Smoke Shopping

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Smoke Shopping

By Matthew Enis - 05/27/2002
In Ohio, buying a carton of cigarettes at the local supermarket can be an alarming experience. Presumably to prevent theft by minors, self-serve carton displays in the state are often outfitted with sirens that draw attention to customers trying to purchase tobacco products.

These are not the types of bells and whistles that most customers appreciate.

Still, one can hardly blame the grocers. While most c-store owners bend over backward with internal mystery-shopper programs, electronic ID verification systems and special training to prevent sales to minors, grocery stores and hypermarkets have simply implemented locked displays or alarms to make the products less accessible. Such a hassle, however, is also likely to deter adult smokers.

Tobacco's importance to convenience stores has grown as other channels, such as drug, mass and grocery, have taken measures such as these — or dropped cigarette sales all together. So despite slimming margins and skyrocketing taxes in many states, some c-store owners have begun to see renewed potential in the category, expanding their retail portfolios with "smoke shops" and carton-only stores.

"It's all about who's got the cheapest cigarettes," said Joe Futey, president of Village Farm Dairy, a 19-store chain with two cigarette outlets. Based in Sylvania, Ohio, a suburb of Toledo near the Michigan border, Futey seized a clear opportunity when tobacco taxes pushed the price of cigarette cartons almost $6 higher in Michigan than in his home state.

"People were flocking over the border; that's why I located these smoke shops in Toledo," said Futey. "They give customers a chance to come in and shop in a self-serve environment."

Aside from presenting a more welcoming retail format for adult smokers, smoke shops, through rebates, buydowns, better shrink controls and sheer volume, can generally offer customers lower prices as well. Also, since minors are not allowed in the stores, operators can more effectively merchandise and promote a wider range of tobacco products.

"Variety is certainly a big issue," said Brandon Trinwith, territory manager for Colfax, Calif.-based Sierra Energy Inc., a 21-store chain with three tobacco shops. "When customers go to a smoke shop, they expect their brand to be there, whereas in

a convenience store, selection won't be nearly as big.

"Since convenience store owners typically split their contracts between two of the major suppliers, they end up carrying the brands that dominate 95 percent of the available market share," he continued. "Still, there are a lot of oddball brands that very few convenience stores carry at all — and 5 percent of all cigarette smokers. That's a lot of money."

Trinwith added that an 18 years-and-over policy allows the company's smoke shops to promote low-cost, solid-margin products such as roll-your-own kits. Smokers can save an average of $23 per carton by filling pre-made filter tubes with loose tobacco using simple hand-held machines, yet due to advertising and marketing restrictions at regular retail outlets, few are familiar with the option.

"Third- and fourth-tier brands are big sellers as well," said Futey. "Those brands often cost less than half the price of major brands. A brand called 'Roger's' is one of our biggest sellers; a carton of those costs $12.99, versus more than $28 for a carton of premiums."

Similar trends have shaped cigar sales at Futey's tobacco shops. During the cigar craze of the mid-1990s, high-end imported cigars were big sellers. Now, "volume in that business has died down considerably — but domestic cigars are back and doing very well again," he said.

Setting Up (Smoke) Shop

"A lot of convenience store operators have worked to improve their carton sales," said Rich Mione, director of marketing for Worsley Cos. Inc., a 155-store chain based in Wilmington, N.C. "But when you hear numbers like 2,000 cartons per week with an additional $2,000 or $3,000 in cigar and accessory sales at tobacco shops, you start to realize that there is a market out there that we really aren't tapping.

"We think there's a niche," he continued. "We have a few stores where we think we could divide off an area and create a separate business, or some stores that aren't doing well where there may be some potential to convert them to tobacco shops."

Mione sees a great deal of opportunity in the format; however, he emphasized that Worsley Co., is currently exploring the possibility with caution. "In some cases, the tobacco shops aren't necessarily even cheaper than local c-stores," he said. "It may sound strange, but it seems to be something in terms of an atmosphere that is needed."

The key to developing an "atmosphere" lies in discovering what it is that customers expect and want in a store. And retailers interested in exploring the format should approach the project with the same attitude of local demographic, marketing and real-estate analysis that would be involved with developing a new c-store.

"There is a certain segment of adult smokers that are shopping only on the basis of price, so volume gets concentrated in these outlets that go after lower-price, lower-margin, lower-tier products," said Ross Webster, vice president of trade marketing for New York-based Philip Morris USA.

He continued: "Profitability, however, is still in premium brands; you have to sell a lot of cartons of lower-tier products to equal the profitability of one carton of premium products. So we think that it's in the best interest of most retailers to focus on premiums, but to make discount brands available."

Webster's comments could be logically extended to illustrate the two basic approaches to the tobacco shop business. One is the bare-bones, low-overhead, "throw some shelves on the wall and stock them full of cartons" approach. The "discount outlet" atmosphere, aiming for the lowest prices to attract the highest volume, would be particularly suitable for locations near states that have high taxes or on exits off of well-traveled interstates.

