Retailers & Wholesalers Assess Tobacco Opportunities vs. Obstacles

WILLIAMSBURG, Va. — The past few years have brought a slew of new products fighting for space on the backbar, but it can be challenging for tobacco retailers and wholesalers to add these items into their lineup.

During a panel discussion on assessing new opportunities at the Tobacco Merchants Association's (TMA) 101st Annual Meeting and Conference, Smoker Friendly International Managing Partner Terry Gallagher cited MSA data showing that cigarettes still dominate the tobacco category, capturing six times the dollar share of other tobacco products (OTP). And as for OTP, 70 cents of every dollar is in smokeless, which leaves a very slim portion for all other products. 

"When you analyze what to bring into our stores, [all other] is not a big category, so something has to move the needle for us," Gallagher said, noting that unlike convenience stores that contend with space constraints, tobacco outlets can more easily be a testing ground for new products in the category. 

"A lot of obstacles have to be overcome before the product gets to me, and then I have my own obstacles," echoed Anne Flint, senior category manager of tobacco for Cumberland Farms Inc., where the tobacco category accounts for 45 percent of the convenience store chain's business. The top three "obstacles," she said, are tobacco taxation, tobacco legislation and meeting customers' needs. 

With roughly 560 convenience stores in eight states, Cumberland Farms' base in the Northeast exposes it to some of the highest tobacco taxes in the United States. For example, the Massachusetts state excise tax on smokeless tobacco is 210 percent of cost. The levy has "mainly dissolved our smokeless business in Massachusetts," Flint told TMA Conference attendees. 

In addition, while Connecticut does not have an electronic cigarette tax, it does have a $300 annual license fee and a one-time, $75 registration fee per location, she noted. 

Meanwhile, on the tobacco legislation side, 51 percent of the 205 Cumberland Farms c-stores in Massachusetts selling tobacco face some form of local legislation. "Any legislation that could be passed has been passed in Massachusetts," Flint said.

Addressing the obstacle of meeting customers' needs, Flint explained that a roadblock to adding new products to the backbar is the short amount of time a customer spends in the convenience store. "How do we keep up with new innovation? We don't have the time to educate the customers," she said.

THE WHOLESALER PERSPECTIVE

For both traditional tobacco products and alternative tobacco products, there is "the good, the bad and the ugly," according to Peter Lippe, vice president of purchasing for convenience distributor Core-Mark International Inc.

The "good" for traditional tobacco includes:

• High-dollar, low-cube value;
• It's a category that's easy to manage and forecast, with relatively few vendors and steady volume; and
• It's probably the most efficient product Core-Mark distributes.

The "bad," according to Lippe, includes:

• Promotional activity that can complicate forecasting;
• Promotional products that can lead to duplicate SKUs; and
• Regulation compliance at the state, county and city levels.

What about the ugly? "To sum it up in one word — taxes," he said. According to Lippe, the role of the wholesaler is to collect the tax, which requires monthly tax returns for each state.

In regards to pros and cons around alternative tobacco products, he identified the "good" as high-dollar, low-cube value and these products tend to come with incremental value.

The "bad," or concerns, center on manufacturers, he noted. The segment draws new manufacturers with small sales forces and a lack of understanding of the distribution industry. In addition, although the reward is high in terms of margin, so is the risk because manufacturers may not "stick around," Lippe explained. 

In the "ugly" bucket is the difficulty in interpreting state excise taxes for alternative products, and unstable and underfunded manufacturers. Core-Mark has lost 50 percent of its electronic cigarette vendors in the past year and half, Lippe reported. 

THE MANUFACTURER PERSPECTIVE

Overall, tobacco category success lies in strong relationships, stated fellow panelist Leonard Wortzel, vice president of marketing for Scandinavian Tobacco Group Lane. 

He stressed the importance of the relationship between the manufacturer and wholesaler, or manufacturer and retailer — which begins before a new product even comes to market.

A manufacturer can spend years and money developing a new product, conduct consumer focus groups, but forget about the retailer, Wortzel cautioned. 

"Bring in the retailer earlier," he advised. "Does it fit the needs of their customers? Is it an opportunity to bring in new customers?"

At the same time, it's "crucial" that retailers and wholesalers lean on manufacturers more, particularly when it comes to regulation and data insights. 

The Tobacco Merchants Association's 101st Annual Meeting and Conference was held May 9-11 at Kingsmill Resort and Spa in Williamsburg.