Reynolds in Talks to Acquire Lorillard in Merger of Tobacco Rivals

http://dealbook.nytimes.com/2014/07/11/imperial-tobacco-in-talks-to-acquire-brands-from-reynolds-and-lorillard/?_php=true&_type=blogs&_r=0

 

Hoping to combat a decades-long slump in smoking, two of the biggest American tobacco companies said on Friday that they were in talks to merge and create a $56 billion cigarette colossus.

A deal between the second-biggest tobacco company in the United States, Reynolds American, and the No. 3, Lorillard, would unite the makers of the Camel and Newport brands and reshape the industry by creating a more formidable rival to the Altria Group, home of Marlboro.

Perhaps more significant, it would give the combined company a leading position in two of the fastest-growing products in a challenged industry: e-cigarettes and menthols.

But a merger, which could be announced as soon as next week, faces a number of significant obstacles.

Antitrust regulators in Washington are certain to scrutinize a deal that would effectively leave cigarette sales — and pricing — in the hands of a duopoly.

A combined Lorillard-Reynolds would control 42 percent of the tobacco market in the United States, according to Credit Suisse research, while Altria has nearly half of the market. And public health advocates have already raised concerns, worried that a merger would increase the influence of cigarette brands that have marketed to children.

Still, a takeover of Lorillard by Reynolds would represent the industry’s boldest response yet to a declining, if still profitable, market. A general drop in smoking rates and aggressive public health campaigns aimed at curbing smoking have cut into sales in the United States.

About 42 million people in the United States, or nearly 18 percent of the adult population, smoke cigarettes, according to the Centers for Disease Control and Prevention. That compares with about 21 percent of the adult population nearly a decade ago and 43 percent of the adult population in 1965, according to the C.D.C.

What remains of the traditional cigarette industry is dominated by Altria, whose Philip Morris arm sells one out of every two cigarettes in the United States.

Opportunity has beckoned in the new business of e-cigarettes. A deal by Reynolds to buy the leading purveyor of e-cigarettes could spur other mergers within the industry as manufacturers jockey for position.

“This transaction in our view will be very positive for the global tobacco industry and could be just the beginning of future transactions with e-cigs/vapor being the underlying catalyst,” Wells Fargo analysts wrote in a note.

At the same time, Reynolds has coveted Lorillard’s strong share of the fast-growing market for menthol cigarettes, which have proved more popular among younger smokers than traditional cigarettes. Lorillard’s Newport brand dominates that business and represents roughly 12 percent of the overall cigarette market.

Under the proposed terms of the deal, Reynolds American would buy Lorillard. It would then sell several billion dollars’ worth of brands and other assets to the Imperial Tobacco Group, the British company that makes Gauloises cigarettes and Montecristo mini-cigars, lifting Imperial to the No. 3 position in the United States.

British American Tobacco, which owns 42 percent of Reynolds American, would invest several billion dollars to maintain the same level of ownership in the combined company and help finance the transaction.

Shares of Reynolds fell 0.8 percent, to $61.75, on Friday, while those of Lorillard surged 4.6 percent to $66.01. Altria shares rose 1.1 percent to $43.43.

A Reynolds and Lorillard deal would combine two of the oldest names in the American cigarette industry. Lorillard traces its corporate ancestry back to 1760 and remains the oldest continuously operating tobacco company in the United States.

And Reynolds was formed from the merger of R. J. Reynolds Tobacco and Brown & Williamson a decade ago.

Talks have been going on for more than a year, with different deal structures contemplated, people briefed on the matter said. The presence of four companies and their particular demands complicated matters. Talks paused about two months ago as the difficulties of negotiating a four-way transaction took their toll.

Still, the companies persisted. The return of Susan M. Cameron as Reynolds’s chief executive helped smooth the process. She had led the company following the merger of Brown & Williamson and R. J. Reynolds in 2004, before retiring in 2011.

While none of the four companies disclosed financial terms for a transaction, Lorillard has a total enterprise value of $24.6 billion, according to Standard & Poor’s Capital IQ.

Given the influence on the market that a combined Lorillard-Reynolds could exert, the companies have long planned to sell some assets to win approval from regulators.

Bringing in Imperial is meant to assuage those concerns. Currently the fourth-biggest player in the American tobacco market with a single-digit percentage of market share, the British company would become a more robust competitor through such a deal.

