Growth in the Face of Adversity

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Growth in the Face of Adversity

By Mehgan Belanger - 07/13/2009
Mehgan Belanger

During a discussion on roll-your-own (RYO) tobacco -- a category particularly hard-hit by this year's increase in FET, which went from $1.0969 per pound to $24.78 per pound -- John Mayer, product director of cigarettes and tobacco for roundtable sponsor McLane Co., said: "People said [RYO] was on its deathbed, but there is still value there. It's not going to die. It will have a viable future."

The RYO shelves at Smoker Friendly stores were "wiped out" ahead of the tax increase because its supplier reduced inventory, according to Jeremy Weiner, category manager. "It is gradually coming back, the demand is still there, and it will keep growing," he added.

The endurance of RYO is thanks in part to its users. "The RYO user has a system. They have a schedule down of when to buy and when to roll. Set yourself up to be a destination for that planned purchase," suggested Mayer.

Months before the tax increase, Mother Hubbard's Cupboard did just that, setting up a "store within a store" concept, encompassing a four-by-four-foot aisle and endcap of RYO products. Company President and CFO Jesus Delgado-Jenkins explained the 17-store chain moved its RYO products from an impulse section to a dedicated area on the sales floor and expanded its selection.

Overall, the OTP category -- which includes RYO tobacco -- is predicted to grow 6.5 percent in dollar sales per store and 4.5 percent in unit volume per store in 2009, according to data in CSNews' 2009 Forecast Study, which was cited during the roundtable.

Much of the promise in OTP stems from new products. While the flavor wave of the past three years appears to have died down to the tried-and-true varieties, product innovations keep customers interested and trying new items. Roundtable attendees noted the potential of Lorillard's Triumph Snus, as well as improved versions of Camel Snus. Similarly, Camel's Sticks, a toothpick-like dissolvable stick of tobacco that is soon to hit test markets, were deemed a potential "home run" by one attendee. Other products mentioned as successful during the roundtable included Skoal Pouches and other pouch moist smokeless tobacco (MST) products; Black & Mild's flavored line extensions; and flavored blunt wraps.

Tobacco industry consolidation also plays a part in the viability of the OTP section.

"Altria, which now has Philip Morris USA, John Middleton and U.S. Smokeless Tobacco Co. (USSTC) in its stable, continues to drive the business through promotional activities, and seems to be applying its strategy from the cigarette business to OTP," Mike Zielinski, president of Royal Buying Group.

Wayne Wills, merchandising manager of Columbus, Ohio-based Certified Oil, noted the tobacco company's desire to drive the premium segment of MST -- where its newly acquired USSTC brands have the biggest market share. Price cuts to Skoal and Copenhagen brands earlier this year reduced the price gap between those and second-tier products, Wills noted.

The drop in price "will have a positive impact on the consumer," said Mayer. "USSTC is trying to eliminate the peaks and valleys on the product's price -- which is dangerous to have."

But not all retailers agreed with the move. "Consumers don't realize the price is down because there's no promotion," said Weiner of Smoker Friendly, who noted despite this, the products are still showing growth in his stores.

Similarly, John Middleton merchandising contracts being offered by Altria in the cigar section concerned retailers at the roundtable. "You can only face so many Black & Mild SKUs," said Butch Fulton, merchandising manager for Plaid Pantries.

The major cigarette companies' snus products, however, are finally gaining some ground. "It is way too soon to judge how it will shake out … It will get there, but I don't know how long it will take," said Mayer, noting snus is a new consumer entry-point into the tobacco category.

Delgado-Jenkins wanted his Mother Hubbard's Cupboard stores in the Quad Cities region of Illinois to lead the market for snus. To do so, he began a competition among store employees to come up with a snus slogan for the stores. The winner -- Put Some Zip in Your Lip, Let Loose the Snus -- received $1,000. The chain of convenience stores average 12 to 15 tins per week per store.

Other retailers at the tobacco roundtable still think the segment has a way to go. "I can't figure out how many we are selling vs. how many R.J. Reynolds is giving away with a coupon," said Fulton.

Pouches are another tobacco category entry point for consumers, and an area seeing great growth, according to roundtable attendees.

"It's more palatable to enter the tobacco category with a pouch," said Mayer, who explained the segment is seeing double-digit growth. Fulton also noted the success of these packs in his stores.

While female tobacco consumers do not appear to be attracted to pouches or MST, they are smoking little cigars, especially alcohol beverage flavors such as wine, apple martini and others, according to roundtable guests. Mayer warned retailers to not overlook the elusive female tobacco user, which he said, "are deeper in [this category] than we care to think or believe. We need to be sensitive to that."

Another piece of legislation that got roundtable attendees talking was the bill giving the FDA regulatory authority over the tobacco industry. Zileinski viewed the legislation as a "no-win situation."

David Bishop, managing partner at the consulting firm Balvor, said, "While federal oversight by the FDA is significant for many reasons, retailers should stay very close to what's happening at the state and municipal levels, as it's already been demonstrated the impact [state or local governments] can have at retail," said Bishop, alluding to developments in cities such as Boston and San Francisco. He encouraged retailers to collaborate closely with tobacco organizations, become active in the political process and help retail customers understand on-going developments and how they impact shoppers with fliers or signs inside the store.

At the conclusion of the roundtable, attendees discussed best practices in OTP, including pricing, product freshness and category management.

"Anything to get people to buy two [units] to save money helps," said Weiner. Worsley stores, meanwhile, are taking a hard look at everyday low pricing on snuff, and Certified Oil continues to offer its customers two-can pricing on all snuff lines, "delivering a value to them and extra sales and penny profit for us," Wills said.

On the product quality side, "Freshness is a critical factor that can impact business if not managed correctly, especially in Copenhagen," said Rakesh Maini, tobacco category manager for BP's ampm stores. Freshness is a large focus for Plaid Pantry stores as well. The Pacific Northwest retailer's stores are on a two times weekly delivery schedule to ensure fresh product, said Fulton.

And regarding category management, "It is more important in OTP than cigarettes because OTP has true growth," explained Mayer. "It's not that cigarettes aren't important to the convenience store, but OTP has true unit volume increases. If you have any question about that, then just ask yourself why R.J. Reynolds bought Conwood, and Altria bought USSTC and Middleton."