The Tobacco Line: Reading Nicotine Revenue in Fueling Station C-Store Feasibility Studies

The line item used to be predictable. It is not now.

For two decades, tobacco sat at twenty to thirty-five percent of c-store inside revenue, declined gently each year, and required no analytical justification beyond a NACS benchmark. Lenders rarely asked questions. Feasibility consultants rarely raised them.

That regime ended in 2022. The replacement is a different problem entirely. The category is bifurcating. Regulation is moving state by state in ways that change unit economics by ten to twenty percentage points of margin. Vendor allowances that historically padded inside-sales gross profit are being reset under federal scrutiny. None of this shows up in a NACS State of the Industry table, because the table averages a portfolio of operators larger and more urban than the typical SBA or USDA borrower.

This note explains how MMCG now treats the tobacco line on a gas station feasibility study, what the borrower must document before delivery, and where current third-party reports are wrong.

Four sub-categories. Different P&L behavior. Stop aggregating them.

Most pro formas still report tobacco as one line at one margin. That is the underwriting error.

• Cigarettes. Largest sub-category by revenue, lowest by margin, in structural decline. NACS reports a 13.54 percent gross margin on cigarettes against 29.25 percent on other tobacco products in 2024 (1). The spread is widening. Industry shipment volumes fell roughly ten percent in 2025 across the major manufacturers (2)(3).

• Other tobacco products. Cigars, smokeless, and pipe in the historical NACS sense. Roughly flat for a decade. Over-indexes in rural sites with high adult male customer concentration.

• Modern oral pouches. Their own category in everything but NACS reporting. Zyn shipped 794 million U.S. cans in 2025, up thirty-seven percent year-over-year, holding sixty-six percent of category dollar share (4). Margin range thirty-five to forty-five percent. The only growth segment in nicotine.

• Vapor. The most regulatorily exposed sub-category in the c-store. In states with PMTA registries the authorized SKU set is now four manufacturers and roughly forty product variants. In states without registries, illicit disposable share remains high and the category P&L is volatile. Same physical store, different economics.

A 2026 feasibility study that treats these four lines as one is not a feasibility study. It is a NACS average copied into a Word document.

Embed nine percent. Not five.

The first analytical decision is the cigarette decline rate over the loan term. SBA 7(a) loans on fueling facilities run twenty-five years. USDA B&I runs up to thirty. A study assuming five percent annual decline is not stress testing the deal. It is hoping.

The defensible 2026 base case has three components.

Cigarette unit volume declines of seven to nine percent annually through 2028, tapering to five percent thereafter as the addressable smoker base contracts. Dollar declines of two to four percent annually, since manufacturer price increases offset roughly five to six points of unit decline through pass-through. Premium-brand share holding above sixty percent of the category for the loan term.

The 2025 data already supports this. Marlboro alone holds 41.7 percent of the U.S. cigarette market, larger than the next ten brands combined, and gained share during a year of double-digit category decline (5). Premium holds. Deep discount gains. Mid-tier compresses. This is the late-cycle signature of every consumer category in managed decline.

A federal menthol ban is not in the base case. The FDA withdrew the proposed rule in January 2025. Restarting takes a minimum of two to three years before any compliance deadline, putting menthol risk at 2028-2029 at the earliest. Flag it as a tail risk. Move on.

The state cigarette tax overlay is more important. Indiana raised its rate 201 percent on July 1, 2025, from $0.995 per pack to $2.995. Tax Foundation modeling projects Indiana flips from sixth-leading exporter to a fifteen percent net importer state (6). Any feasibility study within thirty miles of an Indiana border now needs an explicit cross-border sensitivity. Most do not include one.

Pouches replace forty-seven cents on the dollar to hold flat. They are replacing more.

The reason cigarette decline does not destroy total nicotine gross profit is that pouches replace it on a different margin profile. The arithmetic is not subtle.

