Enhancing variety will continue to be a key for this high growth category.
By Howard Riell, Associate Editor.
Sales of smokeless tobacco products keep increasing and convenience store operators are enjoying the ride.
But keeping that graph line headed north means keeping a wary eye on proposed federal regulations, keeping sets fresh, properly allocating shelf space, rotating product, keeping tabs on expiration dates and weeding out slow sellers.
Sounds like a full-time job. From a sales and legislative perspective what 2012 holds for retailers of smokeless tobacco remains a bit of a mystery.
“The legislative sessions really don’t start until January so in terms of possible tax increases or other restrictions, we won’t know anything until we see what legislation is introduced,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO) in Minneapolis.
Beyond that, with Election Day now in the past, tobacco is unlikely to be a rallying point for politicians looking to fill state coffers. In fact, only two states passed increases in smokeless tobacco product taxes this year.
“I think states are realizing they’ve hit a point of diminishing returns in an attempt to continue to raise more revenue from tobacco products’ excise taxes,” Briant explained. “They’ve realized that states budgets are possibly not as in the red as they were during the great recession, so the need for additional revenue may not be as great.”
Exactly what all of that means for the months ahead, however, remains anyone’s guess. “I am an attorney, so I never predict,” Briant said. “But what can be said with certainty is that this was a very good year with few tax increases on smokeless tobacco products.”
“From an operations or a legislative standpoint, no one asks the convenience store operator for his opinion,” lamented Amer Hawatmeh, president of St. Louis-based St. George Oil, operator of six Coast to Coast convenience stores. “From my perspective, as I look at the tobacco products, the only thing I concern myself with is, is it guaranteed? This is becoming a bigger and bigger issue with tobacco companies. Tobacco used to go stale and they would guarantee it. They would pick it up and send you fresh product. They don’t do that anymore. Now it’s not only a large factor in your inventory, it’s also a big cost factor—you double the cost factor because when it stales you’re throwing it in the garbage can.”
After the product guarantee, Hawatmeh wants to know whether or not the manufacturer is advertising it, and how much space he’ll need to
allocate to it.
“We obviously want to give all brands a fair shake in case a particular SKU starts to generate strong sales,” Hawatmeh said. “With brands that retail at $2.99 with a 30% margin, it’s a good return on investment. That brings us back to the first two questions: is it guaranteed and how much space and how many dollars do I allocate to that inventory?”
Hawatmeh reported that the new Skoal Blend line is doing well in his stores. “It’s all under $3 for a roll. You’re seeing that the chewers—the guys who were buying the roll for $5 a can—are switching to this line because when you go from $5 to $3, that’s a nice savings,” he said. “And it’s the same product line with the same name on the can. It’s just called Skoal Blend.”
That line and others will receive a full opportunity to fly at Coast to Coast stores. “We’re trying them all and we’re pushing them pretty heavily,” Hawatmeh said. “We will push anything that will create value for a customer who will consistently buy it. That’s what it’s all about.”
Counting on Consumers
While the number of places adult consumers can use tobacco has dwindled, Hawatmeh said he sees little in the way of hesitation over health concerns among tobacco consumers in general.
“Smokers are going to be smokers. The only thing they do is smoke different stuff or chew different things that save them money. These people, they know the risk factors that exist out there, the reality of what’s going on, and they’re not stopping,” Hawatmeh said. “The sales have not slowed down. All it’s done is switched over. That’s why all the companies keep coming out with more and different products, so that they can rename them in order to save money on taxes and keep the sales going.”
In fact, Coast to Coast stores have had disappointing results with products designed to help smokers quit. “One of the things that we aimed to do was bring in all the nicotine chews and other cessation products for all the people trying to stop smoking, but we were just getting stuck with inventory. The consumer who wants to smoke is going to smoke,” Hawatmeh said. “I thought sales of tobacco substitutes would go through the roof, especially when you’re competing against the big-box guys who are trying to get a bigger margin on it. It just wasn’t working for us.”
What Hawatmeh and his team have learned about their tobacco customers is that they are not concerned with health risks. “Smokers are far more worried about their freedoms being taken away from them than anything else,” he said.
And what do the government freedom takers have up their sleeves now? “Who knows?” Hawatmeh said. “Every day somebody gets a new itch and they create a new law, and every law seems aimed at prohibiting us from selling tobacco to adult consumers.”
Driving New Business
Despite government interference and higher prices, the tobacco category’s greatest strength lies in its loyal consumer base.
“The OTP business, especially the moist smokeless business, is a very, very strategic one in that the consumer has tremendous repetitiveness,” said Lou Maiellano, consulting partner for Taz Marketing & Consulting Group in Sevierville, Tenn. “That consumer is very strong in the convenience store industry. I’ve seen statistics that say they spend 2-3 times more than the average c-store customer. It is absolutely one of the best customers in a c-store.”
While total tobacco sales over the last quarter have more or less stalled, the OTP segment is up strongly. Maiellano’s big concern is over declining margins. “That is not good,” he said. “Part of that is because of the competitiveness that’s out there.”
The smart move for retailers looking to build sales is to do quarterly reviews and make adjustments to the offering as needed.
“Don’t be afraid to make changes on variety or pricing. It’s still a business that changes rather quickly,” said Maiellano, who also recommended that c-store operators pay strong attention to their pouch business. “Eight years ago I started pushing this segment, and today it has become almost an understatement. The pouch business in the moist smokeless category is over double digits, with probably a 10- 11% share.”