Since the 1998 Master Settlement Agreement (MSA), tobacco taxes and sales from tax-free sources continue to plague the convenience store industry.
Cigarettes continue to be the top in-store category based on sales dollars. On a monthly basis, the industry per-store average over the past year was $39,127. However, its gross profit contribution slipped 3.2% to $6,152, falling behind package beverages ($6,526), according to the NACS State of the Industry report.
While the numbers remain strong, the reason tobacco fell to No. 2 is simply taxation. Since 2002, 43 states have hiked smoking surcharges, which last year hauled in $14.5 billion nationwide.
To complicate matters, the tax situation is poised to get worse at the federal level in the coming months following the expansion of the State Children’s Health Insurance Program (SCHIP) program, which was passed by Congress in January.
Following SCHIP, the excise tax on a pack of cigarettes is set to rise 62 cents to $1.01 per pack. The tax on chewing tobacco will rise to 50 cents per pound, $1.50 per pound for snuff, $2.83 per pound for pipe tobacco and a whopping $24.78 per pound for roll-your-own cigarette tobacco.
Tobacco lobbyists pushed for an amendment to lower the RYO tax rate and eliminate the floor stocks tax, but it was not offered in the final version of the bill, said Tom Briant, executive director of the National Association of Tobacco Outlets (NATO).
As a result, all manufacturers, wholesalers and retailers will also be required to pay a floor stocks tax, which is calculated by multiplying the amount of the tax rate increase on each kind of tobacco product by the inventory on hand as of April 1, 2009. The floor stocks tax is due to the federal government by Aug. 1, 2009.
The fallout from SCHIP will likely include significant cigarette and tobacco sales reductions, large increases in the number of store robberies because the value of tobacco products would be so high, employee layoffs and even potential store closings, Briant said.
A typical convenience store relies on cigarette sales for about 35% of its total sales. That number is much lower in New York and New Jersey, where stores have lost anywhere between 15-25% of their cigarette sales since the tax increase, said Jim Calvin, president of the New York Association of Convenience Stores (NYACS), who estimated that more than half of the cigarettes that are consumed in The Empire State are purchased without a New York State tax being collected.
“The vast majority of smokers who are no longer coming to our stores didn’t quit,” Calvin said. “They just quit coming to our stores and are now buying from lower-tax or no-tax venues.”
The tax affects more than just cigarette sales. Remaining convenience stores are losing profits from all sectors. “We also lose the sales of the other stuff those cigarette customers used to buy when they came through the door,” Calvin said.
In these difficult times, retailers are relying more and more on their tobacco suppliers for support and promotions to drive the tobacco business. According to the 102 category buyers that participated in CSD’s 2009 Brand Preference Study, Philip Morris outperformed all tobacco suppliers in the cigarette category in three distinct areas: Most effective sales program, best product quality and best cigarette supplier. Other top performers included R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. Honorable mentions were Commonwealth Brands Inc. and Liggett Vector.