OTP Trends

OTP. RYO. MYO.

Those acronyms are peppering conversations within the convenience store industry, as Other Tobacco Products (OTP) gain ground in the overall tobacco marketplace.

Moist snuff, plus the loose tobacco and accessories used in Roll-Your-Own (RYO) and Make-Your-Own (MYO) cigarettes, are quickly becoming products of choice for tobacco-loving consumers driven by escalating cigarette prices and tempted by new products flooding the market.

"We continue to experience double-digit increases in our OTP sales. They began four years ago," reported Steve Monaco, director of purchasing for Rockland, Mass.-based Tedeschi Food Shops. "The renewed interest is a combination of three things: price, flavor and new product introductions. I would say new product introductions are the No. 1 reason the category continues to grow."

CATEGORY REPORT

Moist snuff and cigars (see story on page 54) are the OTP sub-categories experiencing the most impressive increases, according to Monaco. "Skoal, Kodiak and Grizzly lead the way in the moist snuff subcategory, which is dominated by males ranging in age from 25 to 60," he said, adding that the demographic has not changed dramatically over the last few years. The category does well year-round, with resort areas reporting higher sales in the summer, he said.

Raj Kumar, manager of True Discount Food Mart just west of Chicago in Oak Park, Ill., finds OTP a profitable part of the tobacco store's business. The large bags and brightly colored cans of loose tobacco hanging from wall pegs and lining the behind-the-counter wall sell well, along with the roll-your-own paper and cigarette rolling machines merchandised on top shelves.

"What we've seen increasing over the past year has been loose tobacco," Kumar reported. "Hand-rolling cigarettes is becoming more popular because it is cheaper to hand-roll them than to buy packs — they've gotten too expensive."

Pouches — small teabag-like bags that hold fine-cut tobacco — also are coming into its own within the smokeless tobacco category, industry experts said. "Pouches are a significant part of growth [in OTP] because it's an entry-level product and more palatable," John Mayer, product director for cigarettes and tobacco for McLane Co., said during the Convenience Store News annual Tobacco Best Practices Roundtable last March 2 — an event during which retailers and manufacturers met to discuss best practices in the category.

BY THE NUMBERS

What was a negative for the cigarette industry has proven a plus for OTP sales. The 2009 federal excise tax (FET) increase on cigarettes and tobacco products boosted the papers and pipe/cigarette tobacco OTP segments, with average per-store sales increasing 7.3 percent and 31.8 percent respectively for 2009, according to the Convenience Store News 2010 Industry Report. Although the RYO segment saw a massive increase in its federal tax rate in 2009, retailers attributed its sales increase to the consumer shift that occurred as smokers turned to RYO tobacco to escape cigarettes' plumped up price. Tobacco customers also discovered they could use pipe tobacco to make their own cigarettes and save money in the process, since it was not taxed to the same degree as RYO tobacco.

Other CSNews report findings pertinent to convenience stores that rely on tobacco sales:

• The average convenience store sold $50,417 in OTP products in 2009, a 9.4-percent increase over 2008 and outpacing that year's 8-percent growth rate. OTP grew from 3.94 percent of in-store sales in 2008 to 4.12 percent in 2009.
• Per-store sales of smokeless tobacco reached $28,737 in 2009, indicating a slight uptick. This segment retained its leading place in terms of sales, making up 57 percent of the OTP category sales.
• Smokeless tobacco lost nearly 5 percentage points of share, which were picked up by cigars (up 4.5 percentage points) and pipe/cigarette tobacco (up 0.5 percentage points).
• Convenience stores continue to lead the way by large margins in terms of competitive channel market share. C-stores gained a few percentage points in 2009, and now boast 89.16 percent of the OTP market on a dollar basis. When compared in terms of unit volume, c-stores lead by an even larger margin, capturing 92.35 percent of the market.

COMING UP...

According to a recent Datamonitor Report, "Tobacco in the U.S. to 2013," the domestic loose tobacco market will be worth $911.6 million in 2013, with an expected Compound Annual Growth (CAGR) of 4.6 percent between 2008 and 2013. This market is forecast to increase by $182.7 million in sales over the five-year period spanning 2008 to 2013, and by the end of 2013, the RYO segment within the loose tobacco category is expected to account for 79.7 percent of the total market. Pipe tobacco will follow with a 20.3 percent share, Datamonitor projected.

Volume-wise, the U.S. loose tobacco market is forecast to increase by 0.4 million kg to reach 9.4 million kg in 2013, with a CAGR of 1 percent over the five-year period spanning 2008 to 2013. By the end of 2013, the RYO tobacco segment is expected to account for a 75.2 percent share, followed by pipe tobacco, with a 24.8 share, according to the report.

Datamonitor forecasts the U.S. chewing tobacco market to be worth $3620.3 million in 2013, with an expected CAGR of 3.9 percent between 2008 and 2013. This market is forecast to increase by $629 million in sales over the same five-year period.

Finally, volume for the domestic chewing tobacco market is forecast to be 55.7 million kg in 2013, an increase of 1.7 million kg, with a CAGR of 0.6 percent over the five-year period spanning 2008 to 2013, Datamonitor statistics show.

As positive as current and projected OTP trends appear, retailers must take an active approach to tobacco sales to remain on top of their game. Convenience stores should keep a few things in mind, industry pros said.

"The key to a successful OTP program is to stay fresh. Use your store data as well as supplied data from companies including Nielson and IRI in the areas you operate in to make decisions on the right mix," Monaco advised. "Develop and implement a planogram, taking into consideration your best-selling items, and update it at least once a year. Select within the cigar manufactures a category captain that will assist you in the product mix and planogram decisions. All four manufactures — Swedish Match, Altadis, Swisher and John Middleton — are capable of doing that," he concluded.

Tobacco 101

How much do your employees and your customers know about tobacco? The following facts offer a glimpse into the world of tobacco.

• Chewing tobacco (also known as chew, dip, chaw, chewpoos, chits or chowers) refers to a form of smokeless tobacco furnished as long strands of whole leaves and consumed by placing a portion of the tobacco between the cheek and gum or teeth, and chewing. Unlike dipping tobacco, it is not ground and must be mechanically crushed with the teeth to release flavour and nicotine. Historically, chewing tobacco was the most prevalent form of tobacco use in the united States until it was overtaken by cigarette smoking in the early 20th Century.
• Loose leaf tobacco, which is sweetened and packaged loose in aluminum-lined pouches, is the most widely available.
• Plug tobacco is press formed into sheets, with the aid of a little syrup (mostly molasses). The sheets are cut into individual plugs, wrapped with fine tobacco and then packaged. Individual servings must be cut or bitten directly from the plug.
• Twist tobacco is spun and rolled into large rope-like strands, then twisted into a knot. The final product is much lower in moisture than plug or loose leaf tobacco, and historic varieties could be smoked in a pipe as well as chewed. This was the most common form of chewing tobacco in the 18th and 19th centuries.
• Tobacco bits are formed by rolling sweetened and typically flavored tobacco into small pieces, which are consumed individually. These are typically packaged in small tins like mints.

— Source: en.wikipedia.org/wiki/Chewing_tobacco