Flexibility a Must in Managing OTP Category

JERSEY CITY, N.J. -- Richard Mione, senior director of merchandising with VPS Convenience Store Group, summed it up best when he said: The days of a one-size-fits-all other tobacco products (OTP) category are long gone.

That was certainly the common thread throughout today's Convenience Store News webcast, "Keeping Up With OTP: Times Are Changing!" During the event, which was sponsored by Swedish Match, it was apparent that the growth of OTP is helping the overall tobacco category power through the decline of cigarettes -- in both sales and volume. As Mione added, hopefully the industry can maintain this growth in OTP.

"No doubt, this is an exciting category for us and for convenience stores," he said, explaining that c-stores currently control OTP, which acts as a destination category for the convenience channel. Mione noted that to be successful with OTP, retailers need to be aware that space allocation is very important, variety is key and flexibility is a must.

Changes in tobacco retailing are nothing new, but consumers -- especially, tobacco consumers -- are facing new pressures in the form of rising gas prices and the Jan. 1 payroll tax hike, explained Joe Teller, director of category management at Swedish Match.

Combined with the still-struggling economy and rising cigarette prices, it's no wonder OTP sales are up. According to David Bishop, managing partner of sales and marketing firm Balvor LLC, OTP dollar sales in c-stores increased from 4.1 percent of total tobacco sales in 2000 to 10.8 percent in 2012. Though it has been "a gradual evolution," OTP and its effect on the total tobacco category have been consistent, Bishop noted.

Digging deeper into OTP, Teller explained that moist snuff tobacco (MST) is driving the majority of the growth. Cigars are holding their own, with multi-pack foil pouches and single sticks taking the lead over traditional cardboard packs. Snus, Bishop said, remains in a period of transition.

As for what individual retailers are seeing, Anne Flint, senior category manager of tobacco at Cumberland Farms Inc., shared that the Northeast c-store chain's customers are primarily looking for value. She said the bleak economic picture is leading customers to be less brand loyal and more price conscious.

Cumberland Farms’ research found that its high-value customer spends more than seven times that of any other customer segment. Of that high-value group, 33 percent are cigarette smokers and of the smokers, 38 percent previously bought Cumberland Farms' private label cigarettes. However, that private label brand was discontinued more than two years ago and since then, the chain has been experimenting with ways to keep this high-value customer. Its efforts included offering a mixture of national, low-priced brands and even investigating an entrance into the exclusive brand arena.

This year, the Cumberland Farms private label cigarette reemerged as the First Class brand. Launched in January, First Class has been successful to date and the company is reviewing expansion of this strategy to OTP, beginning with smokeless tobacco, Flint said.

Meanwhile, at The Pantry Inc., OTP Category Manager Jen Eaton said the Southeast company -- parent of the Kangaroo Express chain -- is seeing modest dollar growth in OTP, but cigar margins are compressed. Overall, though, she reported that OTP is healthy, with most of the growth coming from smokeless.

The Pantry is also seeing success with electronic cigarettes. "I think electronic cigarettes can now be considered a prominent part of the category," Eaton said.

Flint echoed this sentiment, commenting that e-cigarettes "have been a silver lining."

Retailers have several reasons to be excited about e-cigarettes -- mainly the higher margins; the innovation around the product; and the ability to offer customers an alternative when traditional cigarettes are not acceptable, Bishop explained.

While predicting the future of e-cigarettes depends on several major factors -- the least of which is regulation by the Food and Drug Administration -- Royal Buying Group Category Manager James Conrad predicted that one year from now, the e-cigarette segment will look very much the same as today, including the "hodgepodge of manufacturers." In a few years, however, he believes the e-cigarette landscape will look very different.

For one, Conrad foresees the number of e-cigarette manufacturers leveling off; those having good trade marketing, consumer marketing and established names will be counted among the remaining few. "In five years, there will be an established group of manufacturers, maybe five to 10 brands," he predicted. "I also suspect those will include brands under the umbrellas of the big three tobacco manufacturers."

To access a replay of this Convenience Store News webcast, click here.