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Mixed Smoke Signals

Be it a bar in San Diego, a restaurant in Boulder or an outdoor café in New York City, prohibitive laws — along with jeers and sneers from the public at large — have made cigarette smoking nearly impossible in most social situations. Still, more than 46 million people continue to light up each day.

"The adversity we face in providing a controlled but legal product to increasingly ostracized consumers is on the rise and the category is constantly under attack," said Dave Arensdorf, category manager for Mechanicsville, Va.-based GPM Investments LLC, which operates 140 Fas Mart/Shore Stop c-stores in Virginia, Maryland and Delaware.

When the Master Settlement Agreement (MSA) was signed in 1998, the way cigarettes were advertised, marketed and promoted was fundamentally changed, leaving manufactures, distributors and retailers in a lurch. Measures including restrictions on signage in retail establishments, revised national advertising campaigns and substantial tax increases made the art of marketing and selling daunting.

Still, manufacturers such as Philip Morris, Brown & Williamson and R.J. Reynolds — whose brands make up more than 80 percent of the total market — feel this marketing blueprint allows for safe and ethical practices, while delivering tobacco to their target audience.

"We believe that going over and above what's required by the tobacco settlement agreement is an essential component of being a responsible marketer of tobacco products," said Bill Phelps, media affairs manager for Richmond, Va.-based Philip Morris USA. "Philip Morris USA does not direct its advertising to underage smokers or to non-smokers. In the spirit of the agreement, we made it our goal to lower the overall profile of our tobacco advertising."

Arensdorf says that despite marketing restrictions and increases, Fas Mart/Shore Stop's clientele has remained faithful. "The customer base is still strong and [these tobacco consumers are] very loyal to the c-stores they choose to frequent," he said.

Smoke 'Em if You Got 'Em

Those restrictions also have included self-service bans and locked-up products, which have put more focus on tight marketing concepts because the amount of space

dedicated to the category has been reduced.

Reconfiguring the layout of the store to reflect these new regulations has had some ancillary benefits, noted Mary Szarmach, vice president of marketing for Boulder, Colo.-based Gasamat Oil Corp. The company operates 89 locations in six western states — 25 of which are c-stores, with the remaining billed as tobacco-only Smoker Friendly stores. "Under our contract with Phillip Morris, we went to a non-self-serve capacity with the cigarettes behind the counter," Szarmach continued. "This was a good decision and reduced our 'grab-and-run' thefts and lowered our shrink by $200,000 in 2003."

In Fas Mart/Shore Stop c-stores, Arensdorf says in order to retain customers given new advertising restrictions, the back bar should be set up as close to space-to-share as possible. "Pricing must be in line with the competition and signage needs to be uncluttered and focused on top-selling brands," he said.

Many c-stores are also turning to fourth-tier cigarettes like Liggett Select and Best Value. While the profit margins are not substantial, they do bring more customers through the door, which is beneficial because on average, cigarette smokers will purchase more soda, coffee, beer and snacks. Jerry Smith, director of operations for 30-unit Express Convenience Centers, based in Combined Locks, Wis., explained that gaining more "novelty" sales is part of their new tobacco marketing plan. "We are forcing multiple sales like 'buy two sodas and get one free,'" he said.

Roll Up Your Leaves

With cigarette prices off the charts, more and more customers are looking to a quickly growing trend to save money, which is make-your-own (MYO) and roll-your-own (RYO) cigarettes, according to Ken Hagler, vice president of marketing and national accounts for Louisville, Ky.-based National Tobacco Co. "In the last four or five years it has become a real phenomenon," said Hagler, who noted that MYO sales have increased 130 percent since the signing of the MSA in 1998.

"In the current c-store environment it is important to communicate the MYO value proposition and merchandise the product assortment effectively to optimize sales potential over the long term," Hagler continued. "This is necessary due to the relative ignorance of the c-store shopper that a high-quality, low-cost alternative to manufactured cigarettes even exists."

National Tobacco promotes the fact that its Zig-Zag offers a 50 percent savings when compared to premium manufactured cigarettes. "As the retail price of cigarettes has escalated over the past several years due to manufacturer cost increases and state and federal cigarette excise taxes, consumers have been increasingly looking for lower-cost alternatives," said Hagler. He added that new marketing initiatives are currently in the works with such c-store leaders as ExxonMobil and BP, who will be promoting "make your own" campaigns later this year.

"I think roll-your-own is growing in what is a decreasing industry," said Szarmach. "At half the cost you get the same quantity of tobacco and it's becoming very trendy with younger adults, especially around colleges and universities."

Szarmach explains that in many of her company's "tobacco friendly" stores the staff is trained to give demonstrations to curious customers in hopes of securing a new demographic. "This category is growing every day due to tax increases," she noted.

With tens of millions of Americans continuing to smoke, these consumers will always search for the lowest prices at the most convenient locations, which could make MYOs a strong contender in the future of c-store tobacco sales. "Convenience store retailers should be prepared for this explosive growth by properly merchandising the right assortment of RYO and MYO products in their stores to capitalize on this great sales and profit opportunity," said Hagler.

