Cigar Sales Light Up Tobacco Category
After a 25-percent jump in sales last year, the cigar segment is coming on strong again in c-stores, thanks in part to manufacturer innovation and tax-weary cigarette smokers jumping to large filtered cigars.
The Convenience Store News 2010 Industry Report reported a significant leap in cigar sales last year, from $14,897 per store in 2008 to $18,567 per store, as retail prices rose with the increase in the federal excise tax, which pushed wholesale prices more than 32 percent. This year, retailers and wholesalers are again reporting strong sales and continued consumer interest in the segment.
“We have to be careful when we look at sales figures to factor in all of those tax dollars,” cautioned Ron Coppel, vice president, business development, Eby-Brown Co., who said some cigar manufacturers are seeing flat sales or slightly decreased sales. “There are pockets of unit growth in some subcategories, but they have been offset with unit losses in other subcategories.”
Still, there have been significant in-store changes -- many pushed by cigarette retail hikes -- in consumer habits and product offer. “We see consumers looking for options other than cigarettes to satisfy their smoking needs,” said Frank Davoli, director of purchasing for South Bend, Ind.-based Richmond-Master Distributors Inc., both a supplier and retailer that owns and operates 10 Bonkers c-stores and 37 Low Bob's Discount Tobacco stores. The company also has another 85-plus Low Bob's Discount Tobacco licensee sites.
The operator’s retail cigar sales saw double-digit increases last year and are on mark to do the same in 2010. “Consumers are purchasing both cigarettes and little cigars in the same transaction and switching between the products,” Davoli said. “It seems they are taking a ‘smoke a cigarette, smoke a cigar’ approach as a way to decrease the total cost of tobacco enjoyment.”
Retailers are realizing the profit potential of other tobacco products, especially cigars, and merchandising accordingly. “Cigars are making a significant impact on retailers’ bottom lines,” Davoli said. “They are very profitable items in a small footprint -- a winning equation.”
While the segment was once pushed by flavor -- and flavored cigars are still a significant factor -- Davoli said there has been a decline in the number of new flavors launched.
“It seems as if the original flavors -- sweet and grape to name two -- are making a resurgence in the marketplace,” the retailer said. “White grape is the hottest flavor out there right now.”
Although, the flavored cigar segment is not enjoying the growth it has in years past, certain flavors still remain vital, agreed Coppel, who pointed to wine, grape, strawberry and, in certain markets, peach flavors as standouts. “Other flavors will surge in certain regions for a brief period, but the resurgence has proven short-lived.”
Further driving sales is manufacturer innovations, such as the foil pack. Whether in a single, two-stick or buy-some, get-some-free format, foil packs have contributed to the increase in cigar sales, Davoli said. “The packaging screams ‘freshness’ and the consumer loves a fresh product,” he noted.
Indeed, as sales of traditional five-packs fall off, Eby-Brown has seen single sales grow substantially, and two-pack and three-for-two packaging, introduced post-tax increase and boasting added freshness, selling even better.
“This accent on ‘fresh’, combined with the reduction of cigars per package to keep the cigars affordable, had changed the definition of pack cigars,” Coppel said.
Marketers have done a good job of convincing customers that foil is fresher -- and fresher is better, said Andrea Myers, executive vice president of marketing for Kocolene Marketing LLC, the Seymour, Ind.-based operator of 12 Fast Max convenience stores and 19 Smokers Host tobacco stores. “The younger adult customers are into that trait. It’s a little harder to convert the older customers, who just want to come in a buy cigars in a box. But if you can sell them on the freshness aspect, they are willing to change over.”
Since the tax increase, Kocolene’s stores are experiencing a boost in unit sales, especially singles compared to five-packs or box sales. “Customers don’t have the dollars to shell out for the five-pack,” Myers said.” Some manufacturers are now offering a two-pack or three-pack. There are so many deals on single packs, we are seeing a conversion to that.”
When Kocolene reset its cigar category in the c-stores, 30-inch merchandisers were changed to offer two shelves, instead of one, of single cigars, because Myers said singles are driving the category. “It’s all we can do to get all of the singles on one shelf,” she said, noting singles retail between 79 cents and $2.
In the large-cigar segment, a redesign and reclassification of what used to be called “little cigars” to “filtered large cigars” has boosted performance industrywide. Brands such as Cheyenne, Smokers Choice and Santa Fe, all once classified as little cigars, have been reformulated as filtered cigars and continue to impact the segment.
“With filtered cigars coming in a pack just like cigarettes, and taxed lower than cigarettes, many smokers are trading over,” Myers said. The least expensive filter large cigars at Fast Max stores retail for 99 cents per pack; the most expensive, Santa Fe, goes for $1.89. Smoker’s Choice retails for $1.39. At the same time, the stores’ least expensive pack of cigarettes retails for more than $3 and carries a much smaller margin.
Kocolene’s c-stores now carry four or five SKUs of the filter large cigars; the tobacco stores carry approximately a dozen. “It’s a growing segment in the c-stores and a huge category in the tobacco stores,” Myers said. “But the future of the large filter cigars will rely on what the government does [in terms of taxing them in the future].”
Some manufacturers have recognized an opportunity in the development of wood-tip cigars. Combining wood-tip options with proven flavored cigar winners, such as wine-flavor wood tip cigars, have expanded the segment, Coppel said.
At Bonkers and Low Bob’s stores, cigarillos and premium cigar items are among the best sellers. “While the blunt-style market has flattened out, cigarillos continue to grow,” Davoli said, noting merchandising options range from single-stick sales, to five-packs to the popular foil packs.
Consumers have been willing to pay premium prices for a well-made cigar, he added. “I truly believe consumers look at the purchase as a reward or treat for themselves.”
Also spurring cigar sales are new players who are introducing products priced 20 percent to 30 percent below the traditional manufacturers’ comparable items. “I equate this to the growth of the fourth-tier cigarette category as taxes and retail price went up on the major brands,” Davoli said. “I believe that we will continue to see more discount pricing pressure as time goes by.”