While managing new products and planograms is vital, retailers will need to keep an eye out for federal tax increases and FDA intervention over the next 12 months.
By Howard Riell, Associate Editor.
Smokeless tobacco has outperformed expectations for three straight years—which, while good, leaves many in the industry fearing it’s only a matter of time before the federal government turns its troublesome regulatory stare in its direction.Until then, however, there is money to be made.
Unlike cigarettes, where volume sales have dipped each year going back to the 1970s, smokeless-tobacco volumes have climbed at an average annual rate of 3-4% for over a decade.
“We continue to see strong demand for smokeless products,” said David Bishop, managing partner with Balvor LLC, a sales and marketing firm in Barrington, Ill. “That demand is being driven by a variety of factors, such as increased manufacturer interest as they shift to a broader tobacco portfolio.”
That interest has fueled an investment in new products, which has sparked growth and trial at retail, whether it’s with current users or by attracting some cigarette users into the category. “That is being driven by the appearance of smoking restrictions over the last several years,” Bishop said. “While being a headwind for cigarettes it’s been a tailwind for smokeless.”
To put that in perspective, in 2001 there were no states with complete or comprehensive smoking restrictions. Only Utah even had partial restrictions. By 2010, 26 states had what they considered comprehensive smoking restrictions in public and private work areas, and 35 had partials. This represented a major change in the regulatory environment that would, in effect, change consumption patterns for cigarette smokers and boost smokeless.
“That said, smokeless is very healthy and continues to enjoy strong demand for a variety of reasons,” Bishop said. “For retailers, smokeless now represents a larger share of dollar sales and the overall OTP category.”
Ready to Pounce
Are government regulators licking their chops in anticipation of sinking their teeth into smokeless?
“I don’t think so,” suggested Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “I think they’re in a (political) environment that’s not supportive of or conducive to raising taxes of any kind. That’s kind of the driving force behind a lot of these issues. I know that in Minnesota for the first year in a number of years we now have a Republican-controlled House and a Republican-controlled Senate.”
That means the Republicans are not likely going to raise any taxes whatsoever. “We’re not seeing any tax increases: income tax, sales tax, or sin taxes on alcohol or tobacco,” Briant said. “It’s that kind of environment we find ourselves in. Legislatively it’s been a very positive year.”
It’s an issue with which Americans continue to wrestle. “The reality is that cigarette sales are going to continue to come down,” reasoned Kyle McKeen, president and CEO of ALON Brands USA in Dallas. “But moist smokeless is a growing market. In the tobacco industry today the players are looking at a lot of different delivery mechanisms.”
As the smokeless star shines brighter, McKeen conceded, it will likely come increasingly under attack just as cigarettes did. “The thing with tobacco, good or bad, is that it’s a big part of our inside sales. Obviously as taxes go up, the price of the product goes up, but price elasticity in tobacco is pretty stable,” he said.
Alon operates 306 7-Eleven stores in Texas and New Mexico, as well as the Fina fuel brand.
“The threat of invasive legislation is not something we lose sleep over. Ultimately we’re working on growing our other sales so that we’re not so reliant on selling tobacco,” said McKeen. “Tobacco companies understand that, and they’re looking at different ways of packaging product. We’re seeing all different kinds of new smokeless options, whether it’s the snus, sticks or orbs. They continue to be innovative.”
From the standpoint of taxation, as the major manufacturers, primarily Altria, have invested in smokeless as a core part of their portfolios, the tax structure has moved to a weight-based paradigm similar to that of cigarettes. The benefit is that it reduces pressure on the manufacturers from a promotional standpoint by reducing the effective price gap with the discount products. That has also made the premium products more affordable compared to deep-discount and price/value brands like Grizzly and Husky.
“The appeal of the premium segment, which generates more sales for the retailer and more gross profit, is looking healthier than in the past few years,” Bishop said. “The smoking restrictions have helped create more interest in the category. The manufacturer focus has driven a lot of product innovation.”
The Wall Street Journal reported in early May that Altria Group Inc. had posted a 15% rise in first quarter profit, with its cigarette and smokeless tobacco segments “both pitching in despite slipping volumes,” the report said. “The company’s attempt to turn around its Skoal smokeless brand is beginning to pay off, with volume up 12%.”
Variety will continue to be key, especially since smokeless is a growth category. Offering a choice of moist, dry and dissolvable products with different attributes has helped create some good opportunities for smokeless.
“It is absolutely important for any convenience store retailer who wants to grow faster than the market to be able to serve a broader range of products, especially in the areas that are growing the fastest,” Bishop said. “We see dry products starting to pick up thanks to increased demand for pouches and some of the new flavor varieties. Obviously, the retailers who are very aggressive right now are expanding their assortments in those areas, realizing they have a limited amount of real estate.”
What Bishop and his colleagues have also seen is that retailers are being equally aggressive in weeding out the underperformers. The notable casualty, he added, among the smokeless segment has been the old-fashioned loose leaf chewing tobacco segment.
C-store operators should also look to increase the visibility of their smokeless products, Bishop suggested. “Presentation along the back bar has become more critical, especially since June of last year when self-service merchandising displays were restricted or banned in non-age-regulated environments,” he said. “Finding good visible space on the back bar is also important because out of sight is out of mind. If the customer doesn’t see it, they aren’t likely to buy it or even ask for it. It also helps speed of service.”
With the FDA already leaving its fingerprints all over cigarettes, Bishop—and most c-store owners—fear smokeless tobacco is next.
“I think the government will look at all areas of tobacco eventually,” Bishop said. “We’re seeing them starting to focus more closely on the e-cigarettes. As for whether they will look at smokeless the same way they look at cigarettes, I don’t know the answer to that. The practical part of me thinks they will recognize it’s an important product in a variety of ways. Obviously, from a revenue standpoint, it generates tax dollars for the federal and state governments. Plus, it does have scientific backing that smokeless could be considered a safer alternative to smoking. Those two reasons tell me that smokeless won’t be treated or regulated to the same degree that cigarettes would.”