MSA and Paradigm Sample, in partnership with Convenience Store Decisions, examine the purchasing habits of adult tobacco consumers at U.S. convenience stores.
By Trish Temmerman, Management Science Associates, and John Lofstock, Editor.
The tobacco industry continues to face challenges on multiple fronts, namely ongoing legislative initiatives and the ever-present high rate of taxation. These persistent issues coincide with a stalled economic recovery and rising fuel and consumer goods prices.
According to the latest figures released by NACS in April on the convenience store industry’s performance in 2011, tobacco products (cigarettes and OTP) accounted for more than 42% of in-store revenue dollars and 22% of gross margin dollars. Given the importance of the tobacco category in the c-store channel, developing a deeper understanding of consumers’ attitudes on impending legislation and pricing pressures could facilitate management of this key category to mitigate any negative impact to the industry’s bottom line.
To arm retailers with up-to-date information, MSA and Paradigm Sample, in partnership with Convenience Store Decisions, launched the Convenience Consumer Insights Panel (cciPanel) to capture buying habits and attitudinal information among shoppers by maintaining an ongoing dialogue with them about their purchase decisions in convenience stores.
cciPanel conducted custom research between March 28, 2012-April 12, 2012 specifically among c-store tobacco users to learn what products they are buying, what segments they are purchasing and how taxes and additional legislation are influencing their tobacco consumption. Results include completed responses from 503 adults (21 years and older) who reported purchasing tobacco products at a convenience store at least once within the past 90 days. The survey was conducted nationally with respondents balanced across U.S. Census regions. Tobacco products were defined as cigarettes, moist smokeless tobacco, cigars, little cigars, RYO, snus and other all other tobacco (spit free, dissolvables and chew).
Basket Analysis of Tobacco Users
As part of the survey, cciPanel also examined a recent shopping basket among tobacco users to gain insights into what other items were purchased, as well as to assess if these purchases were planned prior to entering the store. cciPanel studies have shown that, besides fuel, the top categories frequently purchased with tobacco products were packaged beverages (40%), candy/gum/mints (23%), dispensed hot beverages (17%), lottery/gaming tickets (15%) and salty snacks (15%). They have also shown that 95% of cigarette buyers know they are going to purchase cigarettes before they step into a convenience store.
To expand the knowledge about purchase dynamics in this category, cciPanel probed how pending legislation and rising prices on consumer goods could impact purchase behavior in terms of overall store selection, brand selection, frequency of visits and dollars spent per trip. Given the thin margins on fuel, it is more critical than ever to get customers inside the store not only to buy tobacco products, but to also spend a few extra dollars on other convenience items.
The following are highlights from this exclusive research.
Categories of Tobacco Purchased
What categories of tobacco products did you purchase in the past 90 days in convenience stores? Within c-stores, 90% of tobacco users purchased cigarettes within the past 90 days. Cigars, little cigars and moist smokeless tobacco were the next most frequently purchased tobacco products.
C-Store Visit Frequency
In the past 90 days, on average, how often did you buy cigarettes in c-stores? Approximately 30% of cigarette customers reported that they visit a convenience store at least four times a week to purchase cigarettes. An additional one-third visit at least 2-3 times a week.
For buyers actively seeking ways to save money, each visit is an opportunity to make store choices, so retailers need to take steps to grow their repeat business by stocking preferred brands at competitive prices.
Additionally, given that tobacco products are located behind the counter, awareness of the market baskets of these high-frequent cigarette buyers in terms of other products purchased could result in higher rings at the register with strategic placement of these other products on or near the cash register or front of store.
Legislation and Package Warnings
The FDA’s “Required Warnings for Cigarette Packages and Advertisements,” which calls for larger, more prominent health warnings on all cigarette packaging and advertisements in the U.S., was scheduled to become effective in September 2012.
The warning labels—a combination of text and graphic images—are being contested as a violation of the First Amendment, and as a result, the implementation of the mandate is uncertain. Cigarette buyers were asked: “The FDA wants to put larger, more prominent cigarette health warnings on all cigarette packaging and advertisements. If the labels were put on the packaging, would this impact your purchases of cigarettes?”
Among cigarette buyers, almost six in 10 would not change their purchasing behavior. Twenty-one percent of cigarette users reported that they would buy fewer cigarettes, while 7% would stop buying cigarettes altogether. Retailers with a higher dependence on profits driven by tobacco sales should develop strategies and plans to diversify their product assortment to compensate for reduced or lost sales if the warnings actually go into effect.
