Driving OTP Sales

While cigar sales do not approach those of cigarettes, they offer convenience stores better margins. Plus, new flavors and competitive pricing are keeping customers interested in the category.

By Joe Bush, Contributing Editor.

Other tobacco products (OTP) in general and cigars in particular continue to earn more shelf space in convenience stores, and the higher price of cigarettes is only one factor.

Cigars and cigarillos are popular not just for their value, but for their flavor options—which cigarettes don’t have as a result of regulation—aggressive maneuvers by suppliers in packaging and promotions, and a feeling among many that they are healthier or safer than cigarettes.

A recent study on cigarettes by Chicago-based market research company Mintel revealed several interesting facts about cigarette smokers who are open to trying alternatives to cigarettes:

• Slightly more than 25% of the 685 adult smokers polled said they smoked cigars as well as cigarettes.
• Approximately 57% of those polled had tried or were interested in trying cigars.
• Of the eight cigarette alternatives offered as an option in the poll, cigars claimed the highest percentage of smokers who had tried or were most open to trying—69% of 18-to-24-year-olds and 76% of 25-34-year-olds.
Data from Chicago-based market research firm Symphony/IRI Group shows that in the 52-week period ended Sept. 4, 2011, dollar sales were just less than flat (down 0.72%) from the previous year, yet unit sales rose nine points, a result of the average price dropping 16 cents.

Capitalizing at Retail
Robert Perkins and Lon Audet, who oversee the tobacco category for their respective chains—Rutter’s Farm Stores in York, Pa., and Stinker Stores in Boise, Idaho—have seen that aggressive behavior on each side of the country.

Perkins said cigars have steadily surged, despite his company’s ability to hold the line on cigarette volume.

“We have had good, steady category growth,” said Perkins, vice president of marketing for the 56-store Pennsylvania chain. “I will tell you that we have gotten into the singles, and two-packs, and foil packs have done very well. I think the move to foil packs was a good move for all the companies and now just about everybody has moved to the foil wraps. It’s definitely a preferred package for the consumer. Whether they get a two-pack, or a single or a two-for-three pack, (foil) has been the driving factor for the last six months for us.”

Perkins switched all tobacco  products at Rutter’s to full service in late 2010, in anticipation of it being mandated. OTP had been in endcaps until then.
“Full-serve product definitely got better visibility at the transaction counter, but in most cases we were on an endcap previously, so it wasn’t like it had bad visibility,” Perkins said. “We actually were able to maintain most all the volume that we had, and the shrink by all means went down. The presentation actually got better when it went behind the counter.”

The move’s one downside has been to increase competition for space. There are five different back-bar configurations across the chain, he said.

“The space is always an issue,” said Perkins. “It does take the new items and introductions to keep the category alive, but we also have space constrictions, where you’re really fighting for space behind the counter with other tobacco products—moist, snus, and cigarettes. It’s a balancing act, quite honestly, between getting the new items and having the space for the tried and true sellers.”

Rutter’s sells Altadis, Swisher, Swedish Match and Altria’s John Middleton products, with Altadis acting as category captain.

“It’s profitable,” Perkins said. “It is still one of those categories that continues to have growth and growth potential to gain sales, customer transactions and profits.”

Cigar Focus
Audet, the marketing and merchandising director for Stinker’s 65 stores, uses Swisher as his category captain on cigars. He likes that Swisher is a cigar-only supplier.

“They’ll take care of our business, not just their business,” said Audet. “Seven years ago, each store in our network was doing its own thing. We didn’t have a program, no schematics, just kind of whatever the manager wanted to do. Swedish Match came to us for two years suggesting that we need to clean it up. We eventually did, but we found that Swisher was a better fit for us primarily because Swedish Match has cigar items, but they’re also into chew with their Longhorn. Swisher is a cigar company—that’s what they do—and we feel very comfortable with them. We meet with our other companies and part of the conversation may be around cigarettes, part of it may be around chew, and usually the minimal part is around their cigars, because it is a smaller part of their business. With Swisher, it’s just cigars. It’s all you talk about.”

It’s usually a pleasant conversation for Audet as OTP is up in both gross margin dollars and sales. OTP is now about 4% of Stinker’s total sales, which is all inside merchandise except fuel and lottery.

Cigars are still well behind chew, Audet said, but the segment is plowing forward because of the suppliers’ active and insistent strategies. Suppliers, Audet said, have been offering 50-cent buydowns and plenty of buy-one-get-one and buy-two-get-one deals, all of which have positively impacted overall category sales.

“Cigar manufacturers seem to be getting more and more aggressive and that’s great for business,” Audet said. “Five years ago this was a category that was largely overlooked. Now that we are seeing a lot of promotions we are starting to garner higher sales. It’s not a coincidence that this is happening.”

Like all other categories, OTP responds well to favorable pricing. For example, cigars still aren’t taxed as high as cigarettes and yet consumers will still go for the smaller packages, further lowering their ring.

“The single-serve and two-pack boxes have really taken off, versus the five-packs,” said Audet. “You can get a 20-pack of little cigars for $1.99 compared to $4.79 for a pack of Marlboros, or even $3.50 for the low-end cigarettes. I believe it’s these people that don’t have the money and want to continue to smoke that are driving sales, and this is a good lower-cost alternative.”

Single PrimeTime cigars in various flavors sell for 99 cents apiece and stand out with their own rack. All of Stinker Stores’ tobacco products are either locked up or behind the counter, Audet said. He has chosen not to sign merchandising contracts with any cigar supplier thus far.

“Another discussion we battle is finding the space for all these popular products. There is only so much counter space,” Audet said. “The bigger companies, like Philip Morris and RJR, are capitalizing most of that with cigarette racks. We had to sign contracts for chew, which requires space. Then you start looking at the rest of OTP and that’s the big question: How do you merchandise this stuff properly in a growing category? You have to keep an open mind and merchandise each store based on local demand. Always listen to your customers.”



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