OTP Remains Strong in Tough Economic Environment

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OTP Remains Strong in Tough Economic Environment

By Melissa Kress, Convenience Store News - 11/17/2015

JERSEY CITY, N.J. — Seven years out from the recession, the economy is still facing challenges, namely high unemployment rates and low median incomes. This doesn't paint a pretty picture for the middle class and, in turn, convenience stores.

"The economy is teetering and this is leading to a difficult operating environment for c-stores," said Joe Teller, director of category management at tobacco company Swedish Match North America.

His comments were made during Tuesday's webcast, "Winning the Back Bar Battle: Other Tobacco Products Are Key to Overall Tobacco Category Growth," hosted by Convenience Store News and sponsored by Swedish Match.

Citing numbers from The NPD Group, Teller noted that c-store visits are down by about 130 million this year compared to the recent past. However, NACS convenience trends data for the first six months of the year pointed to increased in-store sales and in-store profits across all major categories. 

"In the short term, I think things are going well, but I worry about long-term c-store visits and the economy," he explained. "But we have a very good category." 

Growth of the other tobacco products (OTP) category has been very strong and is up about 5 percent in c-stores, excluding electronic cigarettes, he said. In addition, the vast majority of tobacco purchases are planned in advance and are part of the tobacco consumers' routines, giving convenience stores added opportunity to become their store of choice.

Breaking out the different OTP segments, Teller called cigars and smokeless "the sweet spots" because of the amount of heavy and super-heavy buyers in these segments.

Overall, according to NPD, tobacco consumers are inside a convenience store two to three times more a month than average shoppers. And what really stands out is the basket ring and overall value. The average smokeless basket is about $3.57 higher than the average of all baskets, $13.50 vs. $9.93. Cigar baskets come in at $10.13, Teller explained. 

In addition, the value of the OTP shopper is almost double that of the average shopper. The annual c-store dollar spend for the total OTP shopper is $1,126, with smokeless coming in at $1,199, cigars at $1,033 and the average shopper at $679, he said.

David Bishop, webcast co-presenter and managing director of Balvor LLC, echoed the positive trend of the OTP category. Citing his company's Balvor Retail Composite, he said OTP dollar sales are up 7 percent year over year. 

Regarding all the questions lately surrounding electronic nicotine devices (END), Bishop noted these products make up the third largest segment of OTP behind smokeless and cigars. The top two segments, which have posted healthy sales year over year, are driving more than 90 percent of the OTP growth, he said. Smokeless tobacco accounts for 54 percent of the OTP category and, of that, more than 90 percent is driven by moist smokeless.

Delving deeper into moist smokeless, he noted that single cans are still the best sellers, but two-can and five-can packs are each seeing 1.4-percent growth year over year.

Cigars, according to the Balvor Retail Composite, are up almost 9 percent year over year on a dollar-sales basis. Most of this growth is represented by small cigars, which make up approximately 90 percent of the segment in c-stores. 

Circling back to END products — easily the most talked-about segment of OTP lately and the one many category insiders have been watching with a wary eye all this year — Bishop said the fact is that since July 2013, dollar sales have gone up, with a little slowdown hitting at the end of 2014. 

The story around END is rather found in the switch of products. Disposables now make up only 25 percent of dollar sales, tying with refillables. Rechargeable END products make up the remainder.

The uptick in sales of refillable and rechargeable products may indicate a slowing of sales of higher-end kits, but they do point to repeat purchasers and that is good for the c-store retailer, Bishop concluded.

Click here to listen to the replay.