As more cigarette buyers switch to smokeless and electronic tobacco products, convenience store retailers juggle SKUs to drive profit.
By Howard Riell, Associate Editor.
Traditional cigarettes—once the mighty margin maker for retailers—continue to face a rocky road as the tobacco market shifts toward increasing consumer interest in moist smokeless, flavored cigars and electronic cigarettes. Customers are turning to these relatively newer tobacco options, as either a substitute for, or a supplement to, traditional cigarette use.
While this trend has incited pessimism about the cigarette category’s long-term potential growth, many c-store operators are looking at new opportunities in OTP as a silver lining—updating their planograms to incorporate more smokeless and e-cigs, in order to evolve alongside the shape-shifting category. But even as challenges and changes rattle retailers, the cigarette category is here
“Cigarettes sales are going to keep going down,” predicted Leo Vercollone, CEO of VERC Enterprises, the independent chain of 23 convenience stores, gasoline stations and car washes throughout Massachusetts and New Hampshire. “It’s going to keep getting harder.”
After 30 years in the business, times have changed, Vercollone said. Taxes, regulations and smoking laws limiting where cigarettes can be enjoyed by adult consumers, continue to put pressure on the category.
One major issue impacting cigarettes, and thus impacting Vercollone’s business, is a lack of manufacturer-driven customer incentives to give the category some momentum. “It’s a whole different business as far as the cigarette companies being willing to support us with back payments and allotments and deals and those things,” he said.
The OTP companies, on the other hand, are offering flexibility where traditional cigarette brands are not. “OTP manufacturers seem to want to do more, and are open to ways they can boost their market share. That’s probably why they’re up,” Vercollone said, noting OTP is up a whopping 17% at his stores.
If there’s a bright spot, it’s that the big players like Reynolds and Altria have a stake in all the categories, said Andrea Myers, executive vice president of marketing for Kocolene Marketing LLC, the Seymour, Ind.-based operator of 12 Fast Max c-stores and 19 Smokers Host tobacco stores. “I think they will see what needs to be done and how space should be allocated. If and when the time comes when cigarettes get less space, I think they will make that change.”
Myers, like other retailers, has watched as the stagnant economy continues to impact carton sales. “There may be more packs selling versus cartons, because the price is so high. A carton of Marlboros is like $60 in Indiana. Where consumers used to pick up a carton once a week, now they might not have that money on Monday, so they buy a pack or two, then come back Thursday or Friday and buy another.”
Myers conceded that if her company operated only convenience stores, she might be more concerned about recent tobacco trends. “But we play so heavily in the tobacco outlet business that we’re not really seeing any loss of business. We’re seeing a shift of business, where instead of buying two packs of cigarettes, somebody might be buying a pack of cigarettes and an electronic cigar, because they can’t smoke them where they used to. Or they may pick up a pack of cigarettes and snus. Or they might not be buying cigarettes at all; they might be buying roll your own.”
Spotting those trends in the tobacco outlets has allowed Myers and her colleagues to adjust their c-store sets to better meet demand. “If you don’t offer the electronic cigarettes, and you don’t offer the roll your own or snus—the alternatives—then yes, you could see the category deteriorate.”
One of the ways Vercollone has chosen to compete is by getting more aggressive, devoting fewer displays to cigarettes and optimizing his opportunities with OTP.
“It also continues to be a declining commodity, but not too bad in my stores,” he said. “I’m still running about 98% of tobacco sales, so I’m not really doing too bad. But if you took a snapshot of my displays today versus a year ago versus two years ago, you would see a change as to how space is allotted and how we promote to the customer.”
Electronic cigarettes are also seeing strong sales throughout Vercollone’s c-store chain, which for him is a cue to get solidly behind the product. “We have educational training seminars for my managers and cashiers. It’s all related to how the OTP market is changing,” he said.
An integral part of VERC training consists of product knowledge—teaching employees the difference between long cut and short cut and sweet and non-sweet, as well as the sizes of cigars and, of course, e-cigarettes. “We’re training them and our cashiers about a lot of the OTP products so we can educate our customers. A number of them are cigarette customers who are switching out. That’s the way it is, so that’s what we do.”
Still No. 1
But while cigarettes are obviously declining and consumers are trending toward other tobacco options, Vercollone is quick to acknowledge that cigarettes aren’t going anywhere anytime soon. The category is here to stay. “It is still my No. 1 category. We do really well with cigarettes. If you view my stores, you will find that cigarette customers look at my chain as a destination. We work with them, we promote with them and we display them prominently.”
Those same customers, however, have a burgeoning curiosity about e-cigarettes. “They ask, ‘What is an e-cigarette? Do I replace cigarettes with cigars, chew or these new electronic products?’ I think they view us as being cigarette friendly, and so they’ll come to my store even for OTP,” Vercollone said.
Indeed, cigarettes continue to be the No. 1 category at Verc Enterprises—although they accounted for 55% of sales three or four years ago compared to just 45% today. But Vercollone expects the category to remain at No. 1.
“We are not downgrading cigarettes,” he emphasized. “We are still a major cigarette player. But when it comes to, ‘Who do we confide in? Who do we talk to? Who do we want to grow with? Who wants to grow their business?’ We don’t get the warm and fuzzies from the cigarette companies—we get it from the OTP companies.”
Meanwhile, customers continue to tell store personnel that they are interested in electronic cigarettes, Vercollone added. “At the end of the day electronic cigarettes are what we’re trying to go with.”
Graphic Warnings Struck Down
One of the obstacles to selling cigarettes that was thrown up by the Obama Administration may be in the long and complex process of coming down.
In late August, the U.S. Circuit Court of Appeals for the District of Columbia issued a decision striking down the FDA’s graphic cigarette health warnings as an unlawful regulation that violates the free speech protections of the First Amendment of the U.S. Constitution.
The decision came as a result of a lawsuit brought by R.J. Reynolds Tobacco Co., Lorillard Tobacco Co., Commonwealth Brands (now Commonwealth Altadis, Inc.), Liggett Group LLC, and Santa Fe Natural Tobacco Co. against the FDA to challenge the constitutionality of the graphic cigarette health warnings.
A federal district court judge originally assigned to this lawsuit ruled in February that the graphic cigarette health warnings were unconstitutional and the FDA appealed the decision to th
e U.S. Circuit Court of Appeals for the District of Columbia.
The latest ruling upheld the federal district court’s decision issued in February.