Backbar Holds Key to Unlocking C-store Profits

LAS VEGAS — With relatively low gas prices and high consumer confidence, there is no better time to be a convenience store retailer. And with roughly 154,195 stores, there is no better time for tobacco to be in the convenience channel.

Foodservice is undoubtedly a hot category for c-stores, but even without foodservice, merchandise sales were up 4.5 percent in 2015, according to Convenience Store News' Industry Report, published in June. Of the top 10 in-store categories, cigarettes still holds the lead spot, and other tobacco products (OTP) comes in at No. 6, CSNews Editorial Director Don Longo cited during a panel discussion at Tobacco Plus Expo (TPE) 2017. The session was entitled: "Tobacco Category: Still the Key to C-store Profits." 

Cigarettes experienced a good year in 2015, but are now returning to normal levels, with an estimated 1.6-percent increase for 2016 and a return to historical declines for 2017. OTP, on the other hand, has been growing its share of in-store sales over the past five years, and it is one of the fastest-growing categories in the convenience channel.

Backbar offerings account for a large part of the business at Cumberland Farms stores. According to Anne Flint, senior category manager at the Framingham, Mass.-based retail chain, its approximately 550 stores total $1 billion in annual revenue, and tobacco is about 45 percent of the business on the revenue side.

Of that, the combustible segment is approximately 40 percent to 45 percent of the revenue, she said, adding: "I spend a lot of time on combustible." Cumberland Farms saw a 4-percent increase in the combustible segment in 2015, and a 1-percent increase in 2016 — two very good years, Flint noted.

However, "it's a little concerning; the last three months of the year were not as good as the beginning of the year," she acknowledged.

While she expects cigarettes, in general, to return to normal declines of 3 percent to 4 percent this year, Flint said she doesn't "expect Cumberland Farms will be down that much."

As for OTP, smokeless has experienced some "very good increases," she reported, noting that the chain saw some gains in alternative tobacco products when it added them to the mix. However, Cumberland Farms does not offer open systems in the vapor segment. 

Las Vegas-based Speedee Mart is also finding success with its backbar offerings. Ray Johnson, operations manager for the c-store chain, pointed out that tobacco was 40 percent of sales when he entered the convenience business in 1979 and it's still 40 percent of sales today.

"I have always felt without tobacco, there would be no convenience stores," he said, pointing out that when you add in other items a tobacco consumer buys, that percentage-of-sales figure jumps to 50 percent. "The tobacco customer is very important."

Breaking down his segments, Johnson said cigarettes were up 2 percent last year, with smokeless climbing 10 percent, and cigars and vapor products jumping 25 percent. "The trends are going in the right way," he said.

Looking at the backbar from the other angle — the supplier angle — John Wiesehan Jr., CEO of Mistic E-Cigs, said when it comes to the convenience channel, supplier companies can find success with products that are easy to use and have the right price point.

As the regulations set in the Food and Drug Administration's (FDA) deeming rule settle in, vape shops — a  chief competitor to c-stores in the vapor space — are under "arduous constraints," he explained. "A lot of them may not make it, and I think those customers will migrate to traditional channels," Wiesehan predicted. 

He noted that vape shops have filled an important need — they are a good format to teach consumers about the vapor products — and they "played a big part in the growth of the industry." When the migration does happen, he said, traditional channels like convenience will have a better-educated consumer.

LEGISLATIVE CONCERNS

When it comes to the tobacco category, legislation is a major concern.

In the electronic cigarettes and vapor segment, taxation on the state level "is real," Wiesehan said. However, on a cautiously optimistic note, the FDA's deeming rule did not impose a ban on flavors on the federal level.

Legislation in Massachusetts — Cumberland Farms' home state — is another story. As Flint explained, Massachusetts is an anomaly because local boards of health have the authority to make regulations addressing anything they perceive as a threat to public health: tobacco, plastic water bottles, and plastic bags, to name just a few.

"With 200 [Cumberland Farms] stores in Massachusetts, more than half are affected by flavor bans," she said, adding that regulations on cigar sales are also popular. 

Flint also serves as vice president of the board at the National Association of Tobacco Outlets (NATO). "We are fighting back, but we are not getting the support from the manufacturers and that's disappointing," she said. "It's real. It's going to spread. It's in California; it's in Massachusetts."

Limits on tobacco retailing licenses are also a concern as Cumberland Farms builds new stores. 

ON THE HORIZON 

As of now, the FDA's deeming rule has caused the vapor industry to hit pause on innovation. According to Wiesehan, "what you see is what you've got to play with, and I'm not sure what is going to happen with the new administration."

That being said, there is still a market for new backbar offerings. "People are still going to need their nicotine. If you are on top of it as a retailer and as a manufacturer, you will be in a good position to capitalize," he said. 

Speedee Mart is one convenience retailer that is not afraid to try new things. "I keep an eye out for new products and go after them," Johnson said. "You can't wait. I never want to be a 'me too' store."

TPE 2017 took place at the Las Vegas Convention Center Jan. 25-26. In addition to education sessions, Tommy Chong, author, activist and actor, joined the keynote presentation as the celebrity speaker on Jan. 25. TPE also featured a show floor with exhibitors occupying Tobacco Turnpike, Vapor Vista, Alternative Alley, and General Merchandise Main Street sections.