Tax Increase Inflates Cigarette Sales

Despite being a direct target of two historic pieces of federal legislation in 2009, it could be said that cigarettes faired the turbulent climate well. Thanks to a 61-cent increase in its federal excise tax (FET) as of April 1, 2009, along with manufacturer price increases ahead of that date, the cigarette segment saw its percentage of in-store sales increase a solid three percentage points to 33.7 percent, bringing in $412,104 for the average convenience store in 2009. Additionally, the increase seen for per-store sales represents a 14.4-percent jump over 2008.

However, while dollar sales increased for the convenience industry, volume shows a different story. According to figures provided by Altria Group, parent company to Philip Morris USA, convenience store cigarette volume was down 8 percent in 2009. However, the cigarette category's percent of in-store gross margin dollar contribution was 19.20 percent, up from the 17.21 percent seen in 2008.

The second tobacco-focused federal law passed in 2009 gave the U.S. Food and Drug Administration (FDA) authority to regulate the tobacco industry — from manufacturing to sales and marketing. As part of this, flavored cigarettes, rolling papers, filters and tobacco were made illegal, subsequently pushing consumers who smoked them to explore flavored options in the little cigar segment of other tobacco products (OTP), according to retailers.

And while consumers adopted a value-focused mindset throughout the recession, this was not reflected in the cigarette category, where smokers have a fierce allegiance to brands. Evidence of this is the minimal change among each tier's share of the category. Premium cigarettes dollar share led with the vast majority (84.3 percent) and declined 0.3 percent in share. Gaining one-tenth of a percent in share was branded discount cigarettes, at 6.6 percent of the category, followed by the sub-generic/private label tier at 6.4 percent. Fourth tier brands made up 1.8 percent of the cigarette category in 2009, while imports rounded out the category at 0.9 percent on a dollar share basis.

Fig. 15

Category Analysis — Cigarettes

(33.70 percent of in-store sales, 19.20 percent of in-store gross margin dollar contribution)

Fig. 15

Percent of Cigarette $ Sales and Unit Volume

Meanwhile, the convenience store industry continued to lead when looking at all cigarette retailers, with 64 percent of the cigarette unit volume share, a 1-percent bump from 2008 figures. Tobacco outlets held onto their 10-percent share of the category, while supermarkets lost a percentage point, landing at 6 percent. Drug stores gained unit volume share by 1 percent, reaching a 5 percent stake in the cigarette retailing market. However, with increased pressure by municipalities to banish cigarettes from drug stores — a retail outlet perceived to assist in health and wellness — this channel's share of the category is expected to diminish in coming years should such legislation gain traction. Lastly, unit volume share from all other outlets dropped 1 percent to 15 percent.

Fig. 17

Cigarette Unit Volume Market Share

2009 was not limited to federal tobacco regulations alone, though, as states enacted their own cigarette tax increases, anti-smoking restrictions and other harmful laws that chipped away at convenience store retailers' No. 1 in-store category by sales. On the taxation front, 46 U.S. states, Washington D.C., and U.S. territories increased their cigarette tax rates multiple times since 2002. Rhode Island led the way in 2009 as the state with the highest per-pack state excise tax (SET) on cigarettes at $3.46. Connecticut was not far behind at $3 per pack. New York state comes in third with an SET totaling $2.75 for one pack of cigarettes, though lawmakers there have proposed another $1 increase in the tax rate. If passed, it would make New York the state with the highest tax on cigarettes, a title it held for the second half of 2008 and part of 2009.

On the other end of the tax spectrum, at the end of 2009, South Carolina weighed in with the lowest cigarette SET in the U.S. — at 7 cents per pack — a figure that hadn't changed since 1977. However, a legislative squabble in May 2010 between the state's governor and House resulted in an overridden veto and a 50-cent increase in the state's cigarette tax rate. As a result, Missouri became the state with the lowest SET on cigarettes at 17 cents per pack.

BOTTOM LINE:

• Cigarette's share of in-store sales increased 3 percentage points to 33.7 percent.
• Premium cigarettes' share of the category retained its top spot in terms of dollar share and units.
• The convenience store channel continues to add market share in cigarettes.

Fig. 18

State Cigarette Taxes