Wild Ride Continues for Cigarettes

Once again, cigarettes dominated in-store sales, accounting for nearly one in every three dollars spent in stores, but cigarette gross margins continued to plummet, falling to 15.3%. These low cigarette margins dropped the category to third in terms of gross margin contribution (16%) behind foodservice (23.9%) and packaged beverages (16.6%)

Margins promise to continue falling following the overwhelming taxation of the category at the local, state and federal levels. Most notably, beginning April 1 when the expansion of the State Children’s Health Insurance Program (SCHIP) went into effect. SCHIP is a federal program that gives matching funds to states in order to provide health insurance to families with children. It was designed to cover uninsured children in families with incomes that are modest, but too high to qualify for Medicaid. The $32.8-billion program requires cigarette smokers to pay $1.01 more per pack.

“The increase of federal and state cigarette excise taxes will have a far-reaching, negative impact on the convenience store industry. With the exception of petroleum products, no other category is more vital to the industry’s success than tobacco products,” said Tony Miller, senior vice president of sales and marketing for Thorntons Inc. in Louisville, Ky. The company operates 158 stores in six states. “Given that cigarettes represent 30-45% of c-store inside sales, the deterioration of this category will have devastating consequences.”

Plus, Miller added, the increased cost of cigarettes will have a far-reaching impact throughout the c-store. “Credit card transaction fees will increase due to soaring cigarette retails. Internal shrink dollars will escalate due to the higher cost per carton. External theft will rise due to the value of cigarettes and the amount of inventory dollars carried,” he said.

“During these difficult economic times, it is impossible for the average cigarette smoker to assume a higher tax burden. As a result, increased taxes will alter the behavior of our core consumers.”

State Issues Emerge
S
ince the federal tax increased April 1, stores that are forced to compete with Native American reservations, such as markets in Phoenix, New York, New Jersey and Maryland, are seeing a significant drop in sales. “There is no business,” said Mohammed Alsae, owner of the Cigarette Savings Centers in Phoenix and Glendale, Ariz.

Alsae said business had dropped 40% since April 1, and that he would be forced out of business in four or five months if the drop is sustained.

Furthermore, taxes are fueling a black market. Last year, Maryland raised its cigarette tax by $1, and this year, state comptroller Peter Franchot projected that the tobacco tax estimates will be down, with revenue predictions falling short again in 2010.

Patrick Fleenor, chief economist at the Tax Foundation, pointed to the black market as siphoning off tax revenue. According to his estimates, approximately 50-75% of cigarettes sold in New York City —where taxes are $4.25 of a $10 pack—are now on the black market.

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