Focus on Category Opportunities

Despite constant pressure from regulatory bodies, there’s still enough potential in tobacco for c-stores to grow sales.

By Don Burke

The onslaught of tobacco regulations, increased age restriction legislation and higher taxation in many areas is creating quite a bit of concern among convenience retailers. This is understandable as tobacco products continue to deliver more than 35% of in-store sales in the convenience channel.

In every analysis conducted by Management Science Associates (MSA), however, we have consistently found real positives to this category despite all the recent chaos. In fact, there are reasons convenience retailers should keep their focus on the opportunities this category represents rather than the turmoil.

UNDERLYING MESSAGE
While there has been much publicity on the U.S. Food and Drug Administration’s (FDA) deeming regulations it’s important to note that mandates on cigarettes occurred in 2009 with the Tobacco Control Act. This is important because cigarettes make up about 70% of the convenience store tobacco revenue, and manufacturers have already had significant time to adjust their product line. In fact, MSA’s analysis shows that the recent FDA Deeming Regulations only have the potential to affect about 8% of the category volume.

Additionally, in a study of price elasticity across several convenience product lines, the cigarettes had one of the lowest elasticity levels, meaning that consumers tend to continue to purchase without a big impact due to a price change. This has contributed to continued demand despite cigarette price increases and has contributed to revenue gains for retailers.

While the cigarette sales have shown a consistent decline of 3-4% annually, and which have been more than offset by the price adjustments, there are other tobacco categories showing robust growth. Among these categories is the cigarillo category, which has grown at around 10% the past couple of years.

The vapor category also showed stronger performance so far in 2017, with the e-cigarette items growing nearly 15%. Interestingly, the convenience channel has shown stronger growth in these categories than tobacco outlets, and has lost very little sales to the dollar store channel that has been trying to make inroads for several years.

There has been much concern over the cigarette tax increases in certain areas, especially the $2 per pack hike in California that occurred this past April and prior to that, the $1-per-pack tax in Pennsylvania last August. While any tax increase yields a loss of business in that geographic area, analysis after analysis has shown that adjacent areas with lower pricing almost always pick up nearly a corresponding amount of business.

In addition, some tobacco products benefit from significant increases in the cigarette set. For example, analysis of the Pennsylvania tax increase showed that moist tobacco experienced a 5% increase in sales following the cigarette hike. In addition, consumer purchase patterns changed, with two cigarette segments actually experiencing an increase in their share of the category—the value and the super-premium segments.

The deep discount segment and the premium segment suffered the greater levels of sales decline.

Another area worth the retailer’s attention is that tobacco purchases deliver some of the largest market basket rings in the convenience channel.

PUT A RING ON IT
According to MSA research, the average convenience market basket purchase is just under $7, but when cigarettes are added to the basket that ring jumps to nearly $13. The items most often purchased with cigarettes are beverages: carbonated soft drinks, energy drinks, beer and bottled water. Interestingly, one of the largest basket rings for retailers is from the vapor segment, where the basket ring tops $18.

Category opportunity comes in many shapes. Stock up on product if you are near an area that just experienced an increase in tobacco taxes. If you are located in an area where a cigarette tax increase has occurred, monitor consumer response and make sure you maintain your stock in the value and super premium categories.

Furthermore, don’t forget to leverage the significant market basket potential of this important category. These few key steps will help to protect this critical tobacco revenue and may help to reduce your tobacco anxiety.

Don Burke is a senior vice president with Management Science Associates (MSA), a diversified information management company.

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