Deals Driving Smokeless Sales

SmokelessPortion pouches and value pricing are injecting new energy into this core tobacco category.

By Erin Rigik, Associate Editor.

While electronic cigarettes are gaining a lot of attention, smokeless tobacco sales are chugging along with brisk sales.
Overall, smokeless sales jumped 6% to $4.93 billion for the 52 weeks ended April 21, 2013, according to SymphonyIRI Convenience All Scan data. Unit sales were up 3.52% to 1.23 billion for the same period. The average unit price remained relatively flat at $3.99, a modest $0.09 increase from last year.        

Chewing tobacco/snuff, according to SymphonyIRI, rang up $4.76 billion in dollar sales, a 6.02% increase, while unit sales totaled 1.18 billion, a 3.6% increase. Average unit price was $4.02, up $0.09.

SymphonyIRI found spitless tobacco unit sales for the 52 weeks ended April 21, 2013 were $175.83 million, a 5.51% increase. Unit sales totaled 51.16 million, up 1.64%. The average unit price totaled  $3.44, up $0.13 over last year.

Discount Driven
David Bishop, managing partner of Balvor LLC, noted that smokeless continues to grow year-over-year in single digits, primarily driven by canned volume growth.
“All the smokeless growth happening in two areas: discount and portion pouches,” said Bishop. “When we look at the category by segment, low-priced products like Grizzly, Husky, Kayak, are growing above the category average.”

While this trend is driven by the new normal of cash-strapped customers, it’s also being driven by quality as the value segment offers better quality products today than in the past.

“Trends in the moist snuff business are pointing to the mid-tier price points represented mainly by Grizzly,” said Steve Monaco, director of category management, Tedeschi Food Shops, which operates more than 190 convenience store locations throughout Massachusetts, New Hampshire and Rhode Island.
The smokeless category continues to experience growth year after year at Tedeschi Food Shops, based on the c-store chain’s decision to double the space it allocates to other tobacco products (OTP). “The smokeless category is up for us so far this year, but customers are looking for deals,” Monaco said, echoing Bishop’s analysis. “Each of the manufacturers has discount products readily available.”

Meanwhile, portion pouches are growing three times faster than the overall category, Bishop pointed out. “If the category is up in the mid-single digits, portion pounces are up in the middle teens on a can basis,” he said. “It’s a more socially acceptable product, it’s easier to use and it’s cleaner. Most brands offer that in a variety of flavors now, so whether it’s premium or discount, the portion pouches are everywhere in those price segments.”

Retailers looking to grow their business, therefore, are reallocating assortment space to accommodate lower-priced smokeless products, as well as removing some of the traditional loose-leaf tobacco and bringing in more portion pouches as a percentage of SKUs offered, if they’re not able to expand the space.

Price Structure Changes
The defining lines of the price-tiered structure in smokeless is changing as well, Bishop said. The premium segment, like Skoal and Copenhagen, is now appealing to value-minded customers with price value sub-brands, such as Skoal Xtra, at a discount of the premium price of almost 35%.

“They’ve taken a premium brand, made new SKUs in that brand architecture and priced them at the value level. That’s what is driving the growth for the premium segment. It’s argued we should have a premium discount segment. But that reflects the growing demand from consumers for the more discount related products,” Bishop said.

Price inflation is returning to the category, which is a positive for retailers. “Last year, we had price deflation in 2012 compared to 2011. In 2013 we’re starting to see low single digit increases in the average weight in price and that’s as the price value segment starts to raise their prices and takes pressure off the premium segment, closing that gap slightly between the tiers,” Bishop said.

Competition Creeping In
As e-cigarettes soar in popularity, the effect on smokeless is yet to be determined. “E-cigarettes are sourcing their volume from somewhere, and I think everyone agrees it’s a combination of cigarettes and smokeless tobacco,” Monaco said. “Regulations and taxation aren’t currently in place on e-cigs, and as a consequence they are in an advantageous position because they cost less and are able to be used in places traditional cigarettes cannot. They offer some of the same benefits as smokeless plus some of the same features as cigarettes, so they reach a wider base.”

Retailers wishing to maintain strong smokeless sales through 2013, would be advised to grow their assortment in portion pouches. “If chains are able to expand space, they can add SKUs, but since most are limited they need to free up some space to introduce some of the higher growth-driven portion pouches across segments—not just in premium, but price discount products as well,” Bishop said.

At the same time, Bishop noted, the discount segment—whether premium discount or low-price value discount—is the other growth segment in the category. Savvy c-store retailers are satisfying this consumer demand with a broad range of products to meet this need. “This trend puts a lot of pressure on premium and mid-tier products,” Bishop said. “We’ve found that what used to be considered niche has evaporated and moved to premium and become ‘premium discount’ or moved to become straight discount. We almost are moving toward a more two-tier pricing architecture.”

Tedeschi Food Shops keeps smokeless sales strong by updating planograms twice a year to include new items across the entire OTP category. When it comes to product placement, the chain makes sure its smokeless items are as close to the checkout area as possible. Lastly, it provides store operators with a list of the top sellers in the smokeless category within their market area, Monaco said.

SNUS or Lose
Snus, meanwhile, has been relatively flat on a volume basis. “Reynolds and Swedish Match have both done a good job bringing a product to market that the consumer likes,” Bishop said, “Reynolds has done a great job building distribution of Camel Snus, which is the market leader, although when General is in distribution in the same stores as Camel, it performs quite well. So retailers have to look at their market to see what their consumers are demanding, and work with their distributors to see what’s strong in that market. Make sure you have the right product for that segment because it is growing, but not in a uniform fashion.”

Regulations Ahead
Most state taxes on the table in relation to smokeless are weight based taxes. “About 12-15 states use weight-based taxation, which generally levels the playing field for the premium segment and helps reduce the price gap with the discount,” Bishop said. “However, the vast majority of the states still use an ad valorem tax (“according to value” tax), which taxes the product based on the value, and that disadvantages the premium segment because those products carry a higher cost, so they’re taxed at a higher rate.”

The movement therefore to move to a more weight-based tax has the backing of many manufacturers. While proposed federal regulations are threatening to raise excise taxes on tobacco products across the board effective January 2014, one comfort is at least such regulations would hit all locations. State-based taxes can be more detrimental for their tendency to push consumers over state lines for cheaper products. “The only counter argument is a Federal excise tax increase in states where tobacco is already really expensive, could still push people across the border,” Bishop said.

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