Antitrust regulators will not be the only source of potential opposition. Public health advocates pointed to what they said was a history of traditional brands like Camel and Newport and e-cigarette brands like Blu marketing to children.

“Regulators beware,” Matthew Myers, the president of the Campaign for Tobacco-Free Kids, said in an interview. “The problem isn’t just antitrust. It’s the increased power of these companies to market to kids.”

While Reynolds describes the United States in regulatory filings as a “mature market” that has declined since 1981, Imperial still sees it as one of the world’s biggest and most profitable markets.

Instead, Reynolds sees opportunity in e-cigarettes, which already have about $2.5 billion in annual sales. Though that is a tiny fraction of the overall tobacco market, e-cigarettes sales are expected to grow quickly in the coming years.

Lorillard is the early leader in the market, having bought Blu eCigs for $135 million two years ago. It spent about $40 million marketing Blu e-cigarettes last year, driving sales up to more than $50 million per quarter and gaining the biggest share of sales at gas stations and convenience stores.

In October, Lorillard purchased Skycig, a British e-cigarette maker, and introduced the Blu brand to the British market.

A Reynolds subsidiary, R. J. Reynolds Vapor, began selling its e-cigarettes last month. Reynolds showed off its device, called Vuse, at the Consumer Electronics Show in Las Vegas and made it the official e-cigarette sponsor of the South by Southwest festival in Austin, Tex.

Altria is also getting into the e-cigarette market with its own subsidiary, NuMark.

In the first quarter, Lorillard, based in Greensboro, N.C., had net sales of $57 million from its e-cigarette business; that accounted for about 45 percent of all such sales in the United States. Lorillard had net sales of $1.59 billion in the first quarter and net sales of $6.95 billion in 2013.

David Gelles contributed reporting.

The C-Store Pipe-Tobacco Opportunity

The C-Store Pipe-Tobacco Opportunity

Are retailers missing out on one of tobacco’s greatest growth segments?

By  Melissa Vonder Haar, Tobacco Editor
http://www.cspnet.com/category-news/tobacco/articles/c-store-pipe-tobacco-opportunity

OAKBROOK TERRACE, Ill. — The electronic-cigarette boom over the past couple of years has gotten plenty of attention. And while it may be impossible for any segment in the tobacco category to compete with that growth (given the fact that e-cigarettes are a completely new product and thus started with zero sales), pipe tobacco has been experiencing a renaissance of its own in the post-SCHIP era: Sales-data research firm IRI reports that convenience store pipe-tobacco sales have nearly tripled in the last three years, going from 116,061 pounds sold in September of 2010 to 348,011 pounds in April of 2014.

Yes, an easy explanation of the sudden interest in pipe tobacco would be its tax advantage over roll-your-own or make-your-own tobacco after the passing of tax hikes to fund SCHIP (State’s Children’s Health Insurance Program) in 2009. But as vice president of marketing and product development for Scandinavian Tobacco Leonard Wortzel noted, pipe tobacco continues to grow.

“We’re not seeing the 50-60% growth year-over-year, like in 2009, but we are still seeing double-digit growth at tremendous levels,” he said. “There was a whole subset of consumers who were desperate for getting value, and they discovered that pipe tobacco is probably the best value in the tobacco world today.”

“In markets with above-average taxation on cigarettes, retailers have an opportunity to leverage pipe tobacco as a way to deliver value to the price-sensitive consumer,” agreed David Bishop, managing partner of Barrington, Ill.-based sales and marketing firm Balvor LLC.

But are convenience stores taking advantage of that opportunity?

Despite nearly tripling its sales of pipe tobacco over the past four years, “From what we can see, (the c-store channel) has kind of missed this growth story,” Wortzel said. “They have, for the most part, not participated to the extent that other channels have.”

Spatially Challenges

Easily the biggest challenge facing c-store retailers interested in the pipe segment is space. It’s an old story: Between cigarette contracts and burgeoning OTP options, there’s simply not enough room behind the counter. This is all the more challenging when it comes to pipe tobacco.

“Large packages are a key operational issue for convenience retailers as space on the back counter is extremely valuable,” said Bishop.

To help ease some of these space concerns, manufacturers like Scandinavian and Republic Tobacco now offer smaller-format pipe pouches. They still take up more space than the average OTP SKU, but are much easier to fit than the traditional 16-oz. bags.

