Roll-Your-Own Climbs Amid Tax Hit

Mounting cigarette costs are driving smokers to test cost-effective tobacco alternatives, such as roll your own (RYO).

The 2009 NACS State of the Industry report, which polled 156 retail firms with 20,553 stores as of December 2008, found that pipe and cigarette tobacco sales had the strongest growth of all tobacco products and were up 21.1%, bringing in $99.4 million in sales last year.

Taxes however, pummeled the loose leaf tobacco category in April. Federal taxes on loose leaf soared from $1.01 to $24.78 per pound, the largest incremental increase of any category. Taxes on pipe tobacco grew to only 2.83 cents a pound, chewing tobacco to 50.33 cents a pound and snuff to $1.51 per pound.

“Overall, the entire market saw RYO as the up and coming tobacco category and all of a sudden the government realized that as well and slapped a tax on us,” said Jazz Patel, president of Smoker’s Express Cigarette Outlet in Fairless Hill, Pa. “It’s the category a lot of retailers saw as a way to still make a profit in the face of more expensive cigarettes. I think the idea from the government’s point of view was to level the playing field with regular cigarettes and make it that much more expensive to smoke.”

Still, even with the whopping tax, RYO remains more economical compared to cigarettes. “If you bought a one-pound bag of premium tobacco, you could still make two-and-a-half cartons, depending on how dense you pack. Buying a carton of prepackaged cigarettes is going to be more either way, but with RYO, your own labor is involved, so it should be cheaper,” Patel said.

The reduced cost associated with RYO is attracting the attention of the big tobacco companies. Lou Maiellano, president of Taz Marketing & Consulting, said Philip Morris USA is jumping into the roll your own category under the L&M brand and are now test marketing those products in Maine and Michigan. “They want to get into that portion of the business,” he said. “They’re looking to expand and to try to gain some control in that [section of the category] and offer full service across the gamut.”

Sticker Shock
Smoker’s Express, which operates seven stores along the New Jersey border in Pennsylvania’s Lehigh Valley, saw sales of loose leaf tobacco dip with the onset of the April SCHIP tax increase. Many loose leaf consumers responded to the tax by turning to less expensive alternatives. 

“There is a different kind of pipe tobacco that is lower in cost that consumers are buying now,” Patel said. “Normal pipe tobacco is moist, but this one is dry and can be used for making cigarettes. It’s a cheaper alternative, but a personal preference. People are still buying the more expensive

premium tobaccos because there is a difference in the quality of the cigarettes, but it’s up to the individual and what they can afford at this point.”

Discount Smoke Shop, Woodson Terrace, Mo., has had better luck rebounding after the tax hit. “We’re finding our total line of RYO is on the upswing,” said Ray Calderon, director of marketing and merchandising for the 55-store chain with units in Missouri, Illinois and South Dakota. “Our RYO saw triple-digit increases in the last couple of years. There was a little downturn the first week of April with the SCHIP tax increase because of uncertainties of the category. But now we’re in a new upswing back to where we were before April as new customers turn to RYO products.”

Calderon said sales have remained strong with help from new products, such as Gambler Tube Cut and Golden Harvest pipe tobacco, which are RYO product lines. “Sales of pipe tobacco for RYO have increased drastically. Consumers are purchasing that as well as puff tobacco,” he added.

Expanded tobacco or air puff tobacco is used to reduce the weight per cigarette and is chemically puffed up to one-and-a-half to two times its size. “Expanded puff tobacco can fill more tubes with the same weight. A smaller bag rolls just as much because of the way it is processed,” Calderon said.

Darren Collett, Smoker Friendly Stores, Seymour, Ind., which operates 17 stores in southern Indiana and northern Kentucky, also credited new products with keeping the category alive. “Right after the tax increase, we took a little dip, but some of the new products coming to market really filled a void there and the RYO category is not just surviving, but it is thriving in our stores.”

