The SCHIP tobacco tax rates that hit in April 2009 are costing cigar smokers more, but sales continue to persevere. As of April, the federal taxes on large cigars rose from 20.719% of the wholesale price with a tax cap of 4.875 cents per cigar to 52.75% of the wholesale price with a tax cap of 40.26 cents per cigar. The tax on little cigars jumped from four cents per pack to $1.0066 per pack, the same tax placed on cigarettes.
According to the 2009 NACS State of the Industry report, cigar sales increased 5.2% to represent 30.48% of other tobacco sales. As the category grows, retailers are finding that this category has been excellent for complementing rather than cannibalizing cigarette sales.
“A lot of our smokers are looking for variety. It’s not that they are switching exclusively to cigars,” said Keith Martin, owner of Tobacco Outlets Inc., a chain of c-store in the Chicago area that caters to smokers. “They just come in and purchase the flavored cigars for a change of pace, and then go back to cigarettes.”
Over the past two years, Martin has watched cigar sales grow beyond his expectations in his eight stores. One of the major reasons the category has been selling so well is the price, which for a pack of 20 little cigars is often $2 or $3 dollars cheaper than a pack of cigarettes, depending on the taxes of a given area.
“Our top-selling cigars have sold much better now that they are aggressively priced,” said Martin. “The price isn’t causing them to be used as a cigarette alternative, but it’s opening the customer to a larger selection of tobacco products.”
As retailers remain bullish on the category, participants in CSD’s 2010 Brand Preference Study identified Altria Sales & Distribution (John Middleton), Swisher and Swedish Match as top performers. Altadis USA and Republic Tobacco were identified as honorable mentions.
Despite the increase, David Dill, vice president of sales and marketing for Gate Petroleum, Jacksonville, Fla., which operates 225 service stations with convenience stores in six southern states, agreed cigar sales are still going strong. “Our cigar sales are up calendar year to calendar year about 7% for the category,” he said.
What’s more, even with the increase in price on little cigars, at around $2.19 they still are quite a bit less than a pack of cigarettes, and some customers are switching to the cheaper option.
Dill also has noticed increased interest in smaller cigars. “I think those probably are cigarette smokers moving over, so it seems to be the new trend—moving to the smaller cigars,” he said. “We do quite a bit of business with blunts. We’re doing a promotion with four flavors from the Swisher International cigarillos line, and they are doing very well for us.”
With the black cloud of the FDA hanging over the industry, retailers, understandably, are frustrated. “They have passed this ruling,” said Jodi Benson, category manager for Kum & Go c-stores in West Des Moines, Iowa, “yet there is nothing out there telling us what we, per se, can or cannot do, or what the manufacturer are going to be able to sell. It’s so up in the air that we have to kind of just sit and wait.”
Most Kum & Go stores have an acrylic counter case for single cigars plus a two-foot by five-foot area in the back. Benson said she has received good support from suppliers—including little, flavored and premium cigars—for ongoing promotions.