Staying in Step With the Rapidly Evolving OTP Category

JERSEY CITY, N.J. — As a category at retail, other tobacco products (OTP) continues to change at rapid speed, presenting convenience store operators with tough decisions. However, with all the talk about evolution and innovation, the top three OTP segments still rule: smokeless tobacco, cigars and electronic cigarettes.

According to the Convenience Store News 2015 Industry Report, OTP accounts for 4.89 percent of in-store sales and 4.41 percent of in-store gross margin dollar contribution at c-stores. These figures, while not eye popping, place OTP in the fifth spot among the largest convenience store categories. On an average-sales-per-store basis, OTP ticked up 2.7 percent in 2014, and 4.3 percent for the total industry.

Looking at Nielsen's numbers for the first quarter of 2015, the category is keeping pace with last year's growth, said Don Longo, editorial director of Convenience Store News.

His observations came during Wednesday afternoon's webcast, "OTP & E-Cigs: Maximizing Category Profitability," sponsored by Logic Premium Electronic Cigarettes and hosted by Convenience Store News.

Looking at the top three segments, cigars are off to a better start this year, while electronic cigarettes have flattened somewhat but are still increasing at a higher rate than any other player in OTP, Longo cited.

The continued strength of e-cigarettes is not surprising to Miguel Martin, president of Logic Technology Development. The maker of Logic Premium Electronic Cigarettes has been a leading player in the e-cigarette space for the past several years and Logic is the No. 2 brand behind R.J. Reynolds Vapor Co.'s VUSE, according to Nielsen data.

Martin said there are three primary areas of interest regarding e-cigarettes: regulatory, keys to success at retail, and what the future holds for e-cigarettes and vapor products.

While he acknowledged there is a lot of conversation about the Food and Drug Administration (FDA) and what form its final deeming regulation will take, he advised all trade partners — retailers, manufacturers and wholesalers — to take notice of what is happening at the local and state levels. Legislation aimed at age restrictions and taxation issues dominate the talk at those levels.

Retailers also need to keep regulations in mind when partnering with manufacturers, he added. They need to ask: Are the e-cig makers preparing for potential FDA regulations and what type of insurance and guarantees do they offer?

There is some room for regional players, Martin believes, but the big brands have the resources to make it through the FDA process.

STEPS FOR SUCCESS

Martin outlined a few key steps retailers can take to find success with e-cigarettes. For example, e-cigarettes should be called out as a standalone segment adjacent to the cigarettes category. There should also be ample signage calling attention to the segment, and employees should be able to answer two questions: What is an electronic cigarette? What is the difference in products?

While vape shops have an edge in terms of education, "there are advantages a convenience store has that far outweigh the benefits of a vape shop," Martin said.

As for the future, manufacturers are going to continue to innovate as they look for that one product that fully satisfies the adult user, he said. "The products available today are significantly improved [compared to] a few years ago," he pointed out. 

Looking at the retail performance of electronic nicotine devices (ENDs), David Bishop, managing partner of Balvor LLC, said three things are clear:

1. There is a rapid rate of innovation and, in some cases, it is disruptive;
2. The segment takes collaboration among all trade partners; and
3. The evaluation of all available information is very important.

According to the Balvor Retail Composite, ENDs are currently about half the size of cigars and about a quarter of the size of smokeless tobacco on a dollar sales basis. Although the latest data indicates a slowing of ENDs, the segment still grow faster — about 1.2 times to 1.4 times — the rate of smokeless tobacco and cigars.

The real value, though, seems to lie in penny profit. "Though it is still a relatively small segment of tobacco, you don't have to sell a lot to make a lot," Bishop said. Case in point, a retailer would need to sell three smokeless tobacco products or eight cigars to equal the penny profit of one END sale, he explained.

For a replay of the "OTP & E-Cigs: Maximizing Category Profitability" webcast, click here.