Collett agreed that pipe tobacco and air puff tobacco are driving sales. “Both Republic and Commonwealth Brands have air puff tobacco products. The weight of the tobacco is less and because it’s a weight based tax, so it’s a lot less of an impact on the final retail price.”

Across the category, the best-selling brands include Rave, McClintock, Golden Harvest, Red Cap and Premier. “Commonwealth’s brands are doing very well right now in our stores,” Collett said. “They weren’t first to market, but they have great name recognition and their products are well received with the customers. Customers really like it.”

Pipe Dreams
While more consumers are using pipe tobacco in RYO cigarettes, fewer are opting to smoke it out of pipes. “It’s a generational shift. This new generation tends to smoke cigarettes. People are still buying pipes, but the trend is not as popular,” Patel noted.

“New pipe tobacco is being used for RYO versus for pipes,” Calderon agreed. Current pipe users are using new pipe blends.”

This means less competition for RYO in attracting smokers fleeing the cigarette category. Lower income and fixed income consumers or cigarette smokers who perceive the price of a carton to be too high are those most likely to make the switch to RYO tobacco.

“Some consumers may switch to a less expensive brand of cigarettes, or they can get more cigarettes at high quality with RYO, and now they can get the exact flavor they want because now they can mix the tobacco,” Patel said. “They can buy an ultra light and a full flavor and come up with their own mixture. Consumers want to find the flavor they’re coming up with themselves.”

Ultimately, Patel added, for a lot of people it’s more convenient to buy a carton than RYO, “until they realize there is a significant price benefit and it doesn’t take long after that for them to make the connection. It’s a matter of informing the customer.”

Roll With It

RYO customers tend to be split 50/50 when it comes to hand rolling the cigarettes or using machines. When choosing a machine, customers tend to first start with a single roll, handheld device and then move up to better machines. “They more they use it the more apt they are to buy up to a better, bigger machine whether single or multi-fill,” Calderon said. 

RYO accessories have also proved to be profitable SKUs. Smokers Express Outlets offer a variety of manual machines from hand roller machines that make single cigarettes to ejector machines that crank out more cigarettes faster. These machines can range to several hundred dollars with a 35-40% margin.

“It’s easier to make cigarettes with more expensive machines. Different manufacturers offer various types made with different materials. Some are metal, which is less prone to sticking. Others are made of plastic and the tobacco may stick a bit, so there is a range of quality and prices,” Patel said. “We had one electronic machine in our store, but we had some complaints about the electronic and have had more success with the manual cranking ones.”

While manual machines are more proven in the industry, a lot of companies are coming out with electronic variations which lessen the labor. “We’re still looking for a good electronic machine because the consumer demand is there,” Patel said.

Marketing Matters
Discount Smoke Shop has stepped up RYO marketing efforts to show cigarette smokers the benefits of switching.

“We have an expanded training program for all our employees to learn about the new expanded tobacco process,” Calderon said. “In-store, we have signs telling consumers how much money they can save by choosing RYO, and we have videos playing, which demonstrate how to roll cigarettes effectively. We use rolling machines in the store, which consumers can try in the store at our sample station because consumers like to test the product before they buy.”

Smokers Express Cigarette Outlets recently went through a remodel of all their stores during which a special category was created for loose tobacco. “Before RYO was subdued. Now as soon as you walk in there’s a wall of loose tobacco, so as the trend grew we changed our marketing in the store,” Patel said.

Patel said the FDA bill that recently passed will make cigarette companies more competitive with each other, and will affect marketing efforts, including window signage, which several cigarette companies require, but RYO manufacturers do not. He predicted those rules will not affect RYO as much because many tried-and-true RYO consumers are swayed not by price points touted on signage, but by the quality of the tobacco, as well as the ability to mix and match flavors to their liking. Collett agreed that the future of RYO is bright. “Consumers are very smart. They always look for a way to save a dollar, and they’re looking for value, and RYO still provides a good value to them,” he said. CSD

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