The past 10 months have been a pretty wild ride for Julie Van Alyea.Van Alyea, retail merchandise manager for Redwood Oil Co. (Santa Rosa, CA),has noticed a significant change in her most important instore category: cigarettes.While she has heard rumors that premium cigarette sales are supposed to havetaken back some of the share they lost to lower-priced brands, she just hasn’tseen that happen in her company’s 20 Chevron-branded stores.
"We break the tobacco category into distinct segments: premium cigarettes, tobacco (cigars, etc.), generic cigarettes and chew," she says. "Overall, the four segments are down 25,000 units to date. But when we look at the premium segment, that’s down, too. Selling cigarettes is an ingrained part of the convenience store industry. What I don’t know is if people are smoking less in Northern California. If they’re still smoking the same amount and going somewhere else, then that’s a big concern."
In Redwood’s stores, sales of smokeless tobacco and "other tobacco" items like cigars are up over the same period from last year. Meanwhile, sales of "generic" cigarettes—Liggett and Basic represent Redwood’s biggest movers in this space— are down nearly 12,000 units for the year to date. Van Alyea doesn’t yet understand why. Wholesale costs of one of her stores’ best-selling lower-priced brands recently increased 10′ per pack. She passed the increase on to the consumer, but she doesn’t think that’s enough to account for such a significant drop in volume.
"Cigarettes are not a loss leader for us," she says. "If costs go up we typicallyraise our retail by the same amount. Our convenience store competitors are veryvisible. However, the markets we operate in are distinct and spread out. Wehave adjusted our retails in certain locations to accommodate consumer demand."
While some of the markets in which Redwood does business aren’t terribly competitive, others are much tighter—especially near the Oregon border. Oregon’s state excise tax rate stands at $1.18, compared to California’s 87′.
"In our northern stores in Crescent City, Fortuna and Eureka, competition is extremely tight," says Van Alyea. "At four locations we dropped prices of four major brands by about 40′ a pack just to stay competitive, and we promote the heck out of them. Gas margins are a little higher up there, so competitors might be compensating by dropping their tobacco prices. It’s almost a role reversal."
A few exceptions
Farther south, in the city of Fresno, Johnny Quik FoodStores has had a slightly different experience. Joanne Thibodeaux, merchandisingmanager for the 22-store chain, says her company’s cigarette volume has beentrending down slightly but is consistent with last year.
Johnny Quik Stores has a strong representation of Philip Morris brands but also carries brands including Camel, Newport, Capri, Winston, Kool and Misty. So far, she has shied away from adding lower-priced or "fourth-tier" cigarette brands, but with costs rising she has begun to consider a few exceptions.
"The cost of cigarettes is so high that we really have to utilize the spaceand put in nothing but the best sellers," Thibodeaux says. "You can’t have everybrand known to man, but anything’s possible. We’ve been approached by a coupleof different tobacco companies, and with the price of gas going up customersmight start looking for lower-priced alternatives to the other things they buy."
In Colorado, Bryan Hutchins says it would take a fewyears of consistently high gas prices to have a significant impact on salesof the major brands in relation to lowerpriced brands. Hutchins, marketing managerfor Colorado Springs-based Bold Petroleum dba Acorn Food Stores, worries that,in the short term, obscene gas prices— combined with the escalating costsof smoking—could have a draining effect on the cigarette category as awhole.
"I have seen people that were brand loyal go away, and that has more to do with the price than anything else," says Hutchins. "A lot of people are quitting smoking. You also have a lot fewer people that aren’t starting to smoke because of the costs. It’s getting too expensive."
Despite the challenges, Hutchins sees some opportuntiiesto drive sales. He says it’s critical to manage the category-store to store, paying particular attention to demographicsand marketing opportunities by brand. In the low-cost segment, brands like Sonoma and USA Gold continue to perform solidly in Acorn stores.
"We’re seeing some [sales] increases in lower-priced cigarettes, and that hasto do with the area more than anything else," he says. "Aurora, for example,is strong in Newport and Kool. Then we have stores that sell onetenth of whatAurora sells with those same brands. That may increase with the cost of gasoline.We’re seeing people buying $5 or $10 worth of gas instead of filling up. Thosepeople might have used to spend $25 to fill up the tank. I filled my van today,and I used to be able to do that for $20. Today I spent $25 on a quarter ofa tank."