Sometimes a Cigar . . .

Given restrictions and revenue loss associated with cigarettes, there has been renewed interest in marketing other tobacco products like cigars. While this demographic historically has been far smaller than the cigarette-buying bunch, sales have been increasing, which is a signal to retailers that sometimes a cigar is more than just a cigar. "It's interesting on the domestic side because all flavored cigars are taking off like gangbusters," said Szarmach, who adds that cigar sales grew by 23 percent in Gasamat stores over the last year. Popular flavors include grape, apple, and cherry cigars, she added.

Express Convenience Centers has capitalized on the snowball effect experienced in cigar sales in recent years. With five stores featuring walk-in cigar humidors (at a constant 70 degrees) complete with hardwood floors, Smith said they have recouped some of their lost cigarette revenues. "This has been very effective for us and we desperately need this category at this point because it provides us with an over- 30-percent margin," he said. "The humidors really keep our cigar shoppers happy. We have a mixture of lower-priced five-packs as well as medium and premium priced cigar sticks."

Smith said that it has become common for customers to purchase three or four lower-priced five- packs like Phillies as well as a premium cigar for a special occasion. "Why go down the street and purchase cigars that may be crunchy or old?" Smith asked. "A walk-in cigar humidor also gives our store that upgraded image that we strive for and it makes for a great neighbor next to our walk-in beer cooler."

In addition to walk-in humidors, Smith said a majority of his chain's cigar sales are coming from lower- priced flavored brands positioned at the counter near the register. While many of the single "stick" cigars are sold at approximately 80 cents or more, he said that companies like Altadis USA will supply display racks and offer buydown rates if properly advertised. "The cigar companies will pay you to have their rack on your counter, which is a good deal," said Smith.

It's little wonder that Express Convenience sought a new revenue generator, given the chain's experiences in the cigarette business. "Since the start of the year, there have been major changes in the incentives that are paid to the distributors from the cigarette manufacturers," said Smith. "The c-store operator has seen distributor increases while at the same time lowering their retails to a lower profit margin." He noted that tobacco sales account for nearly 40 percent of his business.

"Our chain has had multiple cigarette contract meetings [with one leading manufacturer], each with a reduction of contract payments after the meeting," said Smith, who added that pricing structures have changed between four and five times in the past year. These reductions have resulted in $19,300 in losses per store annually. "We've been chopped at our knees," he added.

Smokeless Surprise

Health-related risks involving smoking have turned some smokers into non-smokers. But some of those who can't function without a nicotine fix have turned to a more socially accepted practice: smokeless tobacco. Chewing tobaccos and snuff products are leading the way and, not unlike cigars, this category continues to grow and compete with cigarette sales. The smokeless tobacco segment's first-quarter 2004 revenue increased by 3.1 percent to $379.2 million, according to Greenwich, Conn.-based U.S. Smokeless Tobacco Co. (USSTC), which produces Copenhagen and Skoal.

"Most restrictions on tobacco products are not exclusive to the cigarette category," said Mike Mahoney, director of trade development for USSTC. "They span all products, including moist smokeless tobacco products and other tobacco products (OTP). The more strategic a retailer can be, the better. Visibility of the category and space management are the keys."

According to Szarmach, younger professional males are purchasing more smokeless products. Last year this segment of Gasamat's business rose by 17 percent, a clear indication that customers are beginning to not only look to their wallets but to their overall health when purchasing tobacco products. "It is interesting to watch," she continued. "It's definitely younger upper-class males using smokeless tobaccos like chewing tobacco and snuff. This is an alternative to cigarette smoking and you can do it without leaving an establishment."

Up in Smoke

As with any other aspect of tobacco sales, partnership with a distributor is crucial to gaining sales. As Express Convenience's Smith noted, even if revenues are being shaved, having the best advertised and priced tobacco products will ultimately result in more customer traffic and potential for unrelated purchases.

"These situations have made it vital for manufacturers to partner with retailers to optimize space and visibility for the category," said USSTC's Mahoney. "Merchandising and marketing message space are at a premium and require strategic placement."

Phillip Morris's Phelps agrees, adding, "Retailers should focus on competitive pricing and value, responsibly merchandise the category in a well-organized and attractive presentation, ensure youths don't have access to cigarettes, focus on the profitability of premium brands, provide fast and friendly service, clearly communicate promotional value to consumers and efficiently manage inventory."

As for retailers, selling tobacco products will be increasingly difficult in the years to come. They will battle an overall "healthier perspective" from their clientele, more severe tax holdings and increases from distributors and manufacturers.

"Tobacco will still be around because the government relies too heavily on revenues from taxation to do away with it completely," said Fas Mart/Shore Stop's Arensdorf. "However, consumption will continue to decline and we need to constantly be on the lookout for new products to replace lost tobacco sales."
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