Each dollar of cigarette sales lost yields fourteen cents of gross profit at NACS-benchmark margins. Each dollar of pouch sales gained yields thirty cents at the conservative end of the pouch margin range and forty cents at the optimistic end. Pouches must replace forty-seven cents of every lost cigarette dollar to hold gross profit flat.

Through 2025 they replaced fifty-three cents on the dollar at the rural fueling sites in MMCG's 2025 engagement sample. The trade is margin-positive when it is happening. The risk is that at sites with low pouch penetration today, it is not yet happening.

The growth rate is what we stress test now. Pouch category volume rose 31.5 percent in the fifty-two weeks ending September 2025, with retail value up forty-four percent (7). Three scenarios. Base case fifteen percent annually through 2028, decelerating to mid-single digits as the category matures. Upside thirty percent through 2026 before tapering. Downside five percent combined with a Washington-equivalent ninety-five percent state pouch tax overlay.

The downside is not theoretical.

Washington enacted SB 5814 effective January 1, 2026: ninety-five percent excise on all nicotine-containing products including synthetic. Oregon enacted $0.0325 per unit with a sixty-five cent floor on the same date. Nebraska enacted twenty percent of wholesale. Maine raised OTP to seventy-five percent of wholesale. Indiana imposed $0.50 per ounce on pouches as ANP (8). Five states changed pouch economics on a single date.

A study delivered in May 2026 using pre-Washington margin assumptions on a Washington site is mathematically wrong. We have seen several.

Exhibit A: U.S. state regulatory matrix for c-store tobacco, May 2026. Interactive map showing pouch tax burden across all 50 states plus DC, with five toggle layers: cigarette excise tax per pack, modern oral nicotine pouch tax structure, flavor ban scope, PMTA vapor product registry status, and MMCG analytical tier classification. Heavy pouch tax states (75% of wholesale or higher) include Massachusetts, Minnesota, Washington, Maine, and Rhode Island. New 2025-2026 pouch tax states are highlighted in gold: Indiana, Oregon, Nebraska, and Maine. Map is essential context for any gas station-adjacent c-store feasibility study, SBA 7(a) acquisition, or USDA B&I fueling facility loan in 2026. Sources: Campaign for Tobacco-Free Kids, Tax Foundation, MultiState Tobacco Legislation Update, Public Health Law Center, FDA.

Geography is now a gate. Apply national averages to a Tier 1 state and the answer is wrong.

The most consequential shift in MMCG underwriting practice over the last eighteen months is treating state regulation as a gating variable rather than a sensitivity. Several states have moved into territory where the entire tobacco line P&L is structurally different.

Tier 1 (material exposure). California, Washington, Massachusetts, New York, Indiana, Minnesota. California operates Proposition 31's comprehensive flavor ban plus the Unflavored Tobacco List under AB 3218, narrowing the legal product set materially below national distribution. Washington's nicotine tax took effect January 2026. Massachusetts has held its menthol-inclusive flavor ban since June 2020, with documented thirty-eight percent cross-border smuggling to New Hampshire (9). New York combines the highest cigarette excise in the country at $5.35 per pack with an e-cigarette flavor ban, producing a fifty-two percent inbound smuggling rate.

Tier 2 (watch list). Rhode Island, New Jersey, Illinois, Maine, Oregon, Connecticut, Nebraska. Each enacted or actively considered pouch and vapor tax expansions in 2024-2026 sessions.

Tier 3 (standard). The states where MMCG runs most of its rural fueling engagements: Georgia, Tennessee, Kentucky, Texas, Oklahoma, Iowa, Missouri, Ohio, Pennsylvania, Wisconsin, Montana, Arizona. With one exception. Indiana moved to Tier 1 on July 1, 2025 and is not coming back.

The map is not static. Nebraska crossed into Tier 2 on January 1, 2026. The next round of state legislative sessions will produce more.