“Convenience retailers have generally figured out that pouches are the best-selling pipe-tobacco format and the easiest to merchandise,” said Steve Sandman, president of Republic Tobacco.

Swedish Match Seeks FDA OK to Label Snus ‘Modified Risk’

Swedish Match Seeks FDA OK to Label Snus ‘Modified Risk’

Has filed application with Food & Drug Administration for General brand

Published in CSP Daily News - http://www.cspnet.com/category-news/tobacco/articles/swedish-match-seeks-fda-ok-label-snus-modified-risk

RICHMOND, Va. – Smokeless tobacco maker Swedish Match is asking the U.S. Food & Drug Administration (FDA) to certify its General-branded pouches of tobacco as less harmful than cigarettes, according to a report by the Associated Press.

The company, with North American headquarters in Richmond, Va., is filing an application with the FDA to approve the snus products as “modified risk.”

Snus–teabag-like pouches that users stick between their cheek and gum to get their nicotine fix–are popular in Scandinavian countries and are part of a growing smokeless tobacco market in the United States.

Both the public health community and the major tobacco companies are watching closely how the FDA handles the products. The tobacco companies are looking for new products to sell as they face declining cigarette demand due to tax increases, health concerns, smoking bans and social stigma.

Swedish Match is proposing to say that the product is addictive but is “substantially less risky than smoking,” Jim Solyst, director of federal government affairs for Swedish Match North America, said in an interview with AP. Swedish Match also wants permission to remove one of the required health warning labels because Solyst said there’s “excellent scientific evidence” that the product does not cause oral cancer.

The application also highlights a philosophical debate over how best to control tobacco. One camp says there’s no safe way to use tobacco and pushes for people to quit above all else. Others embrace the idea that lower-risk alternatives like smokeless tobacco or electronic cigarettes can improve public health, if they mean fewer people smoke.

A 2009 law gives the FDA authority to evaluate tobacco products for their health risks and lets the agency approve ones that could be marketed as safer than others. None has been given the OK yet, but the agency has noted that some tobacco products could pose less of a health risk to users than smoking.

Once the FDA accepts Swedish Match’s more than 100,000-page application, the agency has one year to evaluate it.

“You would hope that products like General and, for that matter, other alternative, would encourage people to move from smoking to the alternative products,” Solyst said.

Total sales of snus are about 50 million cans per year in the U.S., growing from virtually nothing in the mid-2000s, said the subsidiary of Stockholm-based Swedish Match AB.

Market researcher Euromonitor International estimates U.S. sales at $342 million in 2013 and predicts that snus retail volume will grow by about 20% in the United States by 2017.

General snus was first sold in Sweden in mid-1860s and has been sold in the United States since 2007. It is currently available nationwide in more than 20,000 stores, which keep it in small chillers to preserve the product.

AP said the brand has at least a 6% share of the retail market, dominated by Winston-Salem, N.C.-based Reynolds American Inc., which sells the market-leading Camel-branded snus, and Richmond, Va.-based Altria Group Inc., which sells Marlboro-branded snus.

Swedish Match’s snus brands make up 75% of the market in Scandinavia. But in the United States, the company said it only has a 10% share of the overall smokeless category.

The category grew about 5.5% in the United States last year, said the report.

FDA proposes to extend its tobacco authority to additional tobacco products, including e-cigarettes

FDA NEWS RELEASE

Español

For Immediate Release: April 24, 2014 Media Inquiries: Jenny Haliski, 301-796-0776, jennifer.haliski@fda.hhs.gov  Consumer Inquiries: 888-INFO-FDA

FDA proposes to extend its tobacco authority to additional tobacco products, including e-cigarettes

As part of its implementation of the Family Smoking Prevention and Tobacco Control Act signed by the President in 2009, the U.S. Food and Drug Administration today proposed a new rule that would extend the agency’s tobacco authority to cover additional tobacco products.

Products that would be “deemed” to be subject to FDA regulation are those that meet the statutory definition of a tobacco product, including currently unregulated marketed products, such as electronic cigarettes (e-cigarettes), cigars, pipe tobacco, nicotine gels, waterpipe (or hookah) tobacco, and dissolvables not already under the FDA’s authority. The FDA currently regulates cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco.

“This proposed rule is the latest step in our efforts to make the next generation tobacco-free,” said HHS Secretary Kathleen Sebelius.