Regardless of the challenges he sees in relation to rising prices, he’s thankful that his seven convenience stores and travel plazas market in Colorado. The state’s excise tax stands at 84′, which compares quite favorably to states like Rhode Island ($2.46 per pack), New Jersey ($2.40) and Washington ($2.025), among others.
"We drove back through New York a couple of years ago," he recalls. "I paid $75 for two cartons."
As of press time, Johnny Quik had made the decisionto implement a lower-priced alternative to complement its premium cigarettemix. Initially, the chain is dipping its toe into the segment with only threerows of product.
With the country still struggling to find its economic kickstart, 2005 hasnot been the best year for convenience store tobacco sales. Of the top 10 brandfamilies in the cigarette category, eight were down in c-store unit purchasesfor the year to date.
C-store Units Purchased (Cartons), Year to Date
|Virginia Slim Total|
Source: 2005 Wholesale Purchase Data
Despite the less than encouraging numbers, there remains a certain bullishness over the long-term prospects of the category and, specifically, the premium tobacco segment, since smokers of premium cigarettes remain the engine that drives the convenience store channel.
The prevailing thinking among the retail community is that once the economyrebounds and gas prices return to more "sane" levels—prices are expectedto drop to a more stable price range by the end of September— consumerswill return to their normal buying patterns. That means that with an economicupswing, consumers would invest more of their dollars in branded premium cigarettes.
On the tobacco front
NYACS President Jim Calvin pointed out that the state’s Public HealthLaw includes cigars, rolling papers and "other tobacco products" in itsdefinition of tobacco products that are legal for licensed establishmentsto sell as long as they are not sold to persons younger than 18.
"With all due respect, these are legal tobacco products that our membersare licensed by the state of New York to responsibly sell to adult customers,"said Calvin. "No one questions [GRANET’s] commitment to fighting drugabuse, but they are clearly overreaching."
Room for growth
Cigarettes gained some steam in 2004, up 0.2% to 34.7% of total in-storesales, according to the NACS 2005 State of the Industry Report. Premiumtobacco seemed to have regained some share—thanks to aggressivepromotions and price discounts from major manufacturers, as well as priceincreases affecting some lower-tier brands—but lost a little groundlast year. After increasing to 83.08% of all cigarette sales in 2003—aspike of nearly 1%—over the prior year, premium brands dropped slightlylast year to 82.65%. Branded discount smokes were up about 1% to 10.16%of total category sales, according to the SOI.
Another small but promising segment of the category that appears to havegrowth potential is super-premiums. With legislation, competitive pressures,tax increases and other factors affecting how, what and where legalageconsumers smoke, some people may be choosing to smoke less but switchto what they perceive as a higher quality cigarette. Also, there is acertain segment of the cigarette smoking population that remains unaffectedby price and simply wants a super-premium product, according to DarrenThibodeau, director of marketing for Kretek International, whose super-premiumbrands include Djarum and Dreams.
"Our customer is in the age group of 25 to 40, is within an upper incomelevel and is a member of the upper middle or upper class—and they’revery discerning in what they smoke," says Thibodeau. "This is the samecustomer that goes to Starbucks and drinks vitaminwater or other alternativebeverages. These kinds of products attract an affluent customer that typicallyprovides a higher profit margin and a higher basket ring."
The retail on many super-premium products can be as much as 25% higherthan premium domestic cigarettes, but the margin is "significantly higher"as well, according to Thibodeau. The main challenge to the segment, hesuggests, lies in increasing its visibility.
"Consumers need exposure to these products," Thibodeau says. "It goesback to the old adage: No one goes into a gas station to get a haircut.But if you put a barbershop out front of a gas station and promote it,I guarantee people will get their hair cut there."
On the tobacco front
In Oregon, an online cigarette vendor was found not guilty of "racketeeringand computer crime" for selling cigarettes through the now-defunct Inexpensivesmokes.com,reports The Oregonian, but was convicted of conducting businessas a cigarette distributor without a license and failure to comply withstate sales requirements. A small percentage of the 7,500 people who purchasedcigarettes via the site have been billed for the unpaid tax by the OregonDepartment of Revenue.