Tobacco Challenges and Opportunities Abound

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Tobacco Challenges and Opportunities Abound

By Mehgan Belanger

NEW YORK -- The near- and long-term impacts that the April 1, federal excise tax (FET) increase on tobacco products will have on the category in convenience stores was one of several topics discussed during a free webinar titled "Growing Tobacco Profits" hosted yesterday by Convenience Store News and sponsored by McLane Co.

"Tobacco is an industry in decline, on a compound annual growth rate basis, it declines about 3 percent year over year," David Bishop, managing principal at consulting firm Balvor, said during the presentation. Regarding projections on the impact of the FET increase, Bishop said he has seen both a conservative low of 5 percent to a more aggressive 10 percent reduction in legal demand for these products.

In the near term, or for the rest of the 2009 calendar year, it will be "much more challenging" as the industry and consumers adjust to the sticker shock of tobacco product prices, he added.

Another challenge posed to convenience stores' tobacco categories is the increasing prevalence of smoking restrictions, which Bishop said pushes the decline in smoking, but helps other tobacco products (OTP) growth.

Approximately 37 states have anti-smoking laws in place, and combined, the laws would cover 70 percent of smokers, who would face some form of smoking restrictions statewide, according to Bishop.

However, the results of a survey conducted by CSNews and Balvor, which were cited during the webinar, indicated retailers see an upside to the FET, as well as the recently passed legislation that gives the Food and Drug Administration regulatory authority over the tobacco industry—retailers not fully committed to selling tobacco may determine that it is more economical to exit the business, and as a result, convenience stores will gain a share of their volume as the market share is redistributed, Bishop said.

Within that, retailers surveyed said the drug channel will be the primary source of volume losses, as legislation is passed that prohibits retailers with pharmacies from selling tobacco. Such legislation has already passed in San Francisco and Boston, and was proposed in New York.

Other opportunities exist in the tobacco category, particularly in the OTP section. Wayne Wills, merchandising manager for Certified Oil, headquartered in Columbus, Ohio, cited double-digit unit volume increases in the smokeless category following the FET increase on tobacco.

Wills also presented a list of strategies the chain is using to maximize profits in the tobacco category. They include:

--Maintain an in-stock position
--Hold minimum pricing on cigarettes
--Offer two-can specials on snuff to drive units
--Take advantage of value-added deals from manufacturers
--Encourage suggestive selling and cashier interaction with customers
--Take advantage of alternative tobacco products, such as the e-cigarette.

Also during the webinar, CSNews Editor-in-Chief Don Longo provided a tobacco category review from the CSNews 2009 Industry Report.

View a replay of the free webinar.

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