Consistent with currently regulated tobacco products, under the proposed rule, makers of newly deemed tobacco products would, among other requirements:

  • Register with the FDA and report product and ingredient listings;
  • Only market new tobacco products after FDA review;
  • Only make direct and implied claims of reduced risk if the FDA confirms that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; and
  • Not distribute free samples.

In addition, under the proposed rule, the following provisions would apply to newly “deemed” tobacco products:

  • Minimum age and identification restrictions to prevent sales to underage youth;
  • Requirements to include health warnings; and
  • Prohibition of vending machine sales, unless in a facility that never admits youth.

“Tobacco remains the leading cause of death and disease in this country. This is an important moment for consumer protection and a significant proposal that if finalized as written would bring FDA oversight to many new tobacco products,” said FDA Commissioner Margaret A. Hamburg, M.D. “Science-based product regulation is a powerful form of consumer protection that can help reduce the public health burden of tobacco use on the American public, including youth.”

“Tobacco-related disease and death is one of the most critical public health challenges before the FDA,” said Mitch Zeller, director of the FDA’s Center for Tobacco Products. “The proposed rule would give the FDA additional tools to protect the public health in today’s rapidly evolving tobacco marketplace, including the review of new tobacco products and their health-related claims.”

The FDA proposes different compliance dates for various provisions so that all regulated entities, including small businesses, will have adequate time to comply with the requirements of the proposed rule.

Products that are marketed for therapeutic purposes will continue to be regulated as medical products under the FDA’s existing drug and device authorities in the Food, Drug &Cosmetic Act.

The proposed rule will be available for public comment for 75 days. While all comments, data, research, and other information submitted to the docket will be considered, the FDA is requesting comments in certain areas, including:

  • The FDA recognizes that different tobacco products may have the potential for varying effects on public health and is proposing two options for the categories of cigars that would be covered by this rule. The FDA specifically seeks comment on whether all cigars should be subject to deeming, and which other provisions of the proposed rule may be appropriate or not appropriate for different kinds of cigars.
  • The FDA seeks answers to the many public health questions posed by products, such as e-cigarettes, that do not involve the burning of tobacco and inhalation of its smoke, as the agency develops an appropriate level of regulatory oversight for these products. The FDA seeks comment in this proposed rule as to how such products should be regulated.

For more information:

The FDA, an agency within the U.S. Department of Health and Human Services, protects the public health by assuring the safety, effectiveness, and security of human and veterinary drugs, vaccines and other biological products for human use, and medical devices. The agency also is responsible for the safety and security of our nation’s food supply, cosmetics, dietary supplements, products that give off electronic radiation, and for regulating tobacco products.

Cameron Elected President & CEO of Reynolds American

April 17, 2014

Cameron Elected President & CEO of Reynolds American

WINSTON-SALEM, N.C. — The board of directors of Reynolds American Inc. has elected Susan M. Cameron president and CEO, effective May 1.

Cameron served as president, CEO and a member of the RAI board from 2004 to 2011. She also served as chairman of the board of RAI between 2006 and 2010. In 2011, she retired from the company and the board. She rejoined RAI’s board of directors in December 2013.

Cameron replaces Daniel M. Delen, who has chosen to retire and resign from the RAI board. Delen has served as president and CEO of RAI since 2011.

Winston-Salem, N.C.-based Reynolds American is the parent company of R.J. Reynolds Tobacco Co.; American Snuff Co. LLC; Santa Fe Natural Tobacco Co. Inc.; Niconovum USA Inc.; Niconovum AB; and R.J. Reynolds Vapor Co.

Durbin Report Finds E-Cigarette Marketing Reaches Substantial Youth Audiences

April 15, 2014 : http://www.csdecisions.com/2014/04/15/durbin-report-finds-e-cigarette-marketing-reaches-substantial-youth-audiences/

“We must close this new gateway to addiction to protect our children,” says Durbin.

Eleven Democratic lawmakers from the Senate and the House of Representatives released a report that shows a dramatic recent increase in the marketing of electronic cigarettes with extensive resources being dedicated to social media, sponsorship of youth-oriented events, and television and radio advertisements that reach substantial youth audiences.

The report, “Gateway to Addiction? A Survey of Popular Electronic Cigarette Manufacturers and Marketing to Youth,” is the first comprehensive investigation of e-cigarette marketing tactics and was compiled using responses from eight e-cigarette manufacturers received by the lawmakers from their investigation into the industry and other publicly available information.

