No single category has been as important to the convenience store industry over the years as cigarettes. The 86 retailers to participate in the CSD Brand Preference Study reported a total of $5 billion in cigarette sales at the nearly 13,000 stores their chains operate.
Philip Morris, the largest tobacco company in the world, scored highest in most effective sales program and best quality product, squeaking by the country’s No. 2 tobacco company R.J. Reynolds. The two companies were virtually tied among retail participants in sales presentations. Approximately 83% of retailers said Philip Morris called on them in the past two months, versus 80% for R.J. Reynolds. However, 6% of the retailers polled reported no sales presentations in the previous two months and 37% said they had heard from just two companies or less.
While tobacco will remain a vital category for convenience store owners, retailing the top in-store product is certainly getting more difficult. Since the 1998 Master Settlement Agreement went into effect almost a decade ago, tobacco retailers continue to be shackled by heavy regulations and constantly increasing taxes.
While taxation is hurting convenience store retailers and tobacco manufacturers by making products more expensive to purchase, regulation is the force that is really bringing headaches to an industry already facing an ever-increasing amount of laws and class-action suits that are driving smokers out of restaurants, bars, hotels and many other previously smoker-friendly venues.
Earlier this month, the House Committee on Energy and Commerce approved legislation that would grant the Food and Drug Administration (FDA) the authority to regulate tobacco products. H.R. 1108 would amend the Federal Food, Drug, and Cosmetic Act to provide for the regulation of tobacco products by the Secretary of Health and Human Services through the FDA. The legislation would provide the FDA with resources to fulfill new responsibilities by requiring manufacturers and importers of tobacco to pay user fees to fund FDA’s new responsibilities.
While reaction among the big tobacco companies has been mixed, there is no denying the controversy surrounding the industry’s top in-store category has impacted sales. According to the NACS 2007 State of the Industry Report, cigarettes made up 18% of the gross margins for c-stores a year ago, down almost a percentage point from the year before. Cigarettes are still pulling in more than 34% of sales on a per store basis, NACS reports, but that’s on a national level. For stores in states with particularly high state excise taxes, such as New York and New Jersey, the percentage is much lower, hurting not only the segment itself, but also damaging other in-store sales segments as well.
According to Jim Calvin, president of the New York Association of Convenience Stores (NYACS), keeping the cigarette segment profitable has been a fleeting task over the past several years. In the State of New York, it’s been estimated that cigarettes only make up 20% of in-store sales, a low percentage caused primarily by smokers scared off by high excise taxes who often find other sources to purchase cigarettes.
"More than half of the cigarettes sold in New York State are purchased without the collection of any state excise taxes," said Calvin. "Those purchases are going primarily to one of three places: the Internet, Native American reservations or the black market."
Calvin commissioned a report earlier this year that found New York is losing billions in tax revenues to these tax-free sources while failing to execute a law requiring the state to collect taxes from Native American retailers.