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Tobacco Adapts to New Realities

Nearly a year after Congress passed and the president signed a historic increase in the federal excise tax (FET) on tobacco to fund an expansion of children's healthcare benefits, convenience store retailers joined to discuss the tax's implications on tobacco, as well as other factors influencing the category, at Convenience Store News' annual Tobacco Best Practices Roundtable, held before the start of the Tobacco Plus Expo in early March.

CSNews shared with attendees at the roundtable its latest tobacco retailing research, conducted in partnership with Balvor, which polled c-store retailers in late January on tobacco's current performance and their expectations for the category in 2010.

Despite the challenges the tobacco section faces from legislation, FDA control, constricting contracts and more, attendees to the roundtable were generally upbeat about the category's prospects going forward in areas such as other tobacco products (OTP). Retail chains represented at the roundtable included 7-Eleven, TravelCenters of America, Smoker Friendly, Mac's Convenience Stores and Royal Buying Group. The event was sponsored by McLane Co. and Republic Tobacco.

The dual user — who smokes cigarettes and uses OTP — is a growing opportunity for c-store retailers, said one attendee. "Many more people today buying moist snuff are smokers looking for tobacco satisfaction when they can't light up. To a bigger and bigger extent, smokers are also OTP consumers. That will get bigger and overlap," said Joe Teller, senior category manager for Swedish Match North America and special guest to the roundtable. "OTP will become more important as retailers realize that." He also attributed the OTP segment's growth to the blurring consumer profile, and predicted there would be more SKUs in the set and more space allocated to OTP as retailers understand this.

While all attendees agreed that roll-your-own (RYO) loose tobacco took a beating when its federal excise tax rate was raised 1,200 percent in April 2009 — and also suffered further when consumers discovered lower-priced pipe tobacco could be used as an alternative in cigarettes — they said there are still opportunities in this segment.

"The value of RYO is still there," said John Mayer, product director for cigarettes and tobacco for McLane Co. "Consumers will enter this category and not know anything about last year or its previous prices."

In discussing best practices, attendees shared ways they have seen success in the category over the past year.

One such opportunity for Smoker Friendly stores was bringing in loose pipe tobacco. "I was hesitant to bring it in, but once we did, it sold," said Jeremy Weiner, sales and marketing manager, adding consumers see this product as a lower-cost alternative to RYO tobacco for cigarettes.

TravelCenters of America stores have focused on installing new fixtures for a cleaner look, as well as being on the forefront of new products, said Erin Slater, category manager.

And in Canada, Alimentation Couche-Tard's Mac's Convenience Stores reinforced inventory positioning and weeks of supply, according to Peter Chappell, senior category manager. The chain also developed pricing clusters for stores in certain demographic areas.

Meanwhile, Dallas-based 7-Eleven Inc. expanded its sets, keyed in on maintaining contract requirements and staying in stock, said Terry Kailey, category manager. The chain also added tools to help its franchisees manage the category, and encouraged them to focus on taking action on harmful tobacco legislation. "It has never been [a big focus for us], but we're a huge player in the industry," he said. "We saw the success we had with the credit card [interchange fee] petition, and we'll piggyback on that by asking our stores and our customers to get more involved."

While 2009 was a difficult legislative year for tobacco, retailers voiced concerns of contractual challenges in 2010.

Mandatory automated ordering requirements were an issue for 7-Eleven's Kailey. "Contracts that reward for margins are restrictive, and out of stock ordering guidelines are so tight and closely managed that it leaves no room for error," he said.

Mike Zielinski, president and CEO of Royal Buying Group, said there should be more communication between suppliers and retailers. "A contract is [now] a directive from a supplier. If there was education [on the manufacturer's strategy] there would be more acceptance by retailers to drive that strategy down to the consumer," he said.


The new normal for the core tobacco category is a generalized "trading down," according to conversations heard around the roundtable.

"We're seeing more of a decline in premium cigarette sales," Zielinski said.

The trend was noticed in Canada by Chappell at least a year earlier. "Premium sales were flat, while discount sales were up significantly," he said.

Price-sensitive shoppers are apparently responding to the fact that "manufacturers are cutting down significantly on promotions," according to 7-Eleven's Kailey.

Another observation is the category has moved from cartons and is now packing on the pack sales. "Carton sales are almost nil," said Kailey. "Smokers are making more trips to buy cigarettes but they're also shopping around."

Traditional cigarettes were not the only topic addressed by the panel — electronic cigarettes were identified as a "surprising" growth segment for chains such as 7-Eleven, which is conducting a 104-store test on a $29 starter kit and a $14.99 refill package, according to Kailey. "It's way too early to tell who exactly is buying these, but it looks like they are smokers looking for an alternative," he said.

Weiner applauded electronic cigarette manufacturers for countertop point-of-purchase vehicles that offer customers informative pamphlets and even "talking displays" that are operated by the push of a button. "One customer pushes it and four or five other people in the store hear about it," he said.


Once again, the grass is greener on the OTP side of the tobacco merchandiser, according to roundtable participants, who said this is where growth in the category exists.

Retailers identified OTP products that were performing well in stores, which included:

Pipe tobacco

Star Scientific's reformulated Stonewall and Ariva products

Cigar wraps

Foil packs of cigars

Two- and three-count foil packs of cigars

Pouches were another segment of OTP where retailers see promise. "Pouches are a significant part of growth [in OTP] because its an entry level product and more palatable," said Mayer.

"Pouches are starting to become a bigger part of the business," said Teller. "You will see tiers, brands and more of a retailer focus on product assortment management."

Best practices for RYO and make-your-own (MYO) tobacco were also noted at the event. "Those retailers that have dedicated space to MYO and embraced the category through promoting have been very successful. MYO should be considered when selling OTP departments as consumer demand continues to grow," said Mark Loposfsky, a representative with Republic Tobacco.

And on the topic of flavored cigars, roundtable attendees reported seeing some shifts — perhaps the largest of which is a more streamlined flavor assortment, thanks to manufacturers wanting to keep their flavored category out of FDA attack and more clearly gear products to an adult-only crowd.

Additional cigar category shifts discussed include:

Cigar stick volume "is up strong in the last couple of months, away from packs and towards singles," said Teller;

"The bloom is off the rose" for large cigars, according to Chappell;

Domestic cigars/cigarillos are in a growth mode; and,

Many flavored cigarette smokers made the switch to flavored/filtered cigars.

But despite these trends, the group agreed it's not uncommon for shifts to move 180 degrees from one year to the next.

"If retailers want to capitalize on current trends, they have to be flexible, reacting quickly, changing or tweaking plan-ograms to meet consumer demand," said Loposfsky. "You can't fear the unknown here."
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