In light of the findings in this report, and following investigative reports recently released by the New York Times and Centers for Disease Control & Prevention, the group of lawmakers once more called on the Food and Drug Administration (FDA) to promptly issue deeming regulations that would expand the agency’s regulatory authority over tobacco products, including e-cigarettes.

The report was released on April 14 by U.S. Senator Dick Durbin (D-IL), who was joined by U.S. Representative Henry A. Waxman (D-CA), Ranking Member of the House Energy and Commerce Committee; U.S. Senator Tom Harkin (D-IA), Chairman of the Senate Health Education Labor and Pensions Committee; U.S. Senator John D. Rockefeller (D-WV), Chairman of the Senate Commerce, Science and Transportation Committee; and U.S. Senators Richard Blumenthal (D-CT), Edward J. Markey (D-MA), Sherrod Brown (D-OH), Jack Reed (D-RI), Barbara Boxer (D-CA), Jeff Merkley (D-OR); and U.S. Representative Frank Pallone, Jr. (D-NJ).

The major findings of the report include: • All surveyed e-cigarette companies appear to use various marketing practices that appeal to youth, such as social media outreach, sponsorships of and free samples provided at youth-oriented events, and radio and television advertisements played during events and programs with significant youth viewership.

• Six of the nine surveyed e-cigarette companies market e-cigarettes in flavors, like Cherry Crush, Chocolate Treat, Peachy Keen, and Grape Mint, that could appeal to children and teens.

• E-cigarette manufacturers have significantly increased marketing spending, more than doubling marketing expenditures between 2012 and 2013. Last year, six leading e-cigarette companies spent a total of $59.3 million on marketing alone.

• Six of the eight respondents support some form of regulation, including restrictions on the marketing and sale of e-cigarettes to children and teens.

“Six months ago, with growing public health concerns regarding liquid nicotine and growing e-cigarette use among young people, my colleagues and I reached out to nine leading e-cigarette companies with questions about their distribution and marketing to children and teenagers,” Durbin said. “The answers came back: from candy flavors to rock concert sponsorships, every single company surveyed in this report has employed a marketing strategy that appears to target youth. For years, federal regulations prohibiting tobacco companies from targeting young people have helped to protect a new generation of smokers from getting hooked on nicotine. Now, we must close this new gateway to addiction to protect our children.”

“E-cigarette makers are starting to prey on kids, just like the big tobacco companies,” said Waxman.  “With over a million youth now using e-cigarettes, FDA needs to act without further delay to stop the companies from marketing their addictive products to children.”

“This report provides clear evidence that e-cigarette manufacturers are marketing to kids and teens using tactics that would be illegal if these were traditional cigarettes.  This should not be a surprise since some of the e-cigarette makers examined are owned by large tobacco companies well-versed in marketing nicotine products to kids and teens,” Harkin said. “The report shows that e-cigarette manufacturers are investing millions of dollars to create a new generation of nicotine addicts—which is shameful and must be stopped immediately.  As the Chairman of the Senate committee with oversight of the FDA, I urge the agency to swiftly issue deeming regulations that give the agency the authority to regulate e-cigarettes and to stop these marketing practices that are already illegal for traditional tobacco products.”

“I am deeply disturbed that e-cigarette companies are mimicking tactics that tobacco companies used in the past to glamorize smoking for youth,” Rockefeller said. “Recent reports on rising poison center calls involving e-cigarettes and children under age six is yet another red flag regarding potential health consequences posed by youth exposure to e-cigarette products.  No matter what profit may be involved with encouraging young people to use nicotine products, marketing e-cigarettes to kids should be absolutely off-limits.”

The group of lawmakers also recommended several steps that regulatory authorities and e-cigarette companies should take to ensure that children and teens are adequately protected from deceptive advertising practices or unsubstantiated claims. These recommendations include:

E-cigarette companies should take immediate action to prevent the sale of their products to children and teenagers. This should include refraining from the use of television and radio advertisements.

E-cigarette companies should terminate marketing campaigns that target children and teens, including product promotion through social media and event sponsorships intended for youth audiences.

The FDA should promptly issue deeming regulations asserting the agency’s authority to regulate e-cigarettes.

