By John Lofstock, Editor.
With cigarette smokers in flux—some sticking to favorite brands, others trading down or trying e-cigarettes and some transitioning to smokeless products—opportunities for c-stores abound.
Industry insiders are looking for increased moist smokeless tobacco (MST) usage and concomitant rise in sales.
“Obviously, smokeless is a category that is growing again,” said Amer Hawatmeh, president and CEO of St. George Oil, which operates Coast to Coast convenience stores in St. Louis. “What is driving sales for us has been the influx of new brands that retail for under $3. We’re looking at a massive demand on these brands.”
Pricing, along with product freshness, are huge factors when it comes to sales. “A roll of chew five years ago was in the $5 range, but products are available at a fraction of the price,” Hawatmeh said. “For example, Skoal launched its Skoal Xtra brand, which pretty much cut the price in half. And Copenhagen was at $5-$6 a roll, and now it’s in the $4.50 range. As the price has come down, consumers have responded by increasing purchases.”
Also contributing to the category’s resurgence have been line extensions featuring new flavors. “The category has traditionally centered on straight and long cut and not much else,” Hawatmeh said. “Now you’ve also have mint, peach, even sour apple. There are flavors for a wide variety of customers. I think they are a credit to the tobacco companies. They have listened to their consumers and given them the product diversity they’re looking for.”
Whether it is line extensions to Skoal and Copenhagen or new flavors of snus, said Bonnie Herzog, managing director of beverage, tobacco and consumer research for Wells Fargo Securities in New York, innovation continues.
That innovation comes in response to consumer demand. “It’s definitely an area where these guys are trying to get more space, more innovation,” she said. “When you look at the total tobacco category, cigarettes have continued to decline and will likely continue to do so. But smokeless has been growing.”
An interesting aspect is the fact that Grizzly is now the leading smokeless brand. “But it just hit the market about 10 years ago, which is pretty amazing, considering how old Copenhagen is. And there are a lot of dual users,” Herzog said.
Competition in the category remains fierce. “I think there is some fighting for market share within the moist smokeless tobacco category,” Herzog said. “What you’re seeing is the premiums—Copenhagen and Skoal—further extending those price points. Some lines are being extended at a little bit lower price, similar to what Altria did with its Marlboro brand. In my view it’s one way for them to retain some of their core users.”
While state legislatures don’t return to work until after Jan. 1, 2013, many in the tobacco and c-store industries are hoping next year will be a repeat of this year.
“Legislatively, 2012 was a very positive year for retailers of moist smokeless tobacco,” recounted Thomas Briant, president of the National Association of Tobacco Outlets (NATO). “Only a handful of states enacted an increase in other tobacco products (OTP) tax rate.”
For example, in 2012 Illinois raised its tax on moist smokeless to 30 cents per ounce and Maryland raised its OTP tax to 30%. California, on the other hand, placed a question about raising the OTP tax rate on the general election ballot in June and saw it defeated. “That was a big one,” Briant said. “So only two states enacted OTP tax increases in 2012, which caps a very positive year for retailers.”
Hawatmeh concurred with Briant that the year ahead should be relatively calm. “I think on a federal level lawmakers are going to give up. There are just too many people who have challenged them on it; too many people are willing to stand and take the fight,” he said.
On the state level, however, the scenario changes a bit.“What I’ve seen here in Missouri, for instance, is that the state is getting more and more involved in trying to get its fingers in everybody’s pockets,” Hawatmeh said.
In Missouri, voters rejected Proposition B in November, which would have created the Health and Education Trust Fund with revenue drawn from a tax of $0.0365 per cigarette, 25% of the manufacturer’s invoice price for roll-your-own tobacco and 15% on other tobacco products.
“The whole idea was flawed from the start. They wanted to raise tax money from the ‘bad guy’ smoker and give it to the schools,” Hawatmeh said. “That doesn’t work when people are struggling.”
Herzog confessed to being less than optimistic about tax increases given the results of the presidential election. While she does not expect to see another sharp federal excise tax rise, the states are another issue.
“With tobacco, tax increases are a fact of life. So, yes, 2012 and even last year saw very modest increases, but that isn’t an indication of what we should expect in 2013,” she said.
Determining factors will hinge on a case-by-case basis, such as each state’s economic health and political makeup. “Typically Republicans don’t raise tobacco taxes and Democrats do,” Herzog said. “It’s something that we will all have to figure out, but I would say 2013 will see modest tax increases, probably more than we saw this year.”
How can convenience store retailers get cigarette or cigar smokers to cross over to smokeless? According to Hawatmeh, they probably can’t, and shouldn’t spend their time trying.
“I really don’t think you do that,” he said. “I go back to my old philosophy: you’ve got to be all things to all people. I don’t think cigarette smokers, for the most part, are going to become chewers or cigar smokers because you’ve somehow found a way to get them to change their behavior. I think that’s asking a lot of a retailer, to try and change people’s behaviors.”
Instead of trying to craft consumers’ wants, Hawatmeh works to cater to them. “I just focus on taking the space that we have and trying to provide as many different varieties as possible, so that anyone who walks into the store, we have a solution for them. And that puts the burden on us because it demands more money for inventory. But at the same time, more inventory should equate to more sales.”
For 2013, Herzog is projecting continued growth in the mid-single digits. “I wouldn’t be surprised if some of the activity stays pretty elevated in smokeless in 2013, whether it’s price competition or increased line extensions, repositioning, fighting for shelf space, or other things like that.”
How does Hawatmeh advise his c-store colleagues around the country when it comes to moist smokeless? “It’s real simple: listen to your customer and make a broad-based selection for people and don’t be afraid to promote the low-tier stuff.”
Doing so has worked at Coast to Coast stores. After introducing Stackers brand chew, the chain has seen sales soar so much so that it has gone from just one SKU to seven, which is the tobacco company’s entire product line. The progressive price has also helped boost sales of entire rolls, which Hawatmeh retails for $4.99.
“It’s become so popular for us because it’s priced at $1.79 a unit, which comes out to $1.95 with tax. I’m making 40%, versus selling product at $4.95 and making 25%,” he said. “The customers love it.”