Amid the chaos of legislation and taxation, convenience store retailers remain optimistic they can retain OTP customers and even pick up some new ones trading down from cigarettes.
By: Joe Bush, Contributing Editor.
Not much been predictable about the tobacco category over the past 18 months.
Huge taxes increases have renewed questions about just how much money smokers are willing to invest in their habit, and whether cigarette smokers would merely switch their nicotine fixes to other tobacco products (OTP), such as cigars and moist smokeless or even electronic cigarettes. However, FDA regulations on labels and access to tobacco products have made it difficult to predict what smokers will do.
Amid the upheaval, the cigar category has thrived, and in a most consistent way. As an April 2010 tobacco report by Chicago-based research firm Mintel said: “Cigars are the most popular non-cigarette tobacco product purchased by smokers, with a quarter of smokers claiming to use them. Half of smokers who have not tried cigars express an interest in trying them.”
Growing Cigar Sales
Rather than letting the doomsday tale of cigarette use be a self-fulfilling prophecy, many retailers are realizing that smokers who switch their form of tobacco ingestion are among their best all-store customers.
A recent NPD study showed OTP customers lead the store in return trips per month and rank 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 consumer basket.
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 Report.
Smokeless products made up the highest percentage of sales in the non-cigarette products (OTP) subcategory in 2010 by far: 57% to cigars’ 36.6%, according to NACS. However, cigar sales grew more than smokeless sales (15.6% to 11.8%), and while smokeless lost almost a point of subcategory share, cigars grew almost a point.
The marketing and merchandising know-how of long-time cigar (and OTP) suppliers like Swedish Match, Swisher and Altadis is coming to the forefront, while packaging innovations, like foil wrappers that enhance and preserve product freshness, boost in-store presence aesthetically with shiny multi-colored functionality.
The experience of Kocolene Marketing in Seymour, Ind., is unique as well as typical of recent years. The company operates 19 Smokers Host Discount Tobacco stores and 12 Fast Max convenience stores in Indiana and Kentucky.
“That (filtered cigar) business has exploded,” said Andrea Myers, Kocolene’s executive vice president.
The main driver for Kocolene is the gap between the price of cigar cartons and cigarette cartons. The Indiana excise tax on cigarettes, per pack, is 99.5 cents. In Kentucky, it’s 60 cents. The cigar tax is 24% of the wholesale price in Indiana, and 15% of the wholesale price in Kentucky.
So Myers’ stores can, where allowed, hang banners advertising a carton of Smoker’s Best or Wrangler cigars for $9.99. A carton of cigarettes costs $50- $60. “The more contrast in price, the more willing they are to try,” Myers said.
Where banners are not allowed, old-fashioned hawking of wares by store associates surely is. Word-of-mouth advertising is important and effective in the rural areas that host many of Myers’ stores, and because customers are often up front about looking for bargains, employees enjoy the suggestive selling. “(Customers) are usually pretty eager to hear about it,” she said.
It helps that cigars are self-serve in Kocolene’s markets. The ability of customers to touch the cigars provides the best evidence of product freshness. “We really harp on freshness,” Myers said. “You can feel it. Crunchy is out.”
Kocolene’s distributor, Eby-Brown of Naperville, Ill., assists with inventory rotation, as does the popularity of the value cigar. Some of Myers’ stores sell 100 cartons of Smoker’s Best per week.
Before the cigar boom, Kocolene’s tobacco stores stocked 10 brands and the convenience stores one or two. Now, resets that were done annually and then semi-annually are done quarterly. There are eight-foot aisles of filtered cigars.
Myers illustrates why retailers should view declining cigarette sales as an opportunity instead of an albatross. “I meet with my cigar reps a lot more than I used to,” she said.
Kocolene used to be so focused on cigarette sales that when weekly pack numbers fell at any location, “we would send the troops and do a big analysis,” Myers said. “The store manager would report, ‘I’m losing 50 cartons of cigarettes, but I’m selling 60 more cartons of filtered cigars.’ The truth is we make more money on filtered cigars.”
Open Pantry Food Marts in Pleasant Prairie, Wis., is seeing the rewards of having been a longtime cigar supporter. Chief Operating Officer Jim Fiene said his 28 stores have experienced double-digit growth in the tobacco subcategory over the past five years.
Open Pantry has had 64 linear feet of cigars for most of the decade, and in customized fixtures.“I felt the cigar consumer was a minimal focus,” Fiene said. “The racks were small and plastic. Over time, we invested heavily in merchandising and emphasized full displays and new product offerings.”
The result was strong sales gains. The newest offering making an impact is foil packaging, Fiene said. It’s great evidence of suppliers providing retailers with more than just product and POP.
“We’ve always had to battle the perception that we’re selling old products,” Fiene said. “Foil-wrapped cigars are fresh and soft. Cigar makers have helped our industry. They’ve realized we’re the future of tobacco.”
Fiene, however, fears the growth of cigars will invite suppliers to manage them as the major tobacco companies manage cigarettes (and increasingly, OTP)—with contracts that mandate space minimums and in-stock guarantees.
“The cigar companies that have been doing it a long time are good at what they do,” said Fiene. “I would hate to see contracts take over.”
Overall, Fiene said the collaboration between suppliers and retailers is as important as the price differences between cigarettes and cigars, and the packaging innovations.
“The key to good cigars is having good cigar reps,” he said. “I know it’s expensive, but they’ve got the margin.”
Responding to Consumers
Joe Gibson, the director of purchasing and category management for 44-store DariMart Stores of Junction City, Ore., has seen plenty of change accompany the double-digit growth of cigar sales in his stores.
There was a time when DariMart only ordered cigars when a customer asked a manager if it was possible to stock a certain brand. Today, Gibson has upped his cigar space to 21 feet. He resets once a year, usually in early spring. Of the 10 sizes Gibson orders, cigarillos are most popular. Most are sold as singles, and promotions involve two for $2 ($1.49 each) for two months. Gibson’s premium cigar is Swisher, which accounts for 50-60% of cigar sales. Middleton’s Black and Mild cigars account for another 15-20%.
DariMart also sells Swedish Match (White Owl), Zig Zag, and Altadis, whose Backwoods do well in rural stores. Gibson said Swisher Grape has been among his most popular flavored cigars over the last six years.
By a happy surprise, DariMart’s competition seems to have overlooked cigars, whether by neglect or outright absence, making DariMart a destination.
“We sell a lot to guys on their way home from work,” Gibson said.
Gibson’s company, which is family-owned, doesn’t compete in tobacco on price, nor count on it a high percentage of profits as many chains. Still, the rise of cigars and OTP has Gibson optimistic.
“Tobacco has not declined for us,” Gibson said.