Strong Demand for Cigars

Flavored and single-serve cigars represent a real opportunity for convenience stores to boost tobacco sales.

By Howard Riell, Associate Editor.

With flavored cigarettes no longer available in the U.S., flavored cigars are in line for sharp sales gains. But with FDA having declared last year that it’s got the cigar industry in its sights, retailers need to at least acknowledge that the Sword of Damocles hanging over the rest of the tobacco industry is threatening to slice into cigar sales.

As with all tobacco segments, retailers must keep abreast of changes in federal and local laws, follow consumer demands and go with their strengths when it comes to marketing cigars—that is, whatever strengths the government’s lawyers will continue to allow.

According to Lyle Beckwith, senior vice president of government relations for NACS, there continues to be some maneuvering within the cigar industry, which of course has ramifications for retailers.

“There is a movement afoot by the Premium Cigar Association, people who make hand-rolled cigars as opposed to machine-made, trying to get an exemption for themselves from FDA law,” Beckwith explained. “I think all cigars are exempted to a certain extent, but they are trying to push for the machine-made cigars to be regulated by the FDA and exclude themselves. It’s sort of a pre-emptive strike on their part. That’s an intra-family battle on the horizon that is starting to pick up a little steam. It’s interesting: the cigar world is fighting amongst itself.”

Another group has introduced a bill in Congress to exempt what they refer to as traditional large and premium cigars from any future FDA regulation, said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “They’re trying to carve out this segment of the cigar product category to not be regulated by the FDA.”

H.R. 1639, introduced by Rep. Bill Posey of Florida and dubbed the Traditional Cigar Manufacturing & Small Business Jobs Preservation Act, takes away FDA’s jurisdiction over the premium cigar industry by amending the Federal Food, Drug, and Cosmetic Act.

No one in Washington is about to leave cigars—a potential source of greater tax income—alone. Two years ago, FDA was handed regulatory control over tobacco products when President Obama signed into law the Family Smoking Prevention and Tobacco Control Act. FDA immediately set about banning flavored cigarettes (except for menthol), limiting introductions of new products and advertising and restricting the use of words like “lights” and “ultra lights.”

The cigar category, however, remained largely unnoticed until 2010, when the agency said it fully intended to get busy regulating cigars.

In April, Dr. Lawrence Deyton, the director of the FDA’s Center for Tobacco Products (CTP), announced FDA’s plans to take steps to ensure that appropriate regulatory mechanisms govern all tobacco products and all other products made or derived from tobacco. The FDA’s intent, which was issued after the cigar bill was introduced, refers to the administration’s plans to regulate all tobacco products, which likely includes cigars.

“We don’t know if Dr. Deyton’s letter was in response to that particular bill being introduced or not,” Briant noted. “But it would potentially encompass cigars with future regulations.”

Go With Value
Political maneuvering and legal wrangling aside, retailers will continue to do what they’ve always done: follow the route of least resistance in giving consumers what they want.

In order to keep prices low, cigar suppliers have decreased package counts. “An ever-shrinking product count is certainly the wave,” said Rick Yost, president of 21 Dead River Cos. convenience store locations in Maine. “How many singles did you see in a store five years ago? Now there’s a single for almost every variety in there.”

The move toward singles mirrors consumers’ mindset. “People are not walking in and dropping $9 on cigars anymore,” Yost said. “They can get a two-pack for $1.99, so they say to themselves, ‘OK, I can afford $2 worth of cigars.’ But even with that we’ve gotten $40 out of him because he just put $38 in the tank.”

Yost said he has been seeing a lot of movement on value packs. “If it’s on the counter and its got a two for 99 cents value price on it, we’ve been selling a lot of them over the last six months. We have a pretty decent cigar inventory, with a lot of in-line product. But it’s the values that are being put on the counter that really are taking off.”

Dead River devotes a four-foot section to cigars, but with four tiers, making the section a little bigger than most. There are no humidors, nor any upscale cigars. The chain’s average customer is an occasional cigar smoker, male and about 25-40 years old.

“When legislation started affecting little cigars it crushed that category,” Yost noted. “Now, with the natural wrap, flavors and other marketing innovations, we’re seeing little cigars come back into the stores, but in different varieties. They haven’t regained the lost volume yet, but it’s getting better.”

Yost is not so much fearful of what Washington has in store for the cigar category, but bracing for the inevitable sales restrictions and working on a strategy to maintain sales. He predicted more legislation ahead, with more loopholes closed as government and manufacturers parry and thrust.

“Right now we’re in a constant battle of catch up. The tobacco companies have a lot of smart guys that they pay to sit around and look at the legislation and figure out how to poke holes in it,” Yost said. “And the smart guys in the government look at it and say, ‘They’ve poked this hole here, let’s fill it.’ It never ends.”

The most glaring example of this spy vs. spy dance has been pipe tobacco. “Pipe tobacco is a huge seller today simply because they added the tax on roll-your-own tobacco, and pipe tobacco is exempt. Well, now everybody smokes pipe tobacco,” Yost said, acknowledging that this window is a temporary opening. “We look at all this stuff as inevitable. We sell a lot of the pipe tobacco now, but we know that within two years it will go away, and then we’ll try and find another answer. We monitor legislation constantly so that we can plan ahead for whatever inevitable changes come.”

The strategy is simple: try to migrate customers to the products that he and his colleagues think are not going to be affected as much in the future by government meddling.

“That’s one of our big challenges. If we see a product that we think is going to be regulated away in the next two years we won’t necessarily embrace it as strongly as some of the other retailers around us do,” Yost explained. “The smoke shops are grabbing these

products and selling them like crazy. While we will sell them, we aren’t necessarily embracing them or pushing them out there because we feel like they’re not going to be viable products in two years.”

Yost urged convenience store operators to embrace cigar value packs. “The foil packs are super hot, as are any of these things that are value priced and value based. If you put them along the counter you are going to sell them,” he said.

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