Building a Better Cigar Business

candy-cigarillosTracking the trends and stocking more flavored products can help convenience stores boost overall tobacco sales.

By Howard Riell, Associate Editor

Delighted with cigars’ popularity growing among consumers, convenience store operators are taking steps to maximize sales and satisfy customers even as they keep a wary eye on federal and local regulations that could impact the category at any time.

Whatever the legislative climate, however, the basics of retail apply. Keeping sets fresh–smartly allocating shelf space, rotating product, keeping tabs on expiration dates and weeding out slow sellers in favor of new items–remains essential to maintaining strong sales.

The legislative assault on tobacco will not stop. Case in point: a New York City ordinance that goes into effect on March 19, 2014, bans the redemption of coupons and other price reduction instruments on the sale of cigarettes and tobacco products to consumers; requires little cigars to be sold only in packages of twenty little cigars; and requires that cigars other than little cigars be sold in packages of at least four unless a single cigar has a retail price of more than $3.

A second ordinance in the city goes into effect on May 18 that prohibits retailers from selling tobacco products and electronic cigarettes to anyone under the age of 21.

Despite that, there will always be dollars to be earned by selling cigars, and savvy retailers continue to seek better ways to do just that.

Selling Variety
Regardless of the onerous sales restrictions, cigars are important item for convenience stores.

“C-stores can maintain cigar sales by providing a good variety of products,” said Terry Gallagher, president of Smoker Friendly International in Boulder, Colo., which operators 86 corporate stores in the Mountain States region. “The prepriced, foil-fresh, multipack products continue to be the trend in the industry, and should be carried by most everyone.”

Smoker Friendly has taken a similar approach in its corporate stores, providing the customer as much variety as possible, Gallagher explained. “We have a domestic cigar planogram that is set to six feet, with a total of 18 shelves,” he said. “We provide the customer with a choice of more than 100 of the top-selling SKUs in the category, including our Smoker Friendly private-label brands. We look at the set layout a couple times a year to keep it fresh and to slot new items.”

Gallagher and his team review cigar sales quarterly and meet with the various manufacturers to get their input about which products they would like to see added or removed. Smoker Friendly stores will continue to keep their sets at six feet for the coming year because they have the room to dedicate to the domestic cigar category. This, Gallagher points out, gives the chain an edge over its c-store competitors, who tend to be limited in space.”

Freshness is Key
Taking the time and devoting the manpower to keeping sets fresh is essential. There are so many moving parts to the cigar category — new flavors and brands, line extensions, prepriced points — that frequent assortment analysis is needed to stay current with consumer expectations. Suppliers can and should help sort out the top sellers.

Many category managers prefer to stock the cigars that make up at least 85% of market level cigar category sales, which usually translates to about 60 items. Carrying fewer than that could result in consumers looking to stores that have a broader variety of newer products available.

Sight lines are also critical. About half of all category sales come from foil-pouch cigars, causing many retailers to merchandise them together, regardless the brand, at the top of the cigar section. Single-stick cigars, the second-largest part of the category, are often merchandised below foil pouches, with fast-declining pack cigar items at the bottom.

Stocking single-stick uprights is important. Though item counts for these products have declined over time as manufacturers and retailers have leaned toward the fast-growing foil pouch segment, single sticks are still a sizable part of the business, showing only very small declines in volume. In addition, many shoppers carry only pocket change, and prefer buying one stick at a time.

John Archer, operator of a Shell Food Mart and the Hinsdeli in Hinsdale, Ill., said that while his cigar business is brisk, the profit margins leave something to be desired.

“I don’t know if I’m excited about it, but all the two-for-99-cent cigars erode margins,” he said. “I’m selling a ton of them. You don’t make any money sell them, though. That’s the problem.”

Archer will continue to highlight the lower-priced cigars for a very basic reason, he explained.  “That’s what people want, that’s what people are asking for. They can get them everywhere, but they come here,” he said. “When I had the products that weren’t prepriced and I would sell them for $1.69, nobody bought them. I would rather sell something at a low margin and make the money then have a bunch of stock sit here and not sell.”

The demographic breakdown among his cigar consumers is pretty cut and dried, Archer noted. “The cheap cigars are bought mostly by a lot of younger adults. Then I’ve got some older gentlemen who buy Swisher Sweet Wood Tips, and other middle-aged guys who buy five and 10 packs at a time of Dutch Masters Panatelas.

The variety of his cigar offering is a plus, according to Archer. “I carry everything from Backwoods to Grenadiers to Dutch Masters to four different kinds of cigars that sell for about $9 each,” he said. Interestingly, the more expensive product sells well, too. “I’m in a real upscale neighborhood. I’ve got a Maserati dealership two blocks away.”

Archer’s cigar display features clear acrylic cigar racks located up front, just to the side of the cash register. “It’s about four feet long, with four shelves of cigars,” he said.

The cigarette rack includes a four-foot setup of Skoal and Copenhagen, and below that Black & Mild, a machine-made, pipe tobacco cigar brand. The bottom shelf holds a variety of electronic cigarettes.

Archer said he believes growth will continue throughout 2014. “I think there are a lot of younger adults interested because they are switching to cigars from cigarettes to save some money.”

Tracking Regulations
Like it or not, part of keeping up with this category is also staying abreast of legislative action. Many, for example, expect the Food and Drug Administration (FDA) to consider outlawing the sale of flavored cigars. It is important for retailers to understand this and be sure to include unflavored products in order to build up shopper demand in the event flavored products are banned.

“The reason cigars have been a target is that they are not regulated by the FDA,” said Craig Williamson, president of the Washington, D.C.-based Cigar Association of America, the national trade organization of cigar manufacturers, importers and distributors. “We expect they will be. It’s just a matter of time.”
Timely information is available. “If I ran a c-store I definitely would be checking the news every day,” Williamson said. “New York’s raising the legal age from 18 to 21 was one of the last things Mayor Bloomberg did. I think we are going to see more of that in some areas. Our position is we are opposed to raising the age to 21.”

For c-stores, one key to minimizing the effects of government’s heavy hand is ongoing vigilance. “Just be aware,” Williamson advised. “Make sure you are following all the rules and regulations of your state. Keep checking to see exactly when new laws are passed within municipalities and counties. That’s the best way that retailers can keep informed.”

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