The Next C-store Tobacco Competitor: Manufacturers?

NATIONAL REPORT — When it comes to the backbar, convenience store retailers need to manage the here and now, while also keeping an eye on what may be coming down the pike — and sometimes that pike is outside the United States.

David Bishop, managing partner of sales and marketing firm Balvor LLC, points to Japan as an area retailers should be watching. Japan Tobacco International (JTI) and Philip Morris International (PMI) are both opening standalone stores there as they introduce their new heat-not-burn products, which have been growing significantly — especially PMI.

According to Bishop, it's more of a supply issue than a demand issue for PMI and its heat-not-burn product iQOS. Leading research in Japan indicates iQOS is creating a drag, or headwind, for traditional mass-made cigarettes.

"As that product enters the United States — as people expect it to in 2018 — what will happen if and when they open up a similar type of store in the U.S.? Convenience retailers could be faced with some very stiff headwinds if similar trends develop in the U.S. as in Japan," Bishop said.

There are many reasons why PMI, JTI and other tobacco companies would pursue standalone outlets. One of the lessons learned from electronic cigarettes is that convenience stores aren't necessarily the best place to introduce new innovation that requires educating the consumer.

"Speed of service is paramount; the c-store staff isn't necessarily trained to be as knowledgeable as a vape shop or tobacconist," Bishop explained. "So, anything new that requires any degree of explanation or education is better handled in other classes of trade."

Case in point: the arrival of open systems, or vaporizers, on the market was one of the major drivers of vape shops.

"Going forward, if this is in fact the case, it should be a concern to convenience retailers. What will this do to their business?" Bishop asked.

When PMI introduces iQOS in the U.S., it will be through an agreement with Altria Group Inc., and Altria has amassed — and continues to amass — an active and robust direct marketing database through direct mail and its mobile apps.

"If they want to turn on a new product, they can go directly to the consumer to promote it and drive them to wherever they want to drive that traffic," Bishop said. "Today in the U.S., those apps drive you to a physical store that typically will be a convenience store. But tomorrow, if iQOS is introduced and they open stores of their own, where does that traffic get driven to?"

Will c-store retailers even stock iQOS? And if so, will the promotional offers be directed to the retailers or to the company’s own outlets? Bishop further questioned.

"There may be some combination. I am not suggesting that Altria is going to open a thousand of these stores, but look at Japan," he said. "It's likely they will open up some sort of experiential outlet, probably in high-traffic areas like Times Square or downtown Chicago. Who knows?"

For an in-depth report on tobacco in the convenience channel, look in the April issue of Convenience Store News.