Seizing Smokeless Opportunities

Convenience store operators are enjoying the growing popularity of smokeless tobacco products, but they are also being forced to keep a wary eye on federal and local regulations.

By Howard Riell, Associate Editor

Is the smokeless tobacco product category, which includes moist snuff, snus and dissolvables, the lifeboat that convenience store retailers hope it will be as cigarette profit margins continue to sink? The answer is…maybe. Rising taxes, increasing regulation and lingering litigation worries are making cigarettes and some cigars less attractive than before, and so many Americans are trying, if not yet embracing, smokeless. Therein lies the opportunity. Tobacco companies have been offsetting drooping sales by cutting costs, boosting prices and diversifying into smokeless products, such as snus (inserted between teeth and gums) and snuff (inhaled through the nose). This naturally impacts the profit
margin leading to concern over tobacco’s contribution to the bottom line.Litigation has been in a lull lately in the wake of several big wins by the tobacco makers. Local governments have also come to realize just how greatly they benefit from cigarette taxes.As a result, many investors are still high on the tobacco industry, primarily due to the strength of smokeless. The Standard & Poor’s 500 tobacco index has risen 13% thus far in 2012 after climbing 36% last year.Promoting Safer Products

In Kansas, legislators are said to be considering a resolution to require state health officials to conduct studies focusing on the health effects of smokeless tobacco—something that could permit manufacturers and retailers to market smokeless tobacco as a safer alternative to conventional cigarettes.

R.J. Reynolds, for one, has come out in favor of the state-based studies, which officials have said support the company’s so-called “tobacco harm reduction” strategy.

The American Cancer Society is fighting the measure because of its belief that smokeless tobacco products carry their own risks for oral cancer. The group has argued that state public health officials should not be conducting research for an industry.

At the same time, areas around the country are showing that they are just fine with smokeless tobacco.

Case in point: in Minnesota, officials at Target Field—after having declared their facility to be completely smoke-free—have decided to allow chewing tobacco as long as there are few complaints.

Electronic cigarettes also show promise, although few are willing to say just how much. In early May, Lorillard acquired Blu Ecigs, a manufacturer of electronic cigarettes that turn heated nicotine-laced liquid into mist.

Benefit of Bans

“I think other tobacco products are growing, whether it be smokeless or cigars, versus cigarettes,” suggested Steve Loehr, vice president of support operations for Kwik Trip Inc. in La Crosse, Wis. “There is sales growth there, and all the bans and continued restrictions on smoking are going to continue to drive the smokeless business.”

A potential pitfall, though, is believing that the bans and other ongoing legislative interference will drive sales by themselves, turning the category into a no-brainer.

“I don’t know of anything in our business that’s a no-brainer anymore,” said Loehr, who oversees 350 stores across the Midwest. “But there are other issues with smokeless too. For example, will e-cigarettes be a factor? It’s too early to tell. We have not done a lot with them because we think eventually there are going to be more restrictions on the sale of them as well. But roll-your-own and smokeless are areas that have some growth.”

With more and more restrictions on how convenience store retailers can merchandise tobacco products, the challenges are greater and the stakes are even higher.

“I don’t have any specific earth-shattering display techniques or anything else to grow the business, and I’m not sure if anyone does at this point,” Loehr said. “But to some degree, as people are getting forced out of being able to enjoy their traditional cigarettes in more places, they’re looking for alternatives. Smokeless is probably the best alternative for them.”

Following the Trends 

“It’s the fastest growing segment of OTP for us,” reported Ed Oliveira, category manager for Duxbury, Mass.-based Verc Enterprises. “We’re up about 11% year-to-date versus cigars, which are only up a couple of percentage points.”

Verc operates 24 stores in Massachusetts and New Hampshire.

The reason for the surprisingly strong results, according to Oliveira, has to do with in-store merchandising and Verc stores’ unique role in their markets.

“We have become a destination for the market,” Oliveira said. Over and above that, though, he identified three factors related to the smokeless tobacco consumer that he feels are important:

1- “Codes and dates are very, very important,” he said. “You’ve got to have the freshest stuff out there. If you don’t, you don’t get repeat visits.”

2- Merchandising, according to Oliveira, is No. 2 in importance. “We have invested a lot of money in new racks that just showcase the product more effectively,” he said. “About three-quarters of our stores now have new racks that were installed within the past two years. We try and create what we call a value zone to put the Grizzlys and the Skoals of the world in a section of their own to make it easier for the consumer to shop. I think the key to merchandising—in this category—is to make it easy to shop.”

3- The third and possibly the most important factor for Oliveira is signage, which is something many convenience store retailers tend to overlook. “You have got to have clear signage, but it can’t be overdone,” he said. “If you have too much, people just ignore it. But if you don’t have anything, it turns the consumer off because he doesn’t know pricing. Find the right balance and tweak it as necessary.”

The bottom line, Oliveira emphasized, is that properly merchandising smokeless takes a deft hand.

Space for New Products

Andrea Myers, executive vice president of Kocolene Marketing in Seymour, Ind., whose properties include Smokers Host tobacco stores, considers space the final frontier when it comes to moving smokeless tobacco products.

“My big thing with snuff is when you need to get the new items in the store, but you don’t have a place for them,” said Myers. “I like to have a space on my rack for new items—just a couple or three holes for new items to go into—or promotional space or discounted towers, stuff like this. I think that’s important.”

Like others, Myers said she believes new products are helping drive the smokeless category. “Skoal has a new ready cut (Wintergreen). There is a lot of promotional activity on it, a lot of good buy downs.”

At the same time, she agreed with Oliveira that government-imposed smoking bans are leaving consumers little alternative. “People are trying it, whereas in the past they haven’t, because there are so many smoking bans out there,” she said. “That’s helping increase the category, too.”

Will America eventually see bans on smokeless products as well? “Probably,” Myers said. “It wouldn’t surprise me. Nothing surprises me anymore.”

Her anxiety is well founded. In suburban Atlanta, the Norcross City Council recently approved a ban on the use of all tobacco products, including smokeless tobacco, on or near city property, including parks, sidewalks, recreational fields and city buildings. Violators will be fined a minimum of $50, with repeat offenses carrying penalties of up to $800. City employees who violate the ordinance could face disciplinary action up to and including dismissal.

The battle continues.

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