The FDA should issue regulations to prohibit the sale of e-cigarettes to children and teenagers by requiring age verification and face-to-face sales, and by limiting purchases through vending machines.

The FDA should implement restrictions on e-cigarette companies marketing to children and teens, and, where appropriate, should work with the Federal Trade Commission to enforce such restrictions.

The FDA should prohibit misleading product claims on e-cigarettes, and should require clear, uniform labels to inform consumers of the health risks associated with their use.

Following a September 2013 Centers for Disease Control & Protection report that showed a dramatic increase in the use of e-cigarettes among children and youth, 12 members of Congress called on nine e-cigarette makers to provide additional information regarding the sale, distribution, labeling, and marketing of their products to children and teens.

The letter was sent to the following companies: NJOY, Lorillard Inc., Reynolds American Inc., Altria Group, Inc., LOGIC Technology, Eonsmoke, GreenSmoke, VMR Products, and Lead By Sales LLC. Every company but one—Lead by Sales LLC, the maker of White Clouds Cigarettes— responded to the lawmakers’ request, and their responses formed the basis of the report.

The Balancing Act: Premium vs. Value-Priced

Published in CSP Daily News

The right little-cigar plan-o-gram can keep profits growing

By Traci Carneal, Freelance writer

OAKBROOK TERRACE, Ill. – Little-cigar margins and profits are shrinking, but strong volume shows the category holds great potential for convenience store retailers who strike the right balance of premium and price/value options. Premium cigars may comprise less than 30% of little-cigar sales volume, but their profit margins can be as much as 10 times greater than value brands. (See related story “Capitalizing on the Premium Segment.”)

The numbers support the case for a stronger focus on premium brands. Despite a sales decline of nearly 8% in the first 10 months of 2013 compared to the same period in 2012, monthly volume averages an impressive 550+ million products sold (27.5 million 20-count packs). While 70% of volume comes from price/value options, some experts assert that retailers devote adequate attention to the premium segment. Premium-priced little cigars account for more than 24% of small-cigar category unit sales, with an average of 82.3 million premium little cigars—more than 4 million 20-count packs—sold per month (Tobacco and Trade Bureau).

“Too much emphasis on lower-end value items will devalue the little-cigar category and strip away profitability,” said Lou Maiellano of TAZ Marketing & Consulting Group. “Consumers want to save money, but they also want quality products.”

According to LaRese Armstrong, brand manager-little cigars for Scandinavian Tobacco Group, premium offerings are vital in the little-cigar category “to help c-stores maintain margins and create upsell potential for existing and newly created little-cigar enthusiasts.”

The logic behind a premium strategy is clear. “Premium brands account for over 36% of all dollar sales in the category, so you can have fewer SKUs and less stock, but still maintain excellent margin,” Armstrong said. “The premium brands may have slower turns than the value options, but they remain a very viable part of the category because they bring a loyal consumer base.” She added that Winchester, the original little cigar, has the best dollar-velocity-to-turn ratio in the category, making it the most profitable brand to stock.

Joe Teller, senior manager, category management for cigar-maker Swedish Match North America, advises retailers to consider premium brands such as Al Capone Filtered Cigars and Djarum Little Cigars that often get left out of plan-o-grams because they are not owned by major cigar manufacturers. “Very few cigar manufacturers bring these premium brands up for discussion and potential placement in plan-o-grams. These brands are worth a look as they are very high priced and continue to grow,” he said.

Teller also urges retailers to understand trends in their marketplaces to ensure the most profitability. “Most retailers don’t carry the best price/value brands because they aren’t aware of regional preferences, which is vital to selling lower-end products,” he said.

“Volume may be shifting from premium little cigars to price/value products, but retailers are leaving gross profit on the table if they don’t carry the best brands in both of these segments,” Teller said.

It’s not easy, Maiellano said, but “you want to be sure you are giving premium little cigars the attention they deserve. Frequent re-evaluation of your plan-o-gram is a must.”

Convenience Stores Hit Record In-Store Sales in 2013

April 2, 2014

Convenience Stores Hit Record In-Store Sales in 2013

CHICAGO – U.S. convenience stores reached record in-store sales in 2013, with sales climbing 2.4% to $204 billion. Combined with motor fuels sales of $491.5 billion, overall convenience store sales were $695.5 billion, according to figures released today by the National Association of Convenience Stores (NACS).

