Since the late 90s convenience store retailers have experienced the rapid expansion of a deep-discount price segment, often referred to as the sub-price value segment, in the moist smokeless tobacco category. While the category’s growth is driven largely by several market factors, retailers need to understand the role the value offering and make sure it isn’t undermining the store’s overall profitability.
Willard Bishop has been examining the category’s three price segmentspremium, price value and sub-price value using a compilation of retail case studies to identify key questions retailers should answer in order to more effectively manage growth opportunities.
In its study “Examining Growth Opportunities in Moist Smokeless Tobacco,” Willard Bishop found that as the subprice value segment has grown in volume, the effect has been that it’s compressed dollar sales and gross profit per transaction have decreased due simply to the fact that stores are now selling comparable items at a lower price.
“This trend generates lower penny profits forcing category managers to find new volume-building strategies to offset declining profitability,” said David Bishop, director of Willard Bishop in Barrington, Ill., and author of the study.
While new to the smokeless tobacco category, this scenario is reminiscent of the shift in the cigarette segment following the 1998 Master Settlement Agreement when tobacco taxes began to skyrocket and fourth-tier brands came into prominence. The result was it became harder for retailers to make the same gross profit dollars year over year when the entry of a deep discount tier caused a deflationary impact.
Now, as the smokeless deep-discount segment has grown in volume, it too is compressing dollar sales and gross profit per transaction. For example, a premium product that retails for $4 may produce a 25% margin, or $1 profit. But a subvalue price brand retailing for $2.10 may carry a 33% margin, but only a 70¢ profit.
“Retailers need to offer the sub-price value products to maintain competitive,” Bishop says, “but are they growing the sub-price segment fast enough to offset the loss in penny profit from losing each premium sale? For every one premium can that is lost, retailers have to sell nearly one and a half subprice value cans to make the same gross profit dollars.”
But category managers aren’t giving up on the deep-discount segment because it’s an attractive offering to many consumers. Instead, Bishop said, “chains must develop a pricing strategy to satisfy the various customer segments and achieve the retailers’ growth objectives more effectively.”
Valuable scan data
Many retailers have already quantified the impact subprice value brands are having on profits and have started pushing volume using pricing strategies to deliver value on premium brands. GPM Investments, which operates 146 Fas Mart and Shore Stop convenience stores in the Mid-Atlantic, has improved its profit per transaction in the smokeless category and has managed to drive strong repeat business.
“Our data shows that premium moist smokeless tobacco customers typically have higher rings than our average customers so we are trying to position ourselves as their chosen destination in this category,” said David Arensdorf, the tobacco category manager for Fas Mart and Shore Stop stores.
Fas Mart began scanning two years ago. This crucial step allowed the chain to examine hard sales data to develop new strategies that capitalized on consumer trends. One of the first tests the Mechanicsville, Va.,-based chain ran was analyzing the impact of discounting premium moist smokeless tobacco for customers that made multi-unit purchases.
In partnership with two top moist smokeless tobacco companies, Fas Mart launched the test at its 19 stores in the Fredericksburg, Va. Market. The plan involved giving customers discounts on a multi-can deal. “Customers were being rewarded for the larger ring and, after just a few months of monitoring the scan data, we found that they were choosing the multi-can deal at a much higher rate than anticipated.”
In order for Fas Mart to have this kind of success, smokeless suppliers had to be on board. “The leaders in the premium moist smokeless categories seem to be very concerned about how the sales gap between sub-price value and premium is tightening so they are making more programs in the form of buy-downs and in-store promotions available to retailers,” Arensdorf said. “This creates an enormous opportunity for us to maximize profitability.”
The focus on maintaining existing customers has been the main reason many category managers have stocked sub-price value SKUs, the report says. Nearly 30% of the retailers surveyed said the decision to offer the deep-discount segment in moist smokeless is based on “maintaining a competitive assortment.” But, according to Bishop, retailers are starting to notice burgeoning premium opportunities.
“There is evidence that some retailers who expanded aggressively into this sub-price value segment are beginning to rationalize the assortment levels down. This trend appears true more often for limited and moderately assorted retailers where the assortment would have constituted a larger share of the product mix,” the study said.
Overall, Fas Mart estimates that 88% of its smokeless customers are loyal to premium products, but the subprice value segment, led by Grizzly, is still a big part of its business, accounting for about 6% of smokeless sales.
When testing its retail strategy on moist smokeless tobacco, Fas Mart specifically cited the need to keep up with its competitors’ growing commitment to the deep-discount segment. Rather than getting into a price war on the deep-discount brands it knew was eroding profitability, it began searching for new solutions. It learned how to identify emerging market trends and hone its smokeless sales skills as a result of competing in the cutthroat cigarette segment for so many years.
But even the best deals alone may not attract customers. That’s why Fas Mart is also driving premium smokeless using technology and customer service training. To go along with its scanning program, the company has developed a loyalty program, called Fastback Rewards, which offers targeted pricing specials directly to customers.
Once customers are inside the store, it’s up to employees to push customers toward higher margin, higher profit categories. In fact, suggestive selling is so important to Fas Mart that it runs contests regularly. Suppliers seem to reap the benefits of the friendly competition as well. A vendor partner helped fund one competition last year that awarded gift cards to winning store managers and store associates.
“There’s no doubt that maintaining profitability is a team effort,” Arensdorf said. “We lean on suppliers, consultants, employees and sales data to put together sales strategies that not only boost incremental sales, but give customers a good deal to keep them satisfied and loyal to our stores.”
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