Sorting through all of the dynamics at work in the smokeless tobacco category is proving a complex calculation for convenience store operators and consumers alike.
For example: retail prices rose with the April 1 passage of an increase to the Federal Excise Tobacco (FET) tax to fund an expansion of SCHIP, the State Children’s Health Insurance Program, but not as much as for other tobacco products. Stung by restrictions and stigmas and drawn by innovation and value, more consumers are switching from cigarettes to smokeless products, aided by point-of-sale advertising and promotions and downsized packaging designed to encourage trial.
At the same time, states are greedily eyeing smokeless tobacco as a source of, depending on the state, new or greater tax revenue. And some operators have privately expressed concerns about whether manufacturer support of the category will continue apace. Others have shared worries about contracts that may place sustaining suppliers’ marketshare ahead of building retail sales.
In 2008, OTP was once again the fastest growing in-store category on a dollar sales basis, according to NACS State of the Industry data. Dollar sales of OTP increased by 11.9% in 2008 compared to 2007, nearly four times that of overall in-store sales. Its contribution to in-store dollar sales was 3.9%, up from 3.3% the year before, according to NACS. Smokeless tobacco continued as the largest subcategory with OTP at 62.3%.
“Consumers are looking for alternatives,” said Robert Perkins, director of marketing for Rutter’s Farm Stores, a 56-store chain in York, Pa. “But there are a couple of other things that are causing that decision to switch. Some of it is pricing, and really a lot more push and emphasis from the smokeless manufacturers,” including signage and other merchandising and promotional assistance.
According to the National ASSOCIATION OF TOBACCO OUTLETS (NATO), OTP tax increases were defeated or failed in 15 states and passed in 14. The states where OTP taxes failed included Georgia, Indiana, Kansas, Louisiana, Maryland, Minnesota, Mississippi, Montana, New Mexico, North Dakota, South Dakota, Utah, Virginia, Washington and West Virginia. Those that enacted higher OTP taxes or changed the method of moist snuff taxation included Arkansas, Florida, Hawaii, Kentucky, Maine, Nebraska, New Hampshire, New York, Oregon, Rhode Island, Texas, Vermont, Wisconsin and Wyoming.
“I look around the market right now and see pricing all across the board,” Perkins added. “In my state I’m seeing anywhere from 10-50 cents to as much as $1 difference in canned prices, which means somebody’s making a little bit less money and somebody is making a little bit more money.”
As one industry executive pointed out, historically there was not a lot of competition in the moist snuff market, with price points generally on the premium level. But with time have come competitors offering lower-priced products that, especially in turbulent economic times, have wide appeal. The moderately priced Stoker’s moist snuff brand, for example, is sold not in cans but 12-ounce bulk tubs, which carries promises of added value and freshness.
FKG Oil Co. in Belleville, Ill., which operates 74 MotoMart convenience stores in the Midwest, has seen smokeless dollar sales rise by 19% year to date, according to Vice President of Sales and Marketing Todd Badgley. Unit volume is up 17%. Bolstering sales, Badgley said, has been FKG’s competitive pricing and strong value perception, as well as multi-can—specifically, two- and five-can—promotions.
In fact, Badgley added, some manufacturers have missed good opportunities by discontinuing two-can promotions.
Operators and suppliers all seem to agree that the effect on smokeless sales following the FET tax increase has been far less than many had feared. The smokeless category has also held up despite SCHIP because the increase was not as drastic as it was on many other tobacco products. According to one source, for example, premium cigar prices grew by more than 2,500%, and roll-your-own cigarette tobacco by 2,145%. Meanwhile, moist snuff rose about 156%, which is a sizeable increase, but not relative to others.
“That tax,” said Lou Maiellano, president of TAZ Marketing and Consulting Group in Levittown, Pa., “really was miniscule. It was relatively a small number compared to other types of tobacco. A lot of folks didn’t expect there to be that much of an increase, but, of course, there were the alarmists out there. When you really look at it, it didn’t affect things that much. The industry has continued to move in the same direction.”
Others are still taking a wait-and-see approach. “With SCHIP only having gone into effect four months ago, it is most likely too early to determine the full impact,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “Some state legislatures are still in session, so several proposals to increase OTP taxes remain unresolved.”
Tax Man Cometh
New state taxes are starting to hit now, according to Badgley, who operates MotoMart’s in Illinois, Missouri, Indiana, Ohio, Wisconsin and Minnesota. “In Wisconsin and Minnesota they will be coming up soon. Operators need to keep close tabs in order to know what’s coming at them,” he said. “A lot of times our chief financial officer, who handles all that, doesn’t even know it until we read something about it.”
Briant urged storeowners to stay proactive. “Retailers need to continue opposing tax increases on smokeless tobacco products through direct contact with their elected officials,” he said. “They also need to engage their customers to also voice their concern. While a number of states have now begun to introduce bills to raise taxes on liquor products, the threat of higher taxes on tobacco products still remains.”
Rutter’s Perkins said he hears constant rumors of tax issues ahead. “Right now we’re in a perfect situation in Pennsylvania, where moist and other smokeless OTP are not taxed currently.”
At presstime, however, the state was 49 days overdue in coming up with a budget, and politicians there—like politicians everywhere—are “trying to fill some of those budget gaps,” Perkins said.
Clearly, the imposition of a state tax will hurt business. “Whenever you have a price increase, it’s always going to hamper volume, and volume is where we strive right now,” Perkins said. “Rutter’s has stores close to the Maryland border, so we get a lot of residual sales that bleed over.”
Another specter on the horizon for the smokeless category, Perkins predicted, is questions concerning health. “Health issues and risk have not really targeted OTP, moist and smokeless, until now. I think it is coming and the way to prepare for it is to capture as much marketshare as we can upfront.”
Most feel that operators’ concerns about continued supplier support will prove to be groundless. At least one tobacco executive was adamant that such fears “are unfounded because there is a higher level of competition in this market place than there has ever been before. You can see the manufacturers on the whole are being very aggressive.”
Perkins conceded that he is a little concerned about the level of manufacturer support holding steady. “I think it has to do with some of the indicators of trying to manage the category through contract—with merchandising, placement, marketshare—versus SKU movement,” he said.
The danger of such an approach is that you get slow-moving items in the set that maybe shouldn’t be in the set. “In such instances you just have to manage through that,” Perkins said. “Flexibility on both sides is key.”
Retailers ultimately will set the stage for the smokeless category in the future. “Retailers will drive the success of OTP,” said Maiellano, of TAZ Marketing. “They need to take control of the category by focusing on the shopper and being better marketers.” CSD