For the rural belt, the analytical risk is concentration rather than regulation. At rural fueling sites the tobacco line frequently runs thirty to thirty-five percent of inside revenue versus eighteen to twenty-two percent at metro sites. A regulatory shock therefore lands twice as hard on EBITDA. Size working capital and DSCR cushions accordingly.

Vendor allowances are the credit risk no one asks about.

The five largest cigarette manufacturers spent $5.74 billion on retailer price discounts in 2022 alone (10). For a typical gas station-adjacent c-store this is two thousand to five thousand dollars per month in promotional support. Stores enrolled in the Philip Morris Retail Leaders Program, the Reynolds Retail Partners Marketing Plan, or the ITG Retail Partnership Plan receive significantly more.

These payments are contractual. They assume specific shelf layouts, planograms, and category-mix obligations. They are assignable in some program versions and non-assignable in others, depending on change-of-control provisions in effect at the time of acquisition.

When an SBA 7(a) borrower acquires an existing fueling facility, almost no feasibility study addresses contract transfer. Almost no lender makes it a closing condition. The economic exposure is large. A store losing $50,000 per year of vendor allowances at acquisition has lost six to eight points of stabilized inside-sales EBITDA margin.

MMCG now requires the borrower to document, before delivery: which Retail Leaders or Retail Partners contracts the seller currently holds, what the change-of-control language says, and whether the manufacturer rep has confirmed transfer. Where transfer is not confirmed, post-acquisition tobacco gross profit is modeled at NACS averages without vendor support, typically twelve to fifteen percent below the seller's reported gross profit.

In three of MMCG's 2025 fueling engagements this single adjustment changed the DSCR conclusion.

This is the question that distinguishes a feasibility study from a market overview. We ask it on every file.

Exhibit B: U.S. tobacco category transition, 2019-2025. Two trend lines that determine the gross profit trajectory of every gas station-adjacent c-store inside-sales line. Left chart: cigarette industry shipment volumes indexed to 2019 = 100, declining to 65.8 by 2025 with Altria/PMUSA reporting a 10 percent year-over-year volume decline for full-year 2025. Right chart: quarterly U.S. modern oral nicotine pouch shipments by brand, with Zyn (PMI) reaching 196 million cans in Q4 2025 and 794 million cans for the full year. The substitution math: pouches must replace approximately forty-seven cents of every lost cigarette dollar to hold gross profit flat at NACS-benchmark margins. Sources: Altria FY25 8-K, BAT Preliminary Results FY25, PMI FY25 release, Circana retail scanner data via Tobacco Insider, FTC Cigarette Report 2022.

Rural is not metro. Apply a single mix and the answer is also wrong.

The rural-versus-metro question is largest in tobacco. The dispersion is wide enough that a single national assumption is indefensible.

A typical Tier 3 rural site runs tobacco at thirty to thirty-five percent of inside sales, foodservice at five to fifteen percent, packaged beverages at twenty to twenty-five percent, beer at fifteen to twenty percent. Tobacco and beer dominate because the operator has not built the foodservice program that drives metro economics, and because the rural smoker base remains demographically concentrated.

A metro site with credible foodservice runs tobacco at eighteen to twenty-two percent and foodservice at twenty-five to thirty-five percent. Foodservice gross margin in the fifty to fifty-five percent range, which is where it sits at well-run stores per NACS 2024 benchmarks, more than compensates for the lower tobacco contribution.

The error in third-party studies is applying NACS national averages to rural sites. NACS data is heavily weighted to Casey's, 7-Eleven, Maverik, and the regional chains. Single-store rural operators carry tobacco mix two hundred to four hundred basis points higher and margin one hundred basis points lower because they cannot achieve chain-scale vendor allowances.

For SBA 7(a) gas station studies and USDA B&I fueling facility studies, MMCG calibrates the tobacco line against three references rather than one: NACS adjusted down by one to two margin points, the operator's three-year POS data, and a comp within the same county or adjacent counties.

The final pro forma sits at the conservative end of those three. Not the average.

Eight questions. A feasibility study without documented answers does not go to credit.

