New insights on the cigar category reveal that retailers who manage the tobacco segment more strategically benefit from accelerated growth and a larger share of the market.
“Retailers focused on offering a competitive assortment and lower prices on cigar packs are growing faster than the market,” said David Bishop, managing partner of Balvor LLC.
While new cigar products are an important aspect of managing assortment, a larger driver relates to product availability. Bishop pointed out that decisions related to assortment or space cannot be easily separated and should be made in tandem. This insight, along with the observation that the sales space for the cigar category is expanding slower than the assortment offered by retailers, forms the rationale for maintaining a comparable pack assortment. In fact, the research showed that retailers using a comparable assortment pack strategy are reporting year-over-year growth that is 15 percentage points higher than the study average. A large component of this growth can be attributed to simply keeping top-selling SKUs in-stock and on the shelf so that the consumer can buy the product.
To this point, a retail mantra should be “to build the base business, you must protect the core top-selling SKUs,” Bishop said. Retailers who follow this strategy have the potential to grow the category by about 2%.
Previous consumer research indicates that pack cigars tend to be a more planned purchase, indicating that the decision to buy occurs before entering store. “This insight suggests that more aggressive pricing on packs can drive greater foot traffic since consumers may be more likely to be sensitive to pricing tactics,” Bishop said. “We found that retailers pricing below their primary competitor’s non-promoted price by 5% or more enjoyed sales gains that are greater than 20 points over the average [where permitted by law.]”
However, Bishop said that this low-price strategy on packs doesn’t mean all packs need to be priced aggressively. He pointed out: “It’s important to emphasize lower prices on the top-selling SKUs because these products play a larger role in creating the retailer’s price image,” implying that retailers can maintain higher prices on other, lower-selling pack SKUs and generate stronger profits per unit sold.
The main takeaway for retailers was “price for volume” as greater profit dollars can be made even with lower retail margins. The key is remembering that this strategy applies mainly to the top pack products.
Overall, cigar sales increased 5.2% to represent 30.48% of Other Tobacco Product (OTP) sales, according to NACS’ 2008 State of the Industry Report. As their popularity and subsequent sales grow, retailers are finding that this category has been excellent for complementing rather than cannibalizing cigarette sales.
New taxes are threatening the cigar category. Following the expansion of the State Children’s Health Insurance Program (SCHIP), which was passed by Congress in January, lawmakers increased the tax on little/small cigars to $1.0066 per pack (the same tax rate on cigarettes) and on cigarillos by 35 cents, up from just five cents.
As part of CSD’s 2009 Brand Preference Study, 90 buyers of cigar products identified Swisher International Inc., Swedish Match and Altadis USA as top performers in the category. Honorable mentions were John Middleton, Royal Blunts and PrimeTime Cigars.