ALEXANDRIA, Va. – Today's tobacco industry faces several legislative challenges. States and municipalities are increasingly banning smoking, and state excise taxes on cigarettes continue to rise; and when Californians go to the polls on November 7, they will vote on Proposition 86, which would raise the state excise tax 300 percent and raise the price of cigarettes to about $7.00 per pack.
While tobacco may be an embattled category, it’s still a critical one for convenience stores. The tobacco category’s role was discussed during a NACS Show 2006 panel discussion, “The Times, They Are A Changin:’ A Look at Tobacco,” on October 9 in Las Vegas.
“Anti-tobacco strategies are changing, moving toward initiative questions, which require signatures on a petition for a ballot question, instead of legislative bills,” said panelist Tom Briant, executive director of the National Association of Tobacco Outlets (NATO). “Additionally, the strategy involves smoking bans beyond those passed by municipalities, like those recently announced by the Westin and Marriott hotel chains.”
The move toward ballot questions is troubling to many in the industry because people often vote on such initiatives without fully understanding the issue. To help change public opinion, Briant urged convenience store retailers to stay active in the political process. NATO is also teaming with the Heartland Institute to launch a long-term public opinion campaign to educate consumers.
“A carton of cigarettes already comes with about $10.00 in tax, so the additional $34 proposed in California means each carton would come with $44.00 in tax, which is about the cost of the product,” said panelist Mark Cassar, COO of Kretek International. “If the California ballot question passes, it will be like Prohibition, and there will be problems like products from other sources, false stamps and bootlegging.”
On the front lines of tobacco retailing, “It’s easy to get caught up in the bad press tobacco sometimes receives. Retailers ask themselves, ‘Do I really need to be in this business? How important is it?’” noted session moderator John Mayer, national tobacco/cigarette manager for The McLane Company Inc.
But despite challenges like declining consumption, higher taxes and restrictions on tobacco use, tobacco is flourishing in convenience stores, as gross profit and in-store sales are up for both cigarettes and OTP. One way to profit from the tobacco category is to focus resources on OTP. Cigarettes have always taken center stage, but product innovation and restrictions on smoking are driving more and more smokers toward OTP.
“There is a big retailer opportunity to carve out a niche,” said panelist Terry Gallagher, president of Gasamat/Smoker Friendly stores in Colorado. “It takes training and relationship building with manufacturers for convenience stores to become a destination for OTP. Customers are looking for retailers to give them new, interesting OTP products, and retailers can build up customer traffic by giving OTP serious display behind the counter.”
Gallagher’s stores are building OTP business by working with manufacturers on promotional activities, such as contests and sampling events, and rewarding store managers and associates to ensure promotions are well-executed.
“Relationships are moving from buy/sell to plan/partner for success in OTP and cigarettes,” noted panelist Zane Power, category manager at ConocoPhillips. “All of our stores are different, so we can’t take a cookie cutter approach. You should bring your needs to the table and ask manufacturers what they can do for you.”
Menthol cigarettes and OTP have grown in market share recently, tracking with the trend toward flavors in OTP, which have driven sales growth, particularly in moist snuff and cigars.
“I think in the future, the tobacco category will behave like CPG. Consumers want variety and new things, and store operators need to use category management to see which flavors are working and check whether sets are fresh to ensure they’re giving consumers what they want,” added panelist Gary Poehlmann, senior director of field sales for Swedish Match North America.
Another development in the OTP category is the entry of two new smokeless products from major cigarette manufacturers, Taboka from Philip Morris and Camel Snus from R.J. Reynolds. While it means increased competition for smokeless manufacturers, Poehlmann said, “We look at it as a positive development and an endorsement of growth rates in the category.”
Retailers are taking a wait-and-see approach to the Philip Morris and RJR entries. “We are trying to figure out how the European model applies,” said Power. “There’s high usage of Snus in Scandinavia, but whether it applies to U.S. usage, I don’t know. Taboka and Snus are both in very interesting test markets, so time will tell.”