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Brown Gold

Rising price of tobacco increases issues with inventory control and loss prevention

To succeed in selling tobacco products today, a c-store must — in the words of one retail executive — show they are in the business. That means they must have a broad selection of products, must always be in stock, must sell fresh product, and be ready to capitalize on new product trends like snus and even electronic cigarettes.

Those were some of the best category practices discussed at the annual Convenience Store News Tobacco Roundtable, held in Jersey City, N.J., last month. The roundtable was sponsored by Swisher, maker of Swisher Sweets and other cigars, Kayak moist smokeless tobacco and other tobacco products; Swedish Match, makers of White Owl and other cigars, Redman chewing tobacco and other tobacco products including snus; E-Smoke, maker of electronic cigarette starter kits and cartridges; and the Tobacco Vapor Electronic Cigarette Association.

Retailers on the panel included representatives from Wawa, Maverik, CF Capital Assets (Convenient Food Mart), Cenex Zip Trip, Cumberland Farms, Royal Buying Group, Travel Centers of America, Jubilee Food Stores (Hill City Oil) and Certified Oil Co.

One thing that became clear throughout the meeting is the highest-performing retailers maintain the largest departments, promote tobacco products heavily and can afford to be well-stocked at all times, separating themselves from the middle and lower-quartile performers.

Guest speaker David Bishop, managing partner with Balvor LLC, noted, “The bottom quartile stores can't afford to hold all the inventory anymore. It's like gold. Their theft and loss-prevention issues have increased tenfold as the value of the product skyrockets,” said Bishop, who presented results of an exclusive CSNews/Balvor study on retailer tobacco category practices (see story, page 50). “There's also tremendous pressure on the working capital of smaller retailers, especially as fuel prices soar. They have difficult choices to make.”


Since a presidential order was signed in June 2009 giving it regulatory control over tobacco products, the Food and Drug Administration has tackled a wide range of industry issues. The agency's Center for Tobacco Products focused on everything from advertising to cigar regulation and flavored cigarettes to a possible all-out ban on menthol.

“There are always challenges,” explained Anne Flint, senior manager, tobacco with Cumberland Farms. “No two days are the same; that's what makes it a great category.”

One aspect of the FDA's regulatory control is spot store inspections similar to inspections convenience stores have endured for years by local and state agencies. Unlike those inspections, however, is the response time with retailers waiting weeks to hear about possible violations. “In the past with local municipalities you find out if you had any violations pretty quickly,” Flint explained. “But with the FDA it could be up to three to four weeks.”

She added the industry is still waiting for final guidance on training programs. “We need guidance. Doing business in the Northeast is a lot different than doing business in the Southeast,” she added.

Jon Fleck, merchandising manager with Cenex Zip Trip, echoed some frustration with inspections, noting that his stores are subject to spot checks by up to four different entities.

Aside from frustrations with the FDA and inspections, c-store operators also expressed frustration with ever-increasing taxes on tobacco. Fleck noted his stores in Washington State have seen a double-digit decrease in pack sales because smokers can pay $2 to $3 less for a pack of cigarettes in neighboring states.

John C. Call, managing partner with CF Capital Assets LLC, agreed. “U.S. retailers are now glorified tax collectors,” he said. “We have been a place where [state] can come to.” As an industry, convenience stores have prospered partly on tobacco. “Every car we all own, every house we live in and every suit we wear has something to do with cigarettes. That is what got us here,” he added. “We are the purveyor of legalized addictions.”

But retailers can only be the tax collectors for the state for so long. “As an industry, what can we do except oppose them strongly?” Call asked. “How many stores have to close? What is it going to take?”

All the rules and regulations can leave c-store operators feeling like their backs are against a wall. “We could get painted into a corner with FDA regulations. We are fighting the state with taxes, and competing against the Indian reservations without taxes,” explained Jeff Arnold, category manager at Maverik. “These are battles that we need to figure out one way or another.”

But not every state is attempting to boost its coffers by increasing cigarette taxes. Legislators in New Hampshire, Rhode Island, Oregon and New Jersey are considering lowering the cigarette excise tax. According to Bishop, many of those states eying a decrease have already hit the inflection point relative to revenue generation from cigarettes. And other data points illustrate the higher taxation didn't necessarily change smoking behaviors — or at least in the intended ways — as many smokers simply shifted purchases to lower-cost markets. While politically challenging, “reducing the cigarettes excise tax may actually be the least negative option when considering how to balance the budget,” according to Bishop. Otherwise, further program cuts or tax increases will be necessary to make up the additional shortfalls.

Brian Adams, category manager at Wawa, has only been handling the tobacco category since September, but already can tell that tobacco is a focal point for his company's stores. “Tobacco is considered a driver into the store,” he explained, “and a complementary factor to other items.” He added that he views tobacco with a more holistic approach, not just cigarettes, OTP or e-cigarettes but as tobacco products overall.

Retailers also have to contend with the manufacturers increasing prices on their end, which affects a c-store's bottom line. According to Dave Williamson, retail vice president at Jubilee Food Stores in Louisiana, retailers discount cigarettes to increase sales but this does not necessarily increase the bottom line. “Do you farm or do you harvest in the category?” he asked. “I struggle with that. How do you position that price point to maximize profit?”

Shifting manufacturer contracts helped one c-store operator increase cigarette sales. Wayne Wills, vice president of merchandising at Certified Oil Co., said that manufacturers' market share changes have allowed the company to add Lorillard to the back set and discount the Newport brand of cigarettes, which has led to an uptick in cigarette rings.


