Countdown in the Cigarette Category

Tobacco remains a major driver of sales for convenience stores. Within the category, cigarettes still claim the No. 1 position.

But fiscal quarter after fiscal quarter, channel reports show the in-store sales generator has struggled to generate the gross margin dollars it did years ago. Consequently, manufacturers have raised prices time and time again to offset declining volume or unit sales as the smoking population continues to dwindle.

Wells Fargo Securities reported cigarette dollar sales in convenience stores for the four weeks ending Jan. 28 fell 0.1% and 0.2% during the preceding 12 weeks. Both Philip Morris, owned by Altria Group Inc., and Reynolds American Inc., recorded drops of 0.1% and 1.2%, respectively.

UP AND DOWN
Throughout 2016, manufacturers increased the price per pack. It appears, though, the price hikes no longer compensate for falling volumes. During the above-mentioned four-week period, Philip Morris’ Marlboro prices jumped 2.8%, but volume lost 2.9%. Many Reynolds American brands faced a similar situation, and other manufacturers experienced even greater hits.

“Despite improvements from additional brand support, Imperial Brands (IMT) continues to underperform the industry with 50% of retailers participating in our (4th quarter) ‘Tobacco Talk’ survey expecting [its] brands to lose share in 2017,” said Bonnie Herzog, Wells Fargo Securities senior analyst.

Perhaps one reason IMT registered bigger drops is consumer demand for premium cigarette brands.

“As the economy has improved, we have seen a slight shift away from the cheaper brands to the premium brands,” said Sean Bumgarner, vice president of Springfield, Mo.-based Scrivener Oil Co., which operates Signal Food Stores.

“The biggest difference we have seen over the past year is customers are more willing to purchase cartons instead of two or three packs at a time,” he added. “I think that is due to the improvement in the economy leaving customers with a little more discretionary income.”

On the retail level, penny profits have decreased. In a year-to-year comparison, 2016 fourth quarter penny profits per pack fell from 65 cents the previous year to 64 cents. Wells Fargo Securities analysts anticipate penny profits to hover in this range for at least the first quarter of 2017.

In fact, most industry forecasts anticipate the rest of the year to be an extension of what’s transpired over the past few quarters. Nearly three-fourths of the approximately 25,000 c-store operators queried for Wells Fargo Securities 2016 Q4 “Tobacco Talk Retailer Survey” believe cigarette volumes will continue to decelerate this year.

“We expect total [cigarette] industry volume to decline around 3.4% in FY17 as the industry reverts to historical decline trends of down 3-4%,” said Herzog.

Strong marketing efforts include Reynolds American’s Every Day Low Price retailer program that has helped grow shelf presence for Newport, and the Marlboro app for mobile couponing.

Still, industry-watchers fully expect further revenue loss in the long-term. IBISWorld predicts overall tobacco industry revenue could shrink by an annualized 2.4% over the next five years.

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