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CSNews Exclusive: OTP Opportunities Abound

NEW YORK -- With the tough economy as a backdrop to increased taxation and regulation of tobacco products, convenience store retailers need to focus on the lucrative segments of the tobacco category -- other tobacco products (OTP) -- and satisfying those customers' needs, according to Convenience Store News' "Growing Tobacco Profits" Webinar held yesterday.

"The tobacco industry is in a state of transition -- and to some degree, confusion. Consumers are looking for alternative options and new items trials are increasing, while others are seeking to exit the category altogether," Terry Kailey, tobacco category manager for Dallas-based 7-Eleven Inc., said during the free online event, noting price points are becoming even more important to lure in customers than before, and compared the act of driving tobacco customers into stores to "herding cats."

He added: "From our perspective, tobacco is more important than ever," because those purchases generally include more items than tobacco alone. "If you lose the tobacco purchase, you lose all other purchases at the same time. The importance of this customer grows each and every day."

The event, sponsored by Swedish Match North America and McLane Co., highlighted tobacco category performance in 2008 and preliminary results for 2009. In OTP, the biggest gains for 2009 in terms of dollar sales and unit volume were cigars and papers, according to Nielsen Scantrack data presented by CSNews Editor-in-Chief Don Longo. Cigars saw dollar sales jump 22.5 percent, while unit volume increased 6.7 percent. Papers, meanwhile, grew 10.6 percent in dollar sales and 9.5 percent in unit volume.

Kailey also provided his views on the category during the live online event. He said the biggest opportunity in tobacco today is alternative tobacco products such as dissolvables, electronic cigarettes, snus and others.

"As cigarette prices escalate, and more restrictions are placed on cigarettes, these items satisfy a need, and because of their discreetness, are more socially acceptable to use," he said, adding they provide consumers an affordable way to satisfy their needs.

Obstacles in the tobacco category center on the continued escalation of the legal and legislative tobacco issues, such as state excise tax increases and FDA regulation. "All of these issues have serious implications for sales and gross profits in the entire store," Kailey noted, emphasizing the need for convenience store owners and operators to speak out against harmful tobacco legislation to their respective lawmakers. For example, Washington state recently approved an increase in the state excise tax on cigarettes, and 7-Eleven stores "will hold legislators accountable," by posting in stores the names and contact information of those lawmakers who approved the increase, in hopes to prevent similar actions in the future.

Also presenting during the Webinar was Joe Teller, category management director for Swedish Match North America, who began by giving a look at the current economic situation. He continued by outlining the "fantastic" performance OTP has presented for c-store retailers recently, growing dollar sales three times faster than the rest of the store, while gross profits increased four times faster than other in-store areas.

"Last year was as difficult or turbulent a year as ever," he said, noting despite this, OTP had a successful year and he predicts even better performance in OTP for 2010.

"The OTP shopper is worth investing more time and energy on," he said. "I believe [retailers] can get a return-on-investment in this category. There is always low-hanging fruit and operators still have opportunities for even better performance."

Teller explained the OTP customers visit convenience stores more often than buyers of any other categories, including cigarette shoppers. When compared to the average c-store shopper, OTP customers visit twice as often, "This is where we can make money and make a loyal shopper," he said.

View the entire presentation and learn more opportunities within the OTP segment.

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