With more products to choose from, c-store consumers are keeping cigars at the forefront of the OTP category.
By Howard Riell, Associate Editor
The cigar segment is a healthy one, but one that requires more than a passing familiarity with both regular offerings and evolving regulations.
Cigars make up 27.9% of the Other Tobacco Products (OTP) category in c-stores, according to the National Association of Convenience Stores (NACS) State of the Industry report. Moreover, cigar sales rose 7.2% in 2016 and unit sales were up 11.6%. For the 52-week period ending March 19, 2017, cigar sales in convenience stores rose by a healthy 9.85%, to nearly $2.9 billion, according to Information Resources Inc. (IRI).
“Cigar smokers are brand loyal, which means you have to really know what your customers want,” said Steven Montgomery, president of b2b Solutions LLC in Lake Forest, Ill. “The best source for that information is your primary distributor. They will know what is selling in the market and just as, if not more, importantly, what is selling in the area surrounding each store.”
With that information, the retailers should rationalize their selection to ensure that they can properly display the brands that will sell. “In many cases, the cigar and OTP sets are not neatly organized, and this makes it harder for the customers to see the brands they prefer,” Montgomery noted. Retailers should develop and maintain a planogram for cigars, the same as they do for other categories in the store.
Anna Bettencourt, category specialist for VERC Enterprises in Duxbury, Mass., which operates 26 convenience stores, said that determining what is selling in the cigar space is not simple. “That’s because we are heavily legislated by different towns, so we don’t have consistency throughout the state. But it’s primarily cigarillos and foil packs.”
Having an accurate local profile of consumers is critical, she added. “In New England, we’re a natural-leaf cigar market, so things that appeal to consumers in Massachusetts and New England would be different than, say, the South and the Midwest. (Operators) really need to know their markets.”
Another question that can only be answered locally involves marketing premium cigars. “I think that depends on where you are located,” Bettencourt said. “We have stores in which we do carry premium cigars because they do sell, but we don’t do that everywhere because we don’t have the market for it. It goes back to knowing your market.”
The same can be said for pricing, which she termed a complicated question in her state. “In Massachusetts, a single that I would normally sell for $1.50, I have to sell for $2.50. In the stores we can, we’ll sell the two for 99 cents, but we can’t do that everywhere. The two-packs that would normally sell for $1.99, I have to sell for $5 in certain towns. The premium cigars are $8-$12.”
SPOILING CONSUMERS
Sam Odeh, founder and CEO of Power Buying Dealers (PBD) USA Inc., of greater Chicago, which includes 25 owned and franchised locations in Illinois, Georgia and Florida, said convenience stores are suffering from too many brands, styles and flavors. “All manufacturers are racing to the bottom. We retailers have fallen into this huge hole, with no way out.”
As for the legislative front, Odeh was similarly less than optimistic. “Just when you thought it can’t get worse, yes, it can. The government will find (new ways to collect) taxation money.” Part of PBD’s solution is to roll out premium cigars, to be merchandised on a newly-added counter display.
Heidi Rembecki, director of merchandising for Tonawanda, N.Y.-based NOCO Energy Corp., which operates the NOCO Express convenience chain, confirmed that manufacturers continue to transition to pre-priced two- and three-packs.
“Consumers look for the two-for-99-cents pre-priced packages in our area. They are always looking for a new or seasonal flavor. Depending on store location the three- or four-for-$1 packages are growing in popularity.”
Rembecki sees strength in an expanding product line, while holding steady with the proven favorites. “C-stores should keep their planograms up to date with the changing flavors and varieties,” she said. “They need to keep the focus on the old stand-bys, as well.”
James Calabrese, a director with the Stores Consulting Group in Wilmington, Ohio, also recommended that c-store go away from simply stocking the lowest-price products.
“Carry some inexpensive hand-made cigars, such as Omar Ortez for $3 a stick or Edge for $4, as opposed to only machine-made like Phillies, White Owl, etc.,” said Calabrese. “The serious cigar smoking community is not interested in machine-made cigars and flavored cigars. Convenience stores could capitalize on this by carrying the right SKUs and appealing not only to the White Owl and Phillies cigar smoker, but also to the average-income individual who appreciates a well-made, hand-made cigar.”
Calabrese suggested prominently displaying the cigars near the registers but not behind the counter. He has achieved good results with five-shelf units that carry 80% hand-made and 20% machine-made cigars. “It was very successful in turning over the right items. I also took a physical inventory weekly to ensure that my cigar shrink number was under control.”
Calabrese also recommended promoting one or two items each week. “The c-store can also get these deals from the big cigar suppliers, offer the discount to the consumer, and still make their desired margin.”
REGULATION IN PLAY
When the U.S. Food and Drug Administration (FDA)’s tobacco deeming regulations went into effect on Aug. 8, 2016 to regulate cigars, pipe tobacco, e-cigarettes and vapor products, hookah tobacco and nicotine gels, the agency established deadlines for manufacturers, importers, distributors and retailers to comply with various regulations.
However, according to the National Association of Tobacco Outlets (NATO), as a result of lawsuits seeking to overturn some or all of the deeming regulations, and due to negotiations between lawsuit plaintiffs including the International Premium Cigar and Pipe Retailers Association, the Cigar Association of America and the Cigar Rights of America, the FDA announced in the first week of May that it will defer the enforcement of all future regulation compliance deadlines for cigars, as well as pipe tobacco, e-cigarettes and vapor products, hookah tobacco and nicotine gels for a period of three months.
Maintaining sales in so tightly controlled an atmosphere calls for a deft touch, Bettencourt said.
“It’s tricky because we range from pricing restrictions to flavor restrictions, and your bordering towns may not. So, you just go with the rules and roll with the punches,” Bettencourt said.
Bettencourt said she hopes that her state’s legislative patchwork does not turn out to be the nationwide paradigm going forward. “I would like to think not because it’s ridiculous to me to set restrictions on a legal product, other than the age restrictions. Unfortunately, it probably is.”