Small filtered cigarellos represent a real albeit temporary opportunity for convenience stores to rack up sales, so get going before the window of opportunity slams shut.
These diminutive cigars have gained strong appeal among smokers laboring to afford cigarettes in the wake of multiple tobacco tax hikes. The price differential between filtered cigars and cigarettes has reached a new high as the tobacco industry responded to tax hikes that took place to fund the State Children’s Health Insurance Program (SCHIP), which became law in February 2009.
“Right now they are very popular in a lot of states because people are using them instead of cigarettes,” said Michael Zielinski president and CEO of Royal Buying Group Inc. in Lisle, Ill., a marketing association for convenience/gas operators and jobbers.
At the same time, however, there are certain states that looking to spoil the sales opportunity. “New taxes are catching up to the segment,” Zielinski said. “Once the taxes start coming, the opportunity for strong incremental sales growth is going to go away.”
Those companies that are in this niche now, Zielinski pointed out, are in it for one reason. “That’s to profit from it right now. As soon as they can’t profit from it anymore I’m sure they’ll get out of it, so that’s going to be a very volatile and short-term product,” he said.
When the storm settles, Zielinski predicted, the best-known brands will still remain strong, just as with any other product categories ravaged by taxation. “Right now there are a myriad of brands,” he said. “But just as taxation has created the demand and the opportunity, taxation will also eliminate demand and then eliminate the opportunity for these manufacturers.”
Zielinski’s fear that small filtered cigar sales are going to slow down considerably is based largely on the widely held belief that states are going to continue to clamp down on the tobacco segment with higher taxes. “If that does continue, then I think my prophecy is correct. But if they, for some reason, don’t enact some of these taxes for that product, then demand will definitely stay. If I’ve ever seen a product that was dependent on what the government was going to do, it’s this one right now.”
Cigars in general are still showing growth, Zielinski reported. “The growth percentage-wise has slowed down, but that’s because the volume is higher. That means you won’t see the dramatic percentage increases as you have in previous years.”
That said, flavored cigars have been a big hit with convenience store customers. “These flavored products have extended the category’s presence,” Zielinski said. “I would suspect that we’re going to continue to see growth, but again the percentages will continue to go down as the pie gets bigger. It won’t be as dramatic and as volatile as we saw probably five years ago when it started its trek upward, but I think that it is still a significant category.”
Convenience stores in general have evolved from being a destination for cigarettes to a destination for tobacco products as a whole.
“The good retailers will take their back bar setups that, in the past, only included cigarettes and create a destination for tobacco in general,” Zielinski said, adding that these revised sections will include cigars and moist, and possibly alternative products, too. “The category is still in flux. Things are changing: demand is waning on some items and increasing on others. I think that retailers who always have been the best to react and move their businesses around as needed will do the same thing with this category. They will cut down space for certain pieces to get more space for those that are growing.”
Fade to Black
For some retailers, small cigars are allowing them to hold onto their customers that smoke. Retailers report that, for the most part, customers aren’t quitting tobacco, but rather turning to the black market for product.
“The way I look at these things is pretty simple,” noted Amer Hawatmeh, president and CEO of St. George Oil, which operates Coast to Coast convenience stores in Tampa, Fla. “It’s the same way as looking at fourth- and fifth-tier cigarettes: it’s a cheap way to smoke. Even in Missouri, where taxes are relatively normal in comparision to New York and Chicago, a pack of Newports is $5.”
Coast to Coast stores also sell a large amount of the Swisher Sweets varieties. Hawatmeh confessed, “I like this fourth tier, the ‘cigar-cigarettes,’ because they are generating sales from the $2-sale customer.”
The chain carries three brands of small filtered cigars: Santa Fe, Hav-a-Tampa and Muriel.
Hawatmeh said he expects the tobacco majors—if they haven’t already—to lobby legislators. “They’re going to go to Washington and say, ‘Hey, you guys are collecting less and less from us in taxes because all of our sales are going to these cigar-cigarette packages that are not being taxed at the same rate,’ so obviously they’re going to tax them. I mean, that’s the new American way. We’re going to tax it till we kill it.”
Making the most of this temporary window of opportunity, provides a short-term opportunity to generate some extra sales. “Get those sales now, before government gets their hands on them,” Hawatmeh said.
Given what many agree is only a short-term opportunity to make the most of this niche, Hawatmeh urged operators to keep pushing the category without worrying about the potential outcome.
“As long as we’ve got the governemt we have, I don’t think we’re operating in a tunnel where we can see a light at the end of the tunnel. I think we’re in a freefall,” Hawatmeh said. “Whether it’s taxes or healthcare, small business owners are struggling and getting no help from lawmakers. Unless somebody gets Washington in line and our representatives start representing the people instead of whatever interests they decide they want to represent, I don’t see any light at the end of the tunnel.
“Trying to make a buck today is absolutely ridiculous. I’m making multimillion-dollar investments so I can collect taxes. I work for the government; I don’t even work for myself anymore.”
To wring out every dollar possible until it becomes impossible, Hawatmeh recommended adopting an in-your-face approach. “Since you can’t put cigarettes on the counter, put those cigars on the counter in a proper display. Don’t be afraid to earn a smaller margin, but make it so customers are buying three packs. Make them $1.39 a pack or three for $3, the way I’ve got them,” he said. “There is so much variety of flavors that customers are buying three different flavors anyway.”
Operators should be clear on one fundamental point, Hawatmeh added. “There is no loyalty here. Nobody is buying these because they like the menthol or the vanilla. They’re buying them because they’re cheaper and they can smoke them, and it fits their behavioral addiction.” CSD