Other Tobacco: Find the Right Mix

Few product categories are as dynamic as tobacco—or as controversial—which helps make managing the set all the more interesting.

With so many new products, flavors and line extensions to choose from, some operators say they are frankly overwhelmed, a state of affairs that has never been good for anyone’s bottom line.

Keeping sets fresh—allocating shelf space, rotating product, keeping tabs on expiration dates and weeding out slow sellers in favor of new and hot items—can prove tricky, especially when the fortunes of product segments within the category begin to noticeably fall and rise. Case in point: smokeless tobacco.

The announcement in early September that Richmond, Va.-based Altria Group Inc. will buy Stamford, Conn.-based USST, Inc. has c-store operators from coast to coast taking notice. Altria, of course, owns the venerable Marlboro brand and the nation’s biggest cigarette maker, Philip Morris USA, while USST makes and markets the popular Skoal and Copenhagen smokeless tobacco brands. The nearly $11-billion deal is reflective not only of the consolidation trend taking place in the global tobacco industry, but the growth of the smokeless segment of the business.

The deal will “put pressure on everybody else to consolidate,” said Sachin Shah, an analyst with iCap Equities. Altria has been test marketing Marlboro-brand smokeless products in the Atlanta metropolitan area and Marlboro snus in Indianapolis and Dallas-Fort Worth since January. Stock analysts noted the day after the deal was announced that the results had been less than what the company had expected. The USST purchase, however, will place Altria at the top of the smokeless tobacco segment, whose growth seems to mirror the estimated 3% to 4% decline of cigarettes.

Consolidation is nothing new in the smokeless segment, though USST is considered to be the grand prize in the acquisition sweepstakes. Already this year, Imperial Tobacco Group PLC purchased Franco-Spanish Altadis, and Rothmans Inc. in Canada was scooped up by Philip Morris International. Two years ago, Reynolds American Inc. acquired Conwood Co., a maker of smokeless tobacco products.

Impact on C-Stores
Whatever else it accomplishes, consolidation among tobacco companies should help firm up planograms in traditionally complex and fast-paced c-store tobacco products sets.

“It’s a lot of brands in a small space,” said John Kelly, chief operating officer and vice president of operations for Mountain Empire Oil Co./Roadrunner Markets, “and it’s a really fast-growing category—especially the smokeless and the cigars.” The company operates 56 stores in Tennessee, North Carolina and Virginia.

“The smokeless category has grown for us and, I think, for the industry pretty dramatically over the last two years,” said Kelly. He believes a big reason for the growth is a tendency by some smokers to cross over to smokeless tobacco “for those times they just can’t smoke. If it’s not that, then I can’t explain the growth of that category.”

Mountain Empire has increased the amount of space that it devotes to smokeless products, from 48 SKUs last year to 55, with a couple of the higher volume items getting two facings. That said, anywhere from 15 to 20 items are discontinued in a given year.

“The Sad Part”
“The sad part of the situation is that with contractual obligations we really don’t have full control of the category ourselves at the corporate level,” said Gary Tabor, director of marketing for Jay Petroleum Inc., which operates 35 Pak-A-Sak locations in Portland, Ind. “There are a lot of things we would like to do. Obviously, the cigarette companies spend an awful lot of money on marketing and strategies and, I guess, they have a better idea on what approach to take next.”

As a retailer, he added, “I feel a little bit left out of the loop and at the mercy of the cigarette companies in that respect.”

As far as changes at the store level, Tabor doesn’t expect anything radical. “We’re pretty much stocked to our customers’ demand,” he said. “Within the sections you’ve got a little bit of latitude. I think Philip Morris gives you a certain percentage of manager discretion, but pretty much it’s planogrammed out if you’re contracted with any of the majors. We contract with both Philip Morris and RJ Reynolds, and they account for 95% of the set.”

Jay traditionally goes with an 8-foot, high-profile set on the counter, and the company will continue to stock the store based on demand. “Ultimately, our business and our marketing and our sets need to be customer-driven and less influenced by marketing dollars.”

Shopping Your Customers
The tenets of managing a complex section like tobacco vary “wildly” according to the size of the operation, said John Clutts, retail practice leader for The Partnering Group in Columbia, Md., a consultancy. “If I was 7-Eleven, Valero or a company like that, what I would be doing is working with my own marketing department to understand the target audience, the customer, of these products. You really want to market to them.”

Depending on the type of operation, operators need to focus on understanding who comprises their target audience. “Are the customers coming into my stores to shop this category younger? Older? Do I have a cluster of stores that may have different need states coming in?”

In general terms, older customers—long-established smokers with particular brand preferences—are going to be looking for their products, “and they’re probably not going to be swayed by what’s new, what’s innovative, what’s cool,” said Clutts. “A younger audience, however, will be swayed by such considerations.”

Smaller operators, Clutts explained, are probably going to have “a feel for who’s walking in the door. The key here is that the new fashion-oriented types of products, the ones that have a fairly short shelf life to them—not as far as sustainability of the product, of course, but from an interest level—are probably skewing more to the young. Those products that are well established, your longstanding brands, are probably more with your seasoned, senior or older customers.”

And then there are the consumers who turn expectations upside down. “There are young smokers who smoke what dad smoked because they just like it,” Clutts said.

Quick Changes
Change in the tobacco section comes “fairly quickly,” said Kelly, “but I don’t think it’s much quicker than packaged beverage or candy.”

For example, one item that has done “fairly well” for Mountain Empire is Red Man smokeless tobacco. “I think we put it in back in January or February and it took off,” Kelly said. “The was a need and now we’re able to satisfy it for our customers.”

Roadrunner stores include fixtures for tobacco products aside from cigarettes, including smokeless tobacco, cigars and so-called “scrap” tobacco. Price points in the category are all over the board. Its highest-priced smokeless tobacco, Kodiak, sells for $4.19 to $4.29. Cigars are sold as singles, for 79 to 89 cents and as five-pack boxes for about $2.79.

Mountain Empire collects scan data from all of its stores, which it then combines with manufacturer support to determine which SKUs to increase, reduce or hold steady.

“Several times a year, USST offers buy-downs on two-fer deals,” said Kelly. “So instead of buying one can of Skoal or Copenhagen, you save a couple of dollars if you buy two.”

USST also provides signage for front windows, doors and fixtures. But employees are also vital to smokeless sales. “Beyond the marketing material, our sales associates sell as much as the signs do. They know their customers well, and they know that saving $2.50 on a two-can deal is a great deal for the customer, so it’s a real easy plus-sale,” he said.

Mountain Empire reevaluates its set every six months, “and right now we’re in kind of a tweaking mode,” Kelly said. “We think we have a pretty good layout, so we just go in there and decide what bottom 10 SKUs aren’t cutting it and what top SKUs do we need to add.”

Regardless of brand, those are questions every operator must ask. CSD

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