Clearing a Path for Smokeless

Despite unexpected challenges, smokeless tobacco sales continue strong gains.

By Howard Riell, Associate Editor

Expectations are high for the long-term health of the smokeless tobacco category, which has been performing strongly since last year.

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Bonnie Herzog, managing director–equity research beverage, household & personal care, tobacco & c-stores for Wells Fargo Securities LLC, reported recently that smokeless tobacco dollar sales are a “bright spot” as consumers continue to respond positively to recent line extensions.

According to Information Resources Inc. (IRI) data for the 52-week period ending Feb. 19, 2017, sales of smokeless tobacco products in c-stores generated $6.5 billion, an increase of 5.86% over a year ago. Of that, chewing tobacco and snuff were nearly $6.2 billion, a hike of 5.56%.

Spitless tobacco sales were nearly $283 million, an increase of 12.68% during the same period.

“The chewing tobacco category has been consistently growing over the past decade, with annual growth ranging from 3-11%,” said Don Burke, senior vice president of Management Science Associates Inc., a diversified information management company. “It appears that many factors likely have contributed to this growth, including anti-smoking regulations that more recently have often been re-written to include vapor; lower cost versus cigarettes, and usually with lower tax rates; and consumer perceptions that chewing is a less harmful alternative to smoking.”

Nor are the trends influencing the growth of smokeless tobacco likely to abate any time soon, Burke suggested. “Management Science Associates predicts that the growth rate will continue to be consistent with the past few years, likely in the 3-6% range.”

Chewing tobacco represents approximately 8% of the total tobacco/vapor category, snus about 2% and dissolvables less than that, Burke added.

“These are important categories, and are becoming even more important, but retailers should not over-SKU with these products at the expense of the larger tobacco categories,” Burke said. “Equally important is to maintain the right product balance between the premium and discount chew categories, depending on their customer preferences.”

RECALL FALLOUT
This past February, U.S. Smokeless Tobacco Co. (USSTC), a unit of the Altria Group Inc. and the company that markets Skoal, Copenhagen and other smokeless tobacco brands, issued a recall after complaints that foreign metal objects were found in some smokeless products across Texas, Wisconsin, Indiana, Ohio, North Carolina and Tennessee. The recall affected more than Skoal, Copenhagen, Cope and Husky-branded products.

“Last year, for me, (smokeless) was my best tobacco category and I was up over 20%,” said Ray Johnson, operations manager for Speedee Mart Inc., based in Henderson, Nev. “And this year, they had that big recall—disaster. It dropped to nothing; only 4% so far this year. I’m out of stock badly.”

Each week, Johnson added, suppliers are listing which products are available and which aren’t.

“The problem is that they are shipping what they have, and everybody gets a percentage of what they order until it gets evened out. They have downplayed it quite a bit, but it is severe.”

Wells Fargo’s Herzog reported in early March that smokeless tobacco restocking was taking longer than expected.

“We’ve recently learned that USSTC has not yet been able to fully restore its inventory pipeline of select recalled smokeless tobacco products in late January and is in fact limiting the volume that wholesalers can purchase at this time. Apparently, demand for MO’s (Altria’s) smokeless products is exceeding the amount they’re able to produce.”

The recent recall has had an impact in other Western states.

“We are seeing dramatic drop in usage here,” reported Ed Pollock, a principal of Grasslands Market, based in Douglas, Wyo. Concurrent with that, he added, has been a general drop in all demographic categories. Copenhagen and Skoal continue to be his best-selling product lines.

Grasslands’ Pollock opines that in-store merchandising lacks the ability to generate any kind of sales bump. “We display prominently at the counter. Beyond that, I don’t think that given the current trend, money spent here is worthwhile.”

VARIABLES IN VEGAS
Speedee Mart’s Johnson said that he has been largely unable to transition his smokeless customers to other products, although at least one manufacturer has tried.

“R.J. Reynolds was clever. As soon as they heard about (the recall) they sent out something saying, ‘Here are comparable products in Grizzly, why don’t you order them?’ Of course, they weren’t prepared to have extra stock, either,” said Johnson. “They did a little bit, but they were not prepared to replace all the missing products. I got a little extra of it, and that was it.”

Johnson has little interest in doing so even if he were able to. “I’d hate to take a Copenhagen guy down to Grizzly because it’s premium-tier to mid-tier. I don’t want them to discover Grizzly.”

The Speedee Mart chain carries two brands of snus: Camel and General, which is produced by Swedish Match.

Moreover, geography is proving lucky for tobacco-selling retailers in Las Vegas.

“The big thing coming is the California tax change,” Johnson said.
While taxes in that state will rise to $2 per pack of cigarettes and to 28% on vape products on April 1, the pertinent change for smokeless tobacco (and cigars) is scheduled for July 1, when taxes jump from 28% to 66%. When that happens, Johnson added, Speedee Mart figures to make back some of the monetary ground it lost to the recall.

“It should increase,” Johnson said. “The No. 1 tourist is the guy who drives from California. (Speedee Mart) should get a nice benefit.”

In turn, the Nevada chain is doing what it can to prepare for the added business. “We’re just going to have extra stock—if we can get it by then,” Johnson said. “The problem is that we can’t get any stock. We were hoping before this recall happened to be extra-stocked, knowing that those people were going to come over, because that is a huge jump in price for them.”

Johnson has instructed store employees to be honest and up front with disappointed customers.

“We tell them that it was a recall that is affecting everyone,” Johnson said. “That’s about all you can say.”

He dismissed the use of signage to explain the situation to consumers. “Nobody reads signs,” said Johnson. “You put it on the door and they are going to walk out and not buy anything, so we don’t want to do that.”

He suggested that the smokeless segment should be fine overall, in terms of popularity and sales. Regulatory measures in other tobacco categories have an undue, popular impact.

“It keeps going because of all the laws about smoking,” Johnson said.

The most crucial thing for c-store operators to do is simply to keep shelves filled. “You don’t really have anything else. As the cigarette usage keeps declining, you are going to have more people move to smokeless.”