Changes Hit Tobacco as OTP Moves Into Spotlight

LAS VEGAS -- There was a time when any convenience store tobacco discussion would center exclusively on cigarettes, but as they say, times they are a changing.

"Clearly, tobacco is not just about cigarettes anymore," David Bishop, managing partner of Balvor LLC, said during a session entitled "Tobacco: Managing the Changes." 

Looking at a snapshot of tobacco share from 2002 to 2011, Bishop noted that there has been a shift in top-line sales with other tobacco products (OTP) growing from 6.9 percent to 10.2 percent in share. Key drivers behind this shift have been the continued decline in demand for cigarettes, as well as new product innovation in the OTP category.

More notably, he added, has been OTP's three-time increase in its impact on gross margin. 

Mary Szarmach, vice president of trade marketing and government relations at Gasamat Oil Corp./Smoker Friendly, has seen the changes in the category firsthand and explained that cigarettes will no longer give retailers the dollars they need to survive. 

"You need to hang your hat elsewhere and even major manufacturers are hanging their hat elsewhere. You need to follow their lead," Szarmach said. 

That is not to say retailers should turn their backs on cigarettes, according to Nik Modi, senior analyst with UBS Warburg. "The cigarette category is declining, but it is still a large category," he said, emphasizing that cigarettes are not going anywhere. 

Bishop agreed. "From a traffic driver standpoint, there is no other category in the store like cigarettes," he said. Case in point, Balvor research earlier this year found that one in five cigarette transactions includes a dispensed beverage purchase. 

Still, manufacturers are now looking three, five and even 10 years down the road to determine where the category is going and starting to explore new options. "The tobacco category has always been slow to catch on, but it is very important to get ahead of the curve," said Modi. 

Bishop noted that some people used to refer to OTP as "the little engine that could," yet it is growing everyday and coming in various forms like snus and electronic cigarettes. 

In Smoker Friendly's stores, snus accounts for 13 percent of its moist tobacco segment year to date and carries a "much higher" margin than traditional moist snuff. Szarmach shared that her company is seeing crossover, with some traditional moist snuff consumers trying snus as well, as adult smokers turn to snus as an alternative for when they can't light up. 

Drawing the most attention and questions in the tobacco category over the past few years, though, has been the newcomer to the group -- electronic cigarettes. These products have seen a huge jump in sales and product availability in the past year, particularly since the Food and Drug Administration said it would regulate them as tobacco products in April 2011. To date, the agency has yet to set regulations. 

"The industry is really doing the right thing. They are getting ahead of the curve and being proactive" about potential regulations, said Lyle Beckwith, senior vice president of government relations at NACS, the Association for Convenience & Fuel Retailing. He explained that the e-cigarette industry has formed a trade association and is looking at developing standards. 

Modi cautioned, though, that retailers need to do their homework when deciding which e-cigarette brands to carry. They should look at which companies have the capital behind them; which may be facing patent issues; and the overall quality of the brand.  

"This is going to be a tremendous category," Modi said. "The opportunity is monstrous."