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OTP Becoming Increasingly Important for C-stores

JERSEY CITY, N.J. -- As cigarette sales and profit margins continue to decline, other tobacco products (OTP) will become even more important for convenience store retailers, according to today's Convenience Store News webcast, "Putting OTP Into Context: Insights and Perspectives."

OTP sales now make up 10 percent of total tobacco sales in c-stores, a gain of about 3 percent in the past 10 years. Cigarette volumes have declined over the same period.

"The real compelling part of this story is the gross profit contribution," said webcast panelist David Bishop, managing partner at Balvor LLC, a sales and marketing firm. "OTP has become much more critical for c-store retailers [than ever before]."

Bishop cited that as of mid-2012, cigarettes earned c-store retailers an average 14-percent gross profit margin, a large decrease from 21 percent in 2002. Conversely, OTP now offers an average 31-percent gross profit margin, an increase of about 4 percent in the past 10 years.

Still, that doesn't mean a cigarette shopper is not valuable to a c-store, stressed Bishop. One quarter of customers who have at least one OTP product in their basket also buy a cigarette product, he noted. In addition, the average shopper who buys cigarettes spends $2,328 annually at a convenience store, compared to $2,028 spent by smokeless tobacco buyers, $1,900 spent by cigar purchasers and $809 spent by the average c-store consumer.

"Taking care of your OTP shopper can go a long way to taking care of your cigarette shopper," said panelist Joe Teller, director of category management at Swedish Match, sponsor of the webcast.

As for the fastest-growing segment of OTP, that honor goes to electronic cigarettes, which received plenty of attention during the webcast. Recent e-cigarette growth has been dramatic. In February 2011, 24 percent of c-store retailers carried e-cigarette products, Bishop reported. In February 2012, that number ballooned to 53 percent, and as of last month, the figure rose again to 69 percent.

"Clearly, there has been massive interest in e-cigarettes," Bishop added.

Not every data point regarding e-cigarettes is rosy, though. Forty-five percent of convenience store retailers who have sold e-cigarettes for less than 12 months are not exceeding sales expectations. But Bishop noted that new e-cigarette retailers may have too lofty of expectations. He backed up that comment by pointing out that for retailers who have sold e-cigarettes for more than 12 months, sales expectations have been reached at a much greater percentage of c-stores.

In addition, c-store retailers are clearly interested in selling e-cigarettes. Seventy-one percent of c-store retailers questioned in a Balvor/CSNews survey said they will add e-cigarette shelf space in 2013. Many of those retailers also said they will create space at the expense of traditional cigarette products.

Teller of Swedish Match focused on cigars in his portion of the webcast. He offered tips for retailers when selling cigars. First, he said single sticks and foil pouches have become the new packs/singles. Additionally, he advised retailers to reduce traditional cigar five-packs, avoid cigar retail contracts and drive natural leaf volume.

According to Teller, the average c-store chain carries about 65 cigar items.

Bishop concluded the webcast by stating that OTP will continue to grow and expand its presence at retail. In addition, he emphasized that it is critical for c-store retailers to know their OTP shopper, be aware that OTP pricing is impacting their businesses in more ways than before, and recognize the fact that there is still much to learn about OTP.

To access the replay of today's webcast, click here.

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