The practical output is a checklist. MMCG will not deliver a gas station-adjacent c-store study to a credit committee in 2026 unless the following eight questions have specific, documented answers.

One. State cigarette excise tax at the site, and rate in every adjacent state within thirty miles. If the differential exceeds one dollar per pack in either direction, model cross-border traffic explicitly.

Two. State treatment of nicotine pouches and pending 2025-2026 legislation. If Tier 1 or Tier 2, apply an explicit regulatory overlay scenario with documented effective date and tax structure.

Three. State PMTA vapor product registry status and current enforcement. Active registry: model vapor using only the authorized SKU set. No registry: apply a fifty percent haircut for inventory volatility.

Four. Seller's current Retail Leaders, Retail Partners, or Retail Partnership Plan contracts and confirmed manufacturer rep transfer to buyer at closing. No confirmed transfer: strip vendor allowances from the post-acquisition pro forma.

Five. Borrower's three-year point-of-sale data broken out by sub-category: cigarettes, OTP, pouches, vapor. No POS data: use county-level cigarette stamp tax data and Circana scanner approximations, and flag the limitation explicitly in the deliverable.

Six. Working capital implications of pre-stamped cigarette tax inventory. In high-tax states this ties up $50,000 to $80,000 per store on day one, which most SBA 7(a) loan structures do not separately fund.

Seven. Rural-versus-metro mix calibration against three reference points: NACS adjusted, operator POS, county comp.

Eight. Sub-category margin assumptions stress-tested against state-specific overlays. National averages applied to a Tier 1 state are not stress-tested. They are wrong.

These are not optional. A study that does not address them is not a bankable feasibility study for a fueling facility.

Three implications for credit officers.

• The tobacco line is no longer a single revenue assumption with a single margin. It is a four-line analytical problem with state-specific overlays. Anyone delivering it as a single line is leaving credit risk on the table.

• State regulation has accelerated past the shelf life of any feasibility study older than twelve months. Five states changed pouch economics on January 1, 2026. The next round of legislative sessions will produce more.

• The pouch-for-cigarette substitution is margin-positive when it is happening. At rural sites with low pouch penetration today, it is not yet happening, and inside-sales gross profit is materially worse than the headline industry numbers suggest. MMCG has seen this pattern often enough in 2025 rural engagements to flag it as a recurring underwriting risk.

The institutional credit officers we work with have moved decisively toward asking these questions in the last two quarters. The studies that do not answer them are getting sent back. The studies that do are pricing more accurately. The pattern hardens through the rest of 2026.

May 6, 2026, by a collective of authors at MMCG Invest, LLC.

Sources

(1) NACS State of the Industry Report, 2024 data released April 2025, reported via CSP Daily News and Convenience Store News.

(2) Altria Group, FY2025 8-K full-year results, filed January 28, 2026.

(3) British American Tobacco, Preliminary Results for Year Ended December 31, 2025, released February 12, 2026.

(4) Philip Morris International, FY2025 Fourth-Quarter and Full-Year Results, released February 5, 2026.

(5) Tobacco Insider USA Brand of Smokes synthesis of Altria 10-K filings.

(6) Mackinac Center for Public Policy, Cigarette Taxes and Smuggling 2025 Update, and analysis of Indiana HB 1001 effective July 1, 2025.

(7) Circana retail scanner data for U.S. spitless tobacco, 52 weeks ending September 7, 2025, via Tobacco Insider.

(8) MultiState State Tobacco Legislation Update, February 5, 2026, covering Washington SB 5814, Oregon HB 2068, Nebraska LB 9, Maine HP 1001, Indiana HB 1001.

(9) Tax Foundation, Cigarette Taxes and Cigarette Smuggling by State, 2023 data released July 2025; PubMed Central, Impact of Massachusetts Statewide Sales Restriction on Flavored and Menthol Tobacco Products.

(10) Federal Trade Commission Cigarette Report for 2022, released October 2023.