NATIONAL REPORT — The one-two punch of inflationary pressures and lower discretionary income is behind the tobacco category's latest cautionary tale.
Especially for convenience store customers, inflation has been most acutely felt at the pump, according to Don Stuart, managing director of Cadent Consulting Group in Wilton, Conn. "With dramatically higher gasoline prices vs. a year ago, consumers are feeling the pain, resulting in less frequent trips or fewer trips into the store to buy merchandise and tobacco products," he explained.
Onward & Downward
"Tobacco consumers are trading down to fourth tier and deep discount brands as inflation continues to creep in," agreed Ernie Teague, vice president of sales and marketing at Cheyenne International, maker of filtered cigars, cigarettes, moist snuff and pipe tobacco. "More consumers are also discovering that quality products can come at a lower cost."
Stuart identified four typical downtrading scenarios happening in the category now:
- From premium brand/name brand cigarettes to second tier, third tier and fourth tier cigarettes;
- From cigarettes to roll-your-own (RYO) tobacco and papers;
- From cigarettes to little cigars; and
- From cigarettes to reduced-risk options, including e-cigarettes and heat-not-burn tobacco products.
"Within tobacco, trade-down is a very real risk now," he said. "Other tobacco products [OTP] are also coming to the forefront for both reduced-risk and price/value reasons."
Management Science Associates Inc. (MSA), a Pittsburgh-based company focused on analytics and informatics, has been tracking a trend whereby the deep discount cigarette segment is growing despite declines in the other cigarette price tiers. Don Burke, MSA's senior vice president, noted that this trend has spread to include the moist smokeless segment, where "the lowest-priced products are growing despite small declines in the remainder of the category."
What can c-stores do to cater to cash-strapped customers and preserve their tobacco/nicotine business?
Teague told Convenience Store News that it's more critical than ever for retailers to maintain a good mix of products, and develop good working relationships with reputable manufacturers across all subcategories — premium, discount and deep discount.
"There is real value in price-value products right now and it's important c-stores support these brands with signage and correct pricing," he added.
The way Stuart sees it, smart retailers will place more price-attractive OTP products in the forefront for checkout merchandising. He specifically highlighted RYO.
"Placement of RYO tobacco and other alternatives with clear price markings and comparisons per stick/use can help address the needs of cash-strapped customers," he advised. "The leading RYO brands, including Top and Bugler, should benefit from a trade-down resurgence, while more premium brands of RYO will also benefit."
While it's true the taxation differential between cigarettes and OTP has narrowed over the past decade, Stuart pointed out that it is still clearly less expensive to buy RYO or switch to off-brand alternatives.
"This trend will only accelerate with the continued high rate of inflation," he reasoned.
Like Stuart, MSA's Burke expects downtrading and RYO trends to only increase given the current rate of inflation and higher gasoline prices. He's also observed a resurgence in an old-fashioned tobacco item: pipe tobacco. "As a direct result of the current economic conditions, pipe tobacco — a product form often used to make your own cigarettes — is showing signs of growth despite several years of decline," he said.
His advice to retailers is to make it easy for customers to locate value products. "The convenience retailer should use signage and shelf tags to highlight the low-priced products in each category to capitalize on the current consumer purchase behavior," he advised.
C-store retailers also should consider highlighting the modern oral and vapor categories, according to Burke, not only for increased store visibility, but also to ensure their product assortment is keeping up with consumer demand.
"The nicotine categories experiencing growth in the current economy include vapor and the new nicotine pouch products, otherwise known as the modern oral category," he said. "Interestingly, these nicotine categories typically provide nicotine at a more economical level than other nicotine products."
Over the last few years, MSA has found that consumers are gravitating to the more economical product forms to consume nicotine, including small cigars and RYO items.
"Today, when most consumers are back in the workplace, the vapor and modern oral categories are meeting the dual consumer needs of providing a product that can often be consumed where other tobacco products are prohibited, and typically provide an economical purchase choice," Burke explained.