Optimism for RYO Tobacco

ryo tobaccoRoll-your-own (RYO) tobacco will continue to put convenience store operators to the test over the next couple of years—enduring the ongoing legislative assault on all tobacco products while continuing to carry it to provide greater variety and service to loyal consumers.

“Roll-your-own tobacco is important for those retailers that are creating a ‘destination stop’ for all tobacco products,” said Michael Zielinski, executive director of the Royal Buying Group in Lisle, Ill. “It sets them apart from those just selling the most common products. However, it requires attention to detail and continuous changes that reflect the current trends in that sub-category. Knowing which brands are trending higher volume, and having the right accessories, will distinguish those retailers as knowing the space.”

The category has undergone quite a shift over the past few years. The Federal tax on RYO tobacco was increased in 2009 to $24.78. However, the tax on pipe tobacco remained low at just $2.83, creating a price disparity of $21.95 per pound.

Following the tax hike, price-sensitive customers began experimenting with other tobacco products to avoid the higher tax. The good news for retailers is that according to the Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau, for the 52 weeks ended Nov. 30, 2013, the combined manufacture of pipe and RYO tobacco was up slightly from 2012 and up 16 million pounds since 2009.

Close Category Management
Amer Hawatmeh, president of St. George Oil in St. Louis, operator of 10 Coast to Coast convenience stores, said that   a bag of RYO tobacco that used to cost $9 in his stores now retails for $40-50. “It’s just as expensive as buying a carton of cigarettes,” he said.

The politically savvy Hawatmeh urged colleagues to continue to keep a close eye on their legislators, but warned against trying to anticipate what they will do.
“I think right now we’re guesstimating what the government thinks,” he said, “and that’s a very dangerous thing to do because I know the government does not think. But what I perceive has happened is that the industry has switched over to the electronic cigarettes and is really pushing them heavily. I think that’s taken the attention of government off of traditional tobacco right now.”

While tax hikes have resulted in lowered RYO sales in many locations, Zielinski suggested that he remains optimistic about roll-your-own going forward.
“We’ve seen growth in Republic Tobacco and National Tobacco sales reports,” he said. “So while pessimistic comments are probably accurate for the majority of convenience stores, I believe that true tobacco outlets and the c-stores that are really focused on this category will continue to see this offering as important to their identity as a true destination stop for all tobacco products.”

Category management here plays an even more critical role than in some other areas. “It is difficult for convenience store operators today to be everything to everybody, hence the reason to rationalize the SKUs and concentrate on the biggest volume movers,” Zielinski said. “Merchandising, signage and competitive pricing will ensure that the RYO customer feels special and remains loyal to your stores.”  ◆

Tobacco Tax and Fee Rates

Tobacco Products    Per Pound    1 Ounce Tin or Pouch
Pipe Tobacco                $2.8311                $0.1769
Chewing Tobacco        $0.5033               $0.0315
Snuff                                    $1.51               $0.0944
RYO  Tobacco                 $24.78                 $1.5488
Source: Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau

Pipe Tobacco Impacting RYO

The Federal excise tax was increased for tobacco products on April 1, 2009. While excise tax rates prior to the increase were the same for roll-your-own (RYO) and pipe tobacco, the tax on pipe tobacco ($2.83) was $21.95 per pound less than the tax on RYO tobacco ($24.78) after the increase. Subsequently, tobacco manufacturers began selling more pipe tobacco as consumers began experimenting with other tobacco products due to the higher tax rate on RYO. As a result, the overall loose tobacco segment has seen an increase in production driven by pipe tobacco, which now accounts for about 92% of loose tobacco sales.

(In Pounds Manufactured Since 2008)
                                  2013            2012           2011               2010             2009            2008
Pipe Tobacco       35.69 Mil    34.87 Mil    31.15 Mil      21.47 Mil      10.61 Mil      3.37 Mil
Roll Your Own        3.3 Mil       4.05 Mil     4.62 Mil      5.32 Mil      10.72 Mil      18.71 Mil
Combined            38.99 Mil     38.92 Mil    35.77 Mil    26.79 Mil     21.33 Mil     22.08 Mil
Source: Department of the Treasury Alcohol and Tobacco Tax and Trade Bureau, 52 Weeks Ended Nov. 30, 2013

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