On the other hand, urban or suburban locations, where competition is tighter and convenience is still king, a bit more ambience might be needed. Since it's becoming more and more difficult for smokers to find an indoor place other than home to prop up their feet and relax with a smoke, a premium selection with the simple addition of a small, comfortable seating area with a coffee bar could be an excellent way to make a tobacco shop the local stop for an area's smokers.

Retailers in this situation might consider a format similar to Oak Brook, Ill.-based Clark Retail Enterprises Inc.'s Lighthouse Smoke Shop in Carol Stream, Ill.

The location features a state-of-the-art ventilation system that eliminates smoke in the store, allowing customers to smoke while they browse brand-dedicated sections or relax at the store's coffee and juice bar. A separate humidor in the back offers a wide range of both domestic and imported cigars.

Other Lighthouse locations exist as "store within a store" concepts at the company's "Oh! Zone" c-store formats in states where allowed by law.

State College, Pa.-based Uni-Marts Inc. is another chain that has entered the smoke-shop business in a big way. The company owns and operates more than 40 Choice Cigarette Discount Outlets, which carry discounted cigarettes, cigars, chewing tobacco and tobacco accessories as well as lottery tickets and a small selection of beverages and snacks.

Tobacco distributors and shop owners seem to agree that some additional items, such as gum, mints and possibly coffee and beverages fit the tobacco shop format well, but it is imperative to maintain a focus on the shop's core offering.

"C-store owners could easily fall victim to a mindset where they think, 'someone came in yesterday and asked for potato chips or candy bars'; if you start to respond to those requests, the next thing you know, you've started another c-store," said Mione.

Adding too many non-tobacco SKUs can be a mistake. There are plenty of accessories, such as durable lighters, cigarette rolling kits and machines, loose tobacco, cigars and, as Trinwith described, "oddball" cigarette brands to fill shelves and give the stores a specialty feel.

Smoking the Competition

Many operators may even be afraid of the potential success of a new company-owned tobacco shop. After all, if customers go out of their way to head to a new cigarette outlet, they might not be making their daily stops at convenience stores.

"Two of our smoke shops are located either next door or right across the street from convenience stores that we operate," said Trinwith. "The tobacco shops have definitely cannibalized tobacco sales from those stores, but since the c-stores operate 24 hours per day, it lessens the impact.

"We work off of volume in the cigarette stores, and [manufacturer's] rebates compensate for where it hurts sales in the c-stores," he said.

Also, tobacco shops will be ideally situated for larger-ticket cartons, while a chain's c-stores will remain the place to pick up a pack or two.

Operators should be more concerned with cross-channel competition. It may soon be on the rise again.

Webster agreed that traditional carton outlets, such as supermarkets, mass merchandisers and drugstores, have lost carton volume during the past several years. Tobacco shops and c-stores that placed a renewed emphasis on carton sales during that time managed to seize a great deal of market share when carton customers began looking for new places to shop.

Yet, he added that supermarkets, in particular, started to slow that decline during the second half of 2001. "We're seeing drugstores and supermarkets trying to find more convenient locations in their stores to merchandise the products," he said.

Also, while some of the initial apprehension from 1997-98 has died down, operators should not forget the looming possibility that tobacco ultimately may be regulated by the FDA. Potential restrictions that will impact marketing and merchandising of the tobacco category should always be kept back-of-mind.

West Point, Ga.-based Spectrum Stores Inc. took a proactive approach during the FDA talks before the MSA (Master Settlement Agreement) in 1998, developing a new in-store concept that deepened its customer base and established the chain as a local price leader while shoring up defenses against potential future problems.

"We started seeing a lot of free-standing cigarette stores in our region, and we decided that we were going to have to get competitive to maintain our cigarette business," explained Nannette Brooks, merchandiser and buyer for the 89-store chain. "At the same time, we were unsure what decisions the federal government was going to make about cigarettes."

Brooks worked with Chuck Vires, vice president of marketing at Spectrum, to develop "Tobacco Crossing." A simple black and yellow train motif used for billboards, in-store bannerboards, and promotional lighters was rolled out in every store in just a few short weeks.

"If the government had decided that we could only sell cigarettes in age restricted areas, we wanted to be ready. Our customers would be familiar with Tobacco Crossing and familiar with it as a Spectrum concept," she said.

Since government regulations do not yet require cigarettes to be placed in a separate area, some might feel that Spectrum jumped the gun. Brooks, however, explained that the quickly recognizable train logo and concept name had helped Spectrum promote its low prices on cigarettes — fighting cross-channel competition while dramatically increasing carton sales at most stores.

In the end, even operators who do not consider tobacco-only stores to be a viable retail format in their area will still need to stay on their toes to protect market share. Taxes will likely continue to rise in most states indefinitely, and those smokers who do not quit will almost certainly be on the hunt for bargains.