Meeting the Challenge

cigarettesAggressive pricing and eliminating product outages are two keys to maintaining cigarette sales.

By Howard Riell, Associate Editor

Even as the buzz of e-cigarettes continues to grow, traditional cigarettes remain an essential product for the convenience store industry.

However with increasing pressures from government and regulators, cigarette sales continue to decline with seemingly no let up.

Among the forces influencing how cigarettes are sold, marketed, packaged, merchandised and priced, taxes continue to lead the pack of causes threatening profits. According to the most available figures, the National Association of Convenience Stores’ (NACS) State of the Industry report states that while 19 states have not passed any type of cigarette tax in the past decade, state excise taxes on cigarettes still rose an average of $1.02 cents per pack between 2001-2010.

Not surprisingly, cigarette-per-pack prices have steadily climbed over time.

Cigarette-category volumes in convenience stores fell 2.8% during the four-week period ended April 12, 2014, following on the heels of a 2.2% dip in the prior four-week period, according to analysts at Bank of America Merrill Lynch. Based on Nielsen data for the most recent period, Philip Morris USA’s c-store cigarette volume fell by 2.8%; R.J. Reynolds Tobacco Co.’s volume also declined by 2.8%; and Lorillard’s volume slipped 0.9%.

Among the factors of dipping sales is the declining U.S. adult smoking rate, which dropped to 18% in 2012. The number of adult smokers have declined steadily between the period spanning 1997-2005, when the rate fell to 20.9% from 24.7%. Experts attribute the decline on a blend of rising prices, more available cessation programs and public smoking bans.

Citing that the category was detrimental to its customers’ health, CVS Caremark announced earlier this year that it will stop selling cigarettes and other tobacco products at its CVS/pharmacy stores by Oct. 1.The much-publicized move away from the category opens the door for other retail channels to capitalize on $2 billion in tobacco shopper business CVS will relinquish.

As c-store operators deal with growing volatility in the cigarette market, adherence to the basics becomes more important than ever. In maintaining cigarettes sales, maximizing selection, reducing outages and holding the line on prices can combat some of those market pressures.

Pricing is Primary
For Scott Zaremba, owner of nine-store Zarco USA locations in Lawrence, Kan., the key to maintaining cigarette sales is pricing.

“We’re just trying to price accordingly so that we can have a marketplace for them,” Zaremba said. “We still have those consumers who demand that product, and when there is demand we want to make sure we do a good job of marketing them and having them priced accordingly, along with our e-cigarettes.”

Jodi Steinzor, who with her husband John owns the seven-year-old Aces High Tobacco & Gifts in Las Vegas, echoed Zaremba’s emphasis on pricing as a critical factor in consumers’ minds. “The pricing is what would help retailers maintain sales,” Steinzor said. “If they are getting kickbacks from the tobacco companies and are able to keep their pricing low, they are the ones who would get the customers.”

A smoker herself, Steinzor prizes convenience when shopping, though price has only grown in importance in her mind.

“When I need cigarettes, I go to the closest, most convenient store, but I definitely look for what store is near me that also has the best deal because of how expensive cigarettes are.”

Prices in her store range from $32-$65 per carton. Steinzor recommends that retailers use every available coupon offer to help control prices.

“Better pricing is what’s going to get the people in there,” Steinzor said. “Cigarettes are so expensive these days, and people are broke. If they can help customers save them money, they’re going to get the people in there.”

Recent cigarette sales at Zarco stores, Zaremba said, have been flat. “We are really stagnant. But if you throw e-cigarettes in there, we’re up some.”

Like so many others, Zaremba has seen a shift to e-cigarettes. “Our e-cigarette sales are skyrocketing,” Zaremba said. “But we’re still keeping our other products consistent and trying to make sure they are priced so as to be competitive in our marketplace.” He conceded, however, that there is only so much he or his colleagues can do to buck current mandates.

“Other than that there are not a whole lot of things we do in the cigarette world because you just can’t; there are too many restrictions on them,” Zaremba said. “We just want to make sure that we’re always stocked properly with the right products for our area.”

Zaremba and his team also follow marketplace trends closely for clues to changing consumer demands.

“There hasn’t been much change in style for us in the Midwest anyway other than the move to e-cigarettes,” he said.
Zaremba has not tried to transition consumers from cigarettes to other products, nor does he intend to try. “We’re just trying to have all those products available for them,” he said. “We’ve got a lot of e-cigarettes, but we also still have a lot of smokers. We’re just trying to have the products available for customers who want them.”

Zarco store personnel are allowed to rearrange merchandising schemes depending on which products sell best in a given location. At several stores, for example, e-cigarettes have been moved to the front. The company has also expanded smokeless tobacco tremendously over the past three or four years, Zaremba said.

“We now have a larger presence of those products,” Zaremba said. “But other than that, we’re just trying to keep everything available for the consumer in the right packages and styles that they want to purchase.”

Mixing It Up
Steinzor said that for convenience store operators to maintain their cigarette sales, the most effective thing they can do is carry as many brands as possible.
“It’s unfortunate because it costs a fortune,” Steinzor said. “Marlboro has 15 different brands, and everybody smokes all of them. So to keep all of them in stock your overhead stock load is tremendous.”

A common retail miscue, Steinzor continued, is not having every conceivable brand a customer might want. “If you are looking to make money on just cigarette sales alone, if that’s what your main business is, you better have a whole wall full of every brand they make.”

Zaremba agreed, pointing out that successful cigarette sales are also built around consistent product mixes.

“The biggest thing in the cigarette world is no outages,” Zaremba said. “I mean, having the product available for the consumer when they want to pick it up is what drives this category. You need to be sure you are consistent in the products you offer and that you don’t have outages, because you will lose a customer pretty quickly as soon as a product isn’t available.”

In addition to providing product choices, a major point in c-stores’ favor is the inherent advantage they have always enjoyed over other retailers when it comes to selling cigarettes.

“Without a doubt, we have the convenience and the ease of transitioning people in and out of the facility, plus the speed of the transaction,” said Zaremba. “So yes, I think it fits the segment. It will be interesting to see if the rest of the ‘health segment’ removes them.”

Though CVS said it will exit the cigarette business by October, Zarco is maintaining a wait-and-see attitude about what it will mean to his company. The early returns, however, appear promising.

“It’s going to be interesting to see what happens when they go, because I do have locations that sit next to them,” Zaremba said. “In fact, we’ve already had some CVS customers come to us at one of the locations, so they at least have already transitioned. And that was right after (CVS) announced it; these folks just left CVS and came to us.”

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