roll reversal

Eric Dean remembers walking into a store as a child with a note from his mother saying, “Please sell my son a pack of Pall Malls for me.” Things have changed a lot since then. Retailers have become much more responsible, for instance, by taking greater precautions to ensure that tobacco products don’t fall into the hands of minors— even if they have a note.

But, as expected, tighter restrictions have also presented their share of challenges in marketing tobacco products, smokeless tobacco included. Dean, now director of operations for Humboldt Petroleum (Eureka, CA), merchandises his company’s mix of smokeless tobacco on a small back-bar display, well out of reach of customers not yet old enough to purchase such products. While these measures have helped reduce sales to minors, taking tobacco off the counter has also hampered a retailer’s ability to market the product to legal-age consumers.

“I’ve seen plenty of changes in my 18 years with this company,” says Dean. “The state regulations for selling tobacco in California have changed a lot. For instance, we used to have cabinets on the floor and customers could help themselves. Now, most of the tobacco is behind the counter and customers can’t get to it.”

A different mix
Some of the most recent changes that have made Dean take notice don’t concern regulations. Instead they revolve around the product mix and how smokeless tobacco vendors market their products. He has watched smokeless tobacco mirror a trend in the cigarette category, whereby lower-tiered brands are gaining more market share at the expense of some of the higher-priced premium brands.

“The major cigarette manufacturers are trying to stamp out the fourth tier by putting pressure on those small manufacturers,” Dean says. “It’s similar in the smokeless tobacco business. Conwood came in with Grizzly and it changed things. You’ve always had some ‘generics’ in the category, but they never had the promotional support that Grizzly has had. That has forced the other manufacturers to compete on a whole different level.”

But Dean says this trend goes far beyond the bounds of tobacco. Beer and soft drink manufacturers have followed similar cycles throughout the years. Still, he says, while fourth-tier brands in the cigarette business seem to be waning, bargain smokeless brands show no sign of slowing. Five years ago, the lower-priced smokeless brands represented a very small part of Humboldt’s business. Now, he says, the “bargain brands” account for almost 25% of his total smokeless sales.

Feeling the pinch
Manufacturers are feeling the pinch as well. In late April, UST Inc., parent of leading manufacturer U.S. Smokeless Tobacco, posted flat quarterly profits as sales of its premium smokeless tobacco brands fell. It also cut its full-year outlook due to plans to increase spending on promotions as a measure to boost sales. The company, whose smokeless brands include Copenhagen and Skoal, reported a 1.7% increase in total sales, driven by its wine business, but revenue was flat in the company’s smokeless tobacco business at $378.7 million. Its premium net sales declined 5.3% to 130.1 million cans, according to a recent Reuters report.

“As far as the retail end is concerned, we are in some ways stuck with keeping up with the SKUs,” Dean says. “The merchandising end can be terrible, because how do you make it without the latest and greatest items? I don’t know how you go about managing the category without scan data (Humboldt scans in all its stores), even with help from a reliable vendor.”

Humboldt has developed its own system for introducing new items: SKU selection by committee. The company reviews many new products—including those from smokeless vendors—at monthly store managers’ meetings. If managers take an interest in a certain product, it stands a good chance of making it onto store shelves. But if managers don’t have faith in the sales potential of a specific item…well, the results are much different.

“We invite the manufacturer’s rep to bring in the product, and everybody—meaning our managers—looks at the item and some will even try it out, then we make a decision,” says Dean. “If the managers don’t think it’s a good decision to add it to our set, it sits to the side. But if you get them excited about something, it has a much better chance of getting into our stores and succeeding.”

Logistically, Humboldt maintains a sensible approach to implementing new items. If a vendor comes in with two new smokeless items it wants the chain to stock, Dean will review all other SKUs from that particular manufacturer. If, for instance, wild berry and cherry SKUs from one vendor aren’t blowing off the roof, Dean will insist that the manufacturer switch out the underperfomers with the new items.

“We use that as a measuring stick for all of our categories,” Dean insists. “It seems to work well for us.”

Consistent vendor support has been somewhat of a source of frustration for Dean. Because of his company’s geographic situation—tucked away in northern California, with most of its stores near Eureka and three stores skirting the town of Redding—it’s tough to get strong manufacturer support; none of the major smokeless vendors have reps in Humboldt’s operating territory, according to Dean.

“Reps have to drive up from the Bay Area or over from Redding, which is more than a few hours from our headquarters,” says Dean. “If they were to come up here, they could do 30 calls in eight hours’ drive time. But if they are in the Bay Area, they could do 30 calls in a five-block radius. We just don’t get the coverage.”

Where’s the growth?
Humboldt Petroleum’s 19 Shell, Gas 4 Less and Valero stores generally carry less than 20 smokeless tobacco SKUs in total, split between the Copenhagen, Grizzly and Timber Wolf brands. Dean has witnessed some growth in menthol and wintergreen flavors but says the “fruity” flavors like peach, berry and apple have been riding a slower upward trend.

“I’m not sure how the whole flavor trend came about, but we’re seeing that trend in the cigar segment as well,” Dean says. “Maybe it was to attract more female customers, but I haven’t seen too many women rolling down their car windows to spit. We’re on the northern coast of California, near the Oregon border, and timber and trucking are the main industries up here. So that may explain why we haven’t had as much success with the flavors.”

Humboldt has tried multi-pack promotions offered by his key manufacturer partners, but they haven’t sold as well as single cans. Like the prepared foods business, smokeless tobacco is all about freshness and taste; customers prefer to purchase rolls of tobacco one at a time to ensure the quality of the product.

“We’ve done the ‘two-for-one’ deals, but in many respects smokeless is like the single-pack business for cigarettes,” Dean says. “People will stop in and visit—it’s a daily ritual. They will get their gas and buy a cup of coffee, and while they’re at it they’ll buy a can of smokeless. They’re very cautious of the dates—they’re most concerned about having a fresh product. As a result they’re just not going to buy a lot of multi-packs.”

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