The industry’s 2013 numbers were announced at the NACS State of the Industry Summit, a two-day conference that reviews and analyzes the industry’s key economic indicators.

The convenience store industry’s in-store sales have seen rapid growth over the last decade, as consumers seek out more food and beverages on the go. In-store sales in 2013 were led by continued growth in foodservice (2.4%), driven by prepared food and commissary.

Motor fuels sales also hit new highs on a per-gallon basis, with sales climbing 0.9% to 132,029 gallons per store per month. While fuels sales per store increased on a unit basis, a 2.9% decrease in gas prices led to an overall 2.1% decrease in fuels sales.

Although the industry again realized strong sales, store-operating costs increased at a faster rate than sales and led to a decrease in industry pretax profits, which fell from $7.2 billion in 2012 to $7.1 billion in 2013.

The biggest increase in costs was wages and payroll taxes. The industry saw a dramatic 19.5% increase in employees, a function of the industry’s continuing embrace of foodservice, which requires more labor to manage.

The link between fuels and convenience retailing continues to grow. Overall, 83.7% of convenience stores (126,658 total) sell motor fuels, a 2.7% increase (3,369 stores) over 2013, according to the 2014 NACS/Nielsen Convenience Industry Store Count. The U.S. convenience store count increased to 151,282 stores as of Dec. 31, 2013, a 1.4% increase (2,062 stores) from the year prior.

Convenience stores also account for 34.3% of all retail outlets in the United States, according to Nielsen, which is significantly higher than the U.S. total of other retail channels including drugstores (41,378 stores), supermarket/supercenter (37,459 stores) and dollar stores (24,853 stores).

Beyond sales, convenience stores are an important part of the economy. They employed 2.2 million people and generated $174.5 billion in federal, state and local taxes in 2013. Overall, convenience stores sales represent 4.0%–or one out of every 25 dollars–of the entire $17.4 trillion U.S. gross domestic product.

“Our industry numbers demonstrate that convenience and fuel retailing continues to grow, despite economic and retail environment challenges,” said NACS chairman Brad Call, vice president of adventure culture at Maverik Inc. “These numbers show that we continue to meet the needs of our diverse consumers throughout the United States.”

Motor fuels continued to drive revenue dollars, but in-store sales drove profit dollars. Overall, 70.7% of total sales were motor fuels, but motor fuels only accounted for 35.6% of profit dollars. Motor fuels gross margins were 18.5 cents per gallon before expenses, or 5.3%.

The industry’s bifurcation also continues, with a considerable difference between top-quartile and bottom-quartile performers. Top-quartile performers had hot dispensed beverage gross profits that were 7.3 times greater than those of the bottom quartile; prepared food gross profits 3.0 times greater than the bottom quartile; cold dispensed beverage gross profits 3.9 times greater than the bottom quartile; and packaged beverage gross profits that were 2.4 times greater than the bottom quartile.

Of major interest to retailers this year was the breakout of industry numbers into regional benchmarks, allowing them to compare key metrics against more companies in their respective markets.

Here’s how in-store sales were broken down in 2013:

  • Tobacco (cigarettes and other tobacco products): 37.0% of in-store sales.
  • Foodservice (prepared and commissary food; hot, cold and dispensed beverages): 18.0%.
  • Packaged beverages (soda, alternative beverages, sports drinks, juices, water, teas, etc.): 15.5%.
  • Center of the store (candy; sweet, salty and alternative snacks): 9.9%.
  • Beer: 7.9%.
  • Other: 11.7%.

Meanwhile, foodservice was the category that drove profits, accounting for 29.1% of gross profit dollars. Packaged beverages were second, accounting for 19.6% of gross profit dollars. While tobacco products constituted 37.0% of in-store revenue dollars, they accounted for only 18.7% of gross margin dollars.

The industry’s 2013 metrics are based on the NACS State of the Industry survey powered by its wholly owned subsidiary CSX, the industry’s largest online ​database of financial and operating data. Complete data and analysis will be released in June in the NACS State of the Industry Report of 2013 Data.​

Founded in 1961, NACS is the international association for convenience and fuel retailing. The U.S. convenience store industry, with more than 151,000 stores across the country, posted $696 billion in total sales in 2013, of which $491 billion were motor fuels sales. NACS has 2,100 retail and 1,600 supplier member companies, which do business in nearly 50 countries.

CSP Business Media is the exclusive media partner of the NACS SOI Summit.