Dealing With Menthol
The recently formed Tobacco Products Scientific Advisory Committee (TPSAC) is recommending a ban on the sale of menthol cigarettes. Cigarette buyers were asked: “If a ban of Menthol cigarettes went into effect, would this impact your purchases of cigarettes?”
Forty percent of cigarette buyers would not be affected by this ban as they do not buy Menthol cigarettes. Nine percent of smokers would quit buying all tobacco products, while 32% would purchase non-menthol brands or alternative tobacco products.
Retailers with higher proportion of cigarette sales in menthol varieties should evaluate their assortment to consider shifting stock to carry non-menthol versions of the preferred brands, as well as alternative tobacco products to compensate for possible lost revenues if this ban goes into effect.
In an effort to learn the price tier of smokers’ preferred cigarette brands, the panel was asked: “How would you classify the type of cigarettes you buy most often?” Among cigarette buyers, three-quarters describe the cigarettes that they most often purchase as premium-priced brands. Given the vast majority of cigarettes are planned purchases, an understanding of brand preferences is beneficial to retailers in terms of managing SKU assortment and stocking preferred brands to satisfy their customers.
Cigarette Brand Loyalty
Under what scenarios would you buy an alternative brand to your preferred brand? Among cigarette buyers who purchase premium-priced brands most often, two-thirds report they always buy their preferred brand, suggesting fairly high brand loyalty. Among buyers who report their preferred brand is discount-priced, some of these buyers can be swayed to shift their purchase from their preferred brand to premium brands or alternative discount brands if they are on special promotion or money-off deal.
Roughly 20% of buyers would buy an alternative brand if their preferred brand was out of stock. Buyers have brand preferences, and knowing the factors that drive brand choice requires consistent assessment of inventory levels to ensure most popular brands are in stock, and also facilitates development of pricing and promotion strategies.
Cost Saving Measures for 2012
With the rising costs of tobacco products, in the past year, have you ever done any of the following activities to reduce your spending on tobacco products? In 2012, do you plan to reduce your spending on tobacco products? In the past year, only 10% of cigarette buyers reported they did not undertake any cost-saving activities. Almost half of the consumers surveyed reduced their spending by using coupons or taking advantage of special deal offers.
Twenty-five percent have elected to leave one c-store for another one in search of better prices or promotions, which is a caution to retailers to offer competitive prices particularly if they are located in areas where shoppers have many stores to choose from to make their tobacco purchases.
These cost saving measures are even more apparent when broken down by shoppers residing in states with lower versus higher cigarette excise taxes. Cigarette buyers residing in high tax states (more than $2) are more likely to report that in 2012 they plan to use fewer tobacco products, buy packs, buy roll-your-own products, purchase store brands, buy over the Internet or at Native American shops, cross state lines for purchases and redirect money to buying gas.
Furthermore, when asked how they would classify the type of cigarettes they buy most often, approximately two-thirds of cigarette buyers in high tax states cited that their preferred brands are premium priced brands, compared to almost 80% of shoppers residing in states with low excise taxes (less than $1). These higher-taxed buyers not only already prefer brands in a lower price tier, but are also the shoppers who will more actively be seeking out ways to reduce their tobacco expenditures.
Implications and Potential
As consumers’ discretionary budgets continue to get squeezed due to persistently rising prices on fuel and consumer goods, a greater proportion of shoppers will likely become more discriminating in their choice of where to buy tobacco. As they seek out ways to stretch dollars, their decisions will be based on stores that offer them the optimal selection of their preferred tobacco products at the best prices and value.
Convenience store retailers selling tobacco products need to adequately stock preferred products at competitive prices to retain and encourage repeat business and to minimize customers leaving the store due to out-of-stock situations or in search of better prices or deals at other outlets.
For both tobacco manufacturers and retailers, there are always new challenges to manage on the legislative front. The latest challenge to tobacco retailers occurred in April, when the Village of Haverstraw in New York’s Rockland County, passed the first-ever tobacco display ban in the U.S. as a matter of public health.
This is a serious economic issue that impacts retailers’ bottom line as customers shift, not only their cigarette dollars to other stores, but also money they would also have spent on other products.