As they say, the squeaky wheel gets the oil. Or, in the case of traditional cigarettes and electronic cigarettes, the squeaky wheel gets the attention of tobacco category managers. But, by no means, are they the only products on the backbar that should claim a retailer’s focus.
Other tobacco products (OTP), specifically smokeless and cigars, present a great opportunity for convenience stores, according to Kit Dietz, principal of Huron, Ohio-based Dietz Consulting LLC. Speaking at the Convenience Distribution Association’s 2016 Convenience Distribution Marketplace event in February, Dietz presented data from InRhythm Inc.’s C-Metrics database showing the strength of the OTP segments.
Per C-Metrics, which is used to provide benchmarks for warehouse-delivered products, total convenience store warehouse-delivered retail sales dollars for 2015 were projected at $95 billion, up 4.7 percent vs. a year ago. Of that total, cigarettes represented 64 percent and OTP represented 11 percent for the 52 weeks ending Jan. 2 of this year.
“It was a good year for OTP,” Dietz remarked.
Looking closer, the data shows OTP saw 5.3-percent dollar sales growth in 2015 vs. a year ago, charting a continued upward growth trend over the past three years.
Within OTP, smokeless products — including moist and snus — registered solid dollar growth of 8.5 percent vs. 2014, leading smokeless to capture a 69-percent dollar share of total OTP.
Cigars accounted for the second-largest dollar share of OTP, at 21 percent, but only saw dollar sales growth of 1.9 percent for the year, according to the C-Metrics stats shared by Dietz. He noted that while the cigar business is robust, it is becoming more price-driven.
Kevin Campbell, marketing director at Fremont, Ohio-based Beck Oil Co., has experienced the pricing pressure firsthand. The company’s FriendShip Food Stores have seen a bit of a drop in both moist smokeless and cigars — mostly due to moves by the chain’s competitors.
“In moist, some of our competition got a little more aggressive last year,” Campbell explained. “In some of our markets, we’ve given up the margin. In some, we’ve kept it and took a little hit in regards to sales.”
The competition is affecting cigars, too. Cigar sales at FriendShip Food Stores have been flat, but the chain has taken a hit in regards to market share due to its price-point strategy.
“I think it has something to do with us resisting the 3-for-99 cents category. We’re trying to stay away from that. We’re all about penny profit, and we want customers in the store more,” Campbell said, adding that he’s concerned because he sees this price point popping up more in competing stores.
“It’s certainly not where we want to go, but we will go there if we saw our customers were calling for it and it was starting to make a major dent in our cigar sales,” he said.
LEGISLATIVE & TAX HOOPS
For Duxbury, Mass.-based convenience store chain VERC Enterprises Inc., it is not competition, but rather legislation that’s causing the retailer concern. The chain has stores in several Massachusetts and New Hampshire communities and, according to VERC category specialist Anna Bettencourt, each community has different tobacco rules on the books.
“The whole industry is getting tougher and tougher, especially in Massachusetts where we have so many different regulations and different one-off scenarios, from the whole state to town to town,” Bettencourt said.
Atop regulations, the Massachusetts state excise tax on moist snuff — which stands at 210 percent — is another challenge to VERC’s OTP business.
Still, even with the levy, Bettencourt said moist snuff is holding its own across the chain, which she finds a bit surprising because neighboring states don’t have that hefty of a tax. This has resulted in an increase of product being brought into Massachusetts illegally.
“The state has made strides in cracking down on people who do not obtain their product from legal channels and don’t pay the excise tax, but the state is still a ways away from where we need to be,” Bettencourt said. “It affects my business. Customers don’t understand; they just see a $2 to $3 difference and think I am price gouging. What they don’t realize is, I have paid all my taxes.”
The state has made better strides this year and in the latter part of last year, she said, “but [Massachusetts] is a really large state and there’s a lot of work to be done.”