Forecast Strong for Cigars

Amid all the chaos of legislation, regulation and taxation, it’s good to have tobacco category managers like Gate Petroleum’s Matt Hieb.

Hieb’s approach to his chain’s market-leading cigar performance is calm and measured, driven by data, common sense and manufacturer promotions. In 225 locations throughout six southeastern states, Gate’s cigar offering exceeds the southeast market average in cigar movement.

The Food and Drug Administration (FDA) recently indicated that it will try to place cigars under the same regulation as cigarettes and other tobacco products (OTP), but while they are relatively unaffected, Hieb will stick to what works.

“Given all the pressure we have seen from legislation and taxes on tobacco, this category is getting tougher and tougher to compete in,” said Hieb. “By staying out front and offering the best array of cigars in the marketplace, we should be able to retain this customer and even pick up some who are leaving other types of tobacco.”

Hieb nails the reason why the OTP and cigar customers are so valuable—if they exit tobacco altogether, so goes not just their OTP purchase, but their market basket and trip frequency. A 2009 NPD report showed that OTP grew the most of any category in the store in gross margin dollar percentage and dollar sales percentage.

The study also revealed that OTP customers lead the store in return trips per month and ranked fourth in basket size, more than $2 above the average convenience basket. Multiplying those numbers means an annual basket of $1,319 more than double that of an average basket. In this economy those numbers are like gold.

Strong Outlook
Despite the SCHIP tobacco taxes that hit on April 1, 2009, cigar sales continue to persevere. 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.

The taxes had little impact on sales. Overall cigar sales increased 24.1%—and units were up 8.1%—to represent 36.5% of OTP sales, according to NACS’ 2010 State of the Industry (SOI) Report. So one-third of those OTP customer metrics come from cigar business.

These numbers are very promising for cigar sales in 2010, especially since all other tobacco will be forced to the back bar, leaving cigars some prime real estate either on the sales floor or right on the front counter. This, of course, could change in an instant if the FDA is successful in its bid to make cigars subject to the Tobacco Control Act.

Hieb said his attempts to keep what customers he has and attract new ones revolve around the right mix of popular and trial, packs and the higher-margin single sticks.

“We like to offer an adequate variety of cigars, but are also sure to focus on the SKUs that generate the most turns within the category,” Hieb said. “We also find it important to keep some space available for testing new items or OTP concepts.”

It’s also important to keep up with the promotions available from manufacturers. “The single-stick deals that are out there sell pretty well and they also encourage trial within the category. This also gives us opportunity to get people to trade up to a better ring with a pack,” said Hieb, adding that he has been impressed by the performance of little cigars (Cheyenne, Swisher), which have the advantage of price point.

“There is definitely a price-conscious consumer out there who planned on leaving the tobacco category,” said Hieb. “These little cigars that are popping up everywhere seem to be a solution to keep people in the tobacco category without emptying their wallets.”

Regulation Overload
Until the FDA does regulate cigars the same as it does cigarettes and OTP, taxation is a retailer’s main adjustment, so merchandising and keeping fingers on the pulse of the consumer are still most important. Lou Maiellano, head of TAZ Marketing and Consulting Group, used to be a tobacco buyer for Sunoco, and now helps chains with their tobacco issues.

Maiellano said the chaos of the past couple of years doesn’t change the basics of tobacco category management, and in particular, OTP and cigars: “Give it some space, call it out, keep it fresh, remain competitive (on price).”

Much of Maiellano’s advice is back-to-basics—develop a plan; do the research; work with manufacturers; set sales goals and make them measurable; bring in new products, but have an exit strategy; and make sure the offer meets the demands of the consumer in that marketplace.

These are all tried and true methods for all convenience store operators. “Retailers that have a strong cigar business, there’s a reason they have it,” said Maiellano. “They know it’s a driver.”

Hieb seems to like the basics as well.

“It’s important not to create a lot of clutter within the category; the customer needs to see what’s available and how much it is,” he said. “It’s also important to take advantage of any deals that are offered from the manufacturers. Retailers should allocate a certain percentage of their rack for permanent items, and retain a portion for expansion or trial on new items.”

Emphasize Marketing
In a rough economy, it’s more important than ever to effectively market products and inform consumers about sales, said Joe LaCorte, director of operations for Smokes 4 Less, which has 12 smoke shops and three c-stores called Thrifty Beverage in New York.

Smokes 4 Less drives cigar sales by picking a cigar of the month and advertising that by emailing the 500 members in its cigar club, and by doing some local advertising in the newspaper.

“We pick a cigar and price it attractively enough that it stands out as cigar of the month. In our humidors, we have a little center aisle where we put the cigar of the month on a pedestal, if you will, with all the proper signage to alert consumers,” LaCorte said.

Now that the Family Smoking Prevention and Tobacco Control Act that gives the FDA power over regulating tobacco, including the ability to ban candy-flavored, clove and fruit-flavored cigarettes, has been signed into law, more smokers may look to cigars for their flavor fix in the future.

Suppliers are moving swiftly to keep pace with the demand from adult cigar customers. For example, Kretek International recently introduced new Djarum Filtered Clove Cigars, developed in response to customer preference for a clove product with a longer lasting smoke and the same clove aroma and flavor found in previous Djarum clove cigarettes. Only time will tell what, if any, FDA rules will have an impact on cigar sales. So far, retailers are optimistic that the cigar category will remain strong.

The trends he sees include a move away from larger cigars, more weekend business and the multi-tobacco user. “The new smoker is dabbling in cigarette and cigars and a little dip,” LaCorte said.

Maeillano advises retailers to evaluate their plans periodically, and to be critical. Periodic re-sets may be necessary. What works in Pittsburgh may not work in Philadelphia; a sales leader in the panhandle of Florida might move slowly in Orlando.

“You need to be very, very flexible,” Maiellano said. “Ask your manufacturers what is happening in your market. One size fits all is not the answer.”

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