch to vapes, pouches or cheaper brands. 

That has left manufacturers and retailers competing for the remaining chunks of the market, Burke said.

C-store partnerships with tobacco companies can limit them from competing with independent stores on deep-discount cigarettes.

In return for financial incentives, convenience stores agree to prioritize shelf space for certain brands or ensure they are among the cheapest in the shop, Burke said. Smokers priced out of Marlboro or Camel smokes may then find a broader range of discount brands in stores without such agreements. 

Tobacco companies paid retailers like 7-Eleven and Circle K $247.2 million for promotions including displays and merchandising in 2022, up 5% from the prior year, according to the U.S. Federal Trade Commission’s cigarette report. The companies spent the most on funding discounts on cigarettes at retailers, about $5.74 billion in 2022, according to the report. 

Large c-store retailers have also largely missed out on the sky-rocketing sales of flavored vapes, like Elf Bar, made by Chinese company Heaven Gifts. 

The vast majority of such vapes cannot be legally sold in the United States and are too risky for retailers like 7-Eleven and Circle K to carry. But they are easy to find at independent bodegas and smoke shops. 

BEYOND MARLBORO

Canada’s Couche-Tard has taken steps to stem tobacco revenue declines, including adjusting prices and offering loyalty programs to customers, executives told investors on conference calls this year.

Nicotine pouches, which users insert under the lip to get a buzz, have soared in popularity, driven by Philip Morris International (NYSE:PM)’s brand ZYN. That has helped boost Couche-Tard’s nicotine profits.

“We’re making more from nicotine than we ever have in the past,” executives said.

New nicotine products are likely to be a key competitive front in the future, especially as smoking rates decline, Stuart said: 

“I think we’ll see a big push in the less harmful alternatives category … more items, more space, better merchandising beyond just the Marlboros of the world.”

A combined Circle K and 7-Eleven would have a big advantage in terms of their ability to advertise tobacco and nicotine products around the cash register – one of the few remaining places where tobacco companies can spend on marketing, he continued.

But large c-stores may find they aren’t able to maintain dominance in pouches, either.

Online retailers like Haypp Group are looking to take a growing share of the U.S. pouch market by offering cheaper prices for bulk purchases, while manufacturers like Altria have warned of a growing black market.