In the cigar category single-serve foil seems to be doing better than multipack, according to the cigar insiders. “The industry, both manufacturers and retailers, have done a great job of getting behind single-serve,” Joe Teller, director, category management at Swedish Match, said. “Foil has been one of the drivers for that. The message is that it is fresher.”

As for cigars, stick volume is relatively flat, but unit volume has jumped up because more cigar smokers are buying singles instead of packs, Teller added. “This tells me that consumption hasn't really changed despite the big 2009 SCHIP FET increase. Fewer sticks purchased at a time with unchanged consumption probably means cigar consumers are making many, many trips to c-stores. This is a good shopper for c-stores to attract,” he explained.

While cigar use is experiencing a great run, the flavored cigar run seems to have moved from many flavors to just a few core ones, Teller said. According to him, four flavors have survived: grape/white grape, wine, peach and strawberry. “At one point there was every flavor possible but now we are basically down to these four core flavors,” he said.

Jeff Rossi, Swisher International, echoed that. “People are still looking to have a cigar, whether sitting on their deck, in their garage,” he said.

Manufacturers are also giving cigars a big push, added Randy Outlaw, Swisher International. “I probably have never seen the level of promotional activity that I have seen right now,” he said.

As for who is buying cigars, Fleck explained his stores are seeing a lot of young, urban hip people purchasing cigars. He added that, in his experience, there appears to be in uptick in women cigar smokers also.


When asked what's driving sales in the growing OTP category, retailers responded with numerous examples.

“Camel Snus is doing very well and we're going to be testing the Generals in our Utah stores this month,” said Jeff Arnold of Maverik Stores.

“Low price snuff, portion pouches and snus are driving sales,” added Teller of Swedish Match.

“An awful lot of promotional activity is driving sales,” said Jeff Rossi at Swisher. “But it's a balancing act for the retailer — how low do you go?”

Retailers and suppliers agreed snus is an innovative product, but it will take time to build sales of the popular Swedish moist tobacco product in the U.S.

There was also discussion of the viability of somewhat “questionable” products like synthetic cannabis, often marketed as herbal incense but smoked by some consumers to get a marijuana-like high. A few of the smaller retailers reported success selling these products at extremely high margins. Most of the larger retailers said they were steering clear of the products, though, mostly due to future legal worries.


E-cigs are the buzz at the moment. Based on comments from roundtable attendees, electronic cigarettes could be anything from a fad to a truly disruptive, innovative new product like energy shots were when introduced to c-stores a few years ago.

Panelists did agree that some of the misunderstandings around the potential of e-cigs are due to disagreement over where they belong. “E-cigs needs a classification,” said Oliver Camilo of E-Smoke. “Our customers are tobacco users, so e-cigs should be in the tobacco category.”

The CSNews/Balvor study indicated that about a quarter of all c-store retailers currently sell electronic cigarettes despite their high margins and rate of growth (Nielsen pegged the growth rate of e-cigs starter kits and cartridges at over 1,000 percent for the 52-week period ending Feb. 19, 2011).

Among the roundtable panelists, only about a third said they currently sell e-cigs, citing regulatory and legislative uncertainty as well as lack of wholesale distribution as determinants for not carrying the product.

Besides the fear of future legal issues, retailers also questioned the social acceptability of the product. “When is it going to be accepted by society?” asked Flint from Cumberland Farms. “I don't see people in the street or at the airport using it.”

Fleck of Cenex ZipTrip stores also added that customers will have to be educated about the product.

Williamson at Jubilee Food Stores, though, has a plan for educating customers. “We gave them to all our clerks in the stores. That really helps get conversations going about the product,” he noted.

“The import ban was lifted a month ago (February),” noted Ray Storey of the TVECA, the trade association promoting the sale of electronic cigarettes. “There is this misperception about e-cigs being a drug (nicotine) delivery device. That's not true. It's a tobacco product. The judge agreed it's a tobacco product. It's not a smoking cessation product and it's not a product that makes health claims. This product will absolutely take over the industry. E-cigs are here to stay.”

In the CSNews/Balvor survey, 11 percent of retailers said they planned to test e-cigs in 2011 and another 25 percent said they were currently evaluating the product.

For the latest news and analysis on the tobacco category, check out CSNews' new Tobacco Retailing microsite at

For comments, please contact Melissa Kress, Associate Editor, at [email protected].

Menthol Update

At press time, leading cigarette manufacturers said they still planned to work with the Food and Drug Administration as the agency reviews menthol cigarettes, despite a draft report from the FDA's Tobacco Product Scientific Advisory Committee endorsing a menthol ban.

“The agency now has input from the Tobacco Product Scientific Advisory Committee (TPSAC), tobacco manufacturers and industry representatives, and from the general public,” said Jeffery S. Gentry, executive vice president of operations and chief scientific officer for R.J. Reynolds. “As the director of the Center for Tobacco Products at FDA said in his remarks today, the TPSAC report does not set FDA policy and it does not set FDA actions. It is information that the agency will take into consideration in its analysis.”

Gentry was referring to Dr. Lawrence Deyton's assertion that the FDA is not working on any timetable to take action, if any action at all, on the non-binding recommendation, as Convenience Store News reported.

Lorillard echoed R.J. Reynolds' desire to work with the FDA as the potentially lengthy process moves forward. “While we fundamentally disagree, we are not surprised by what we believe is TPSAC's unsubstantiated conclusion relative to the impact of menthol cigarettes on public health,” stated Murray S. Kessler, chairman, president and chief executive officer of Lorillard. “Most importantly, TPSAC's report is just the first step in what we believe will be a very long process that ultimately does not result in the removal of menthol cigarettes from the marketplace, especially when contraband and other unintended consequences are seriously considered.”

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