The vote, which was unusually subjected to a three-line whip, had been hotly debated with a number of concerns raised among peers of all parties, according to the Association of Convenience Stores.
It has pledged to continue its campaign against the ban in the wake of the defeat.
Chief executive James Lowman said: “Our focus is on making the case to MPs that the cost of the display ban, imposed on retailers at the worst possible time, is being pushed through in the face of weak evidence that it will make a difference to youth smoking.
“It is disappointing that the cost of the ban has been so inaccurately and confusingly communicated to MPs over recent months. The briefings from government have downplayed the likely costs of the measure and this has portrayed an inaccurate picture of the cost and disruption that retailers will face to implement this law. It is important that in the next phase of debate there is greater clarity about the costs.”
The Bill will have its third reading in the House of Lords on May 12 and will then pass to the House of Commons for MPs to consider.
The ACS is calling on retailers to make their voices heard as the process continues.
Lowman said: “Retailers have a real opportunity to tell MPs about the disruption that they face. We are confident that MPs will listen to the grassroots opinions and weigh the regulatory costs against the sketchy evidence of impact on youth smoking. If they do they will conclude that a display ban is a distraction from achieving the important smoking reduction objectives.”