The SCHIP tobacco tax rates that hit on April 1 are costing cigar smokers more, but sales continue to persevere.
As of April, the federal taxes on large cigars rose from 20.719% of the wholesale price with a tax cap of 4.875 cents per cigar to 52.75% of the wholesale price with a tax cap of 40.26 cents per cigar. The tax on little cigars jumped from four cents per pack to $1.0066 per pack, the same tax placed on cigarettes.
Despite the increase, Joe LaCorte, director of operations for Smokes 4 Less, which has 12 smoke shops and three c-stores called Thrifty Beverage throughout New York, said the tax hikes did not have the negative impact on his business that he was bracing for.
“We ended up readjusting some of our margins, and we found that a lot of the distributors and the companies we buy cigars from started coming out with more deals on their products, so it enabled us to keep our prices somewhat competitive and not increase them that much,” LaCorte said.
David Dill, vice president of sales and marketing for Gate Petroleum, Jacksonville, Fla., which operates 225 service stations with convenience stores in six southern states, agreed cigar sales are still going strong. “Our cigar sales are up calendar year to calendar year about 7% for the category,” he said.
What’s more, even with the increase in price on little cigars, at around $2.19 they still are quite a bit less than a pack of cigarettes, and some customers are switching to the cheaper option.
“We believe there’s some migration from cigarettes to cigars, but I don’t think there’s been enough time to really get a good read on that,” Dill said. “In Florida, we had a state excise tax increase in July on cigarettes of about $1 a pack. Our snuff and loose leaf business went from having a 25% tax to an 85%, and cigars were not taxed. So we believe there’s going to be a migration into the cigar category as a result of that.”
Dill also has noticed increased interest in smaller cigars. “I think those probably are cigarette smokers moving over, so it seems to be the new trend—moving to the smaller cigars,” he said. “We do quite a bit of business with blunts. We’re doing a promotion with four flavors from the Swisher International cigarillos line, and they are doing very well for us.”
Sweets, peach and grape are among the top-selling flavors, with sweets being especially popular with consumers.
While the majority of Dill’s customers are young males ages 21-34, he credits the recent female influence on the category for up tick in cigarillos and smaller cigars.
LaCorte also has noticed an increase in female consumers.
“We’re finding that more of the younger males and females getting into cigars are moving more toward the flavored ones,” LaCorte said. “Cigarillos definitely sell a little more in the winter time when it’s too cold to stand outside and smoke a big cigar for any length of time. Because of the flavor, those are being sold to younger adult smokers and even female customers who enjoy small flavored cigars, whether it be an Irish cream, exotic fruit, honey or vanilla bourbon.”
LaCorte has found his target market varies. “We have everything from old timers who come in and want to buy the DeNoblies, the Te Amos, the Avanti cigars—the old Italian stogies—to young adult smokers who want an Acid cigar or a Koopa Koopa, so we have that whole spectrum and everything in between.”
Another trend LaCorte has noticed among his customers is that due to the economy, some customers are cutting back on their cigar spending. Customers who have long smoked $10 and $12 dollar cigars are opting for less expensive options during the week and saving the more expensive variety for for the weekend or special occasions.
When it comes to the best-selling traditional cigar brands, location and demographics play a big role and results tend to vary. Smokes 4 Less finds different cigars are doing better at different stores.
“Some of our top brands would be Arturo Fuente; and our Smokes 4 Less house brand, which sell very well because they’re a lower priced product; Padron; Romeo y Julieta and Montecristo are always popular with cigar loyalists,” LaCorte said. He also has seen a lot of the regular customers smoking more maduro cigars lately, possibly a sign that more cigar smokers are looking for a full-bodied cigar.
Meanwhile, Dill noted that Black & Mild continues to have a loyal following with Gate Petroleum customers.
Marketing in Tough Times
In a rough economy, it’s more important than ever to effectively market products and inform consumers about sales.
“We have started doing a better job of bringing in signage and having better marketing pieces and price call outs for the cigar category, and especially price call outs on promoted items,” Dill said. “In the past, I don’t think we did as good a job of that, nor do I think the manufacturers did a very good job with it.”
Smokes 4 Less drives cigar sales by picking a cigar of the month and advertising that by emailing the 500 members in its cigar club, and by doing some local advertising in the newspaper.
“We pick a cigar and price it attractively enough that it stands out as cigar of the month. In our humidors, we have a little center aisle where we put the cigar of the month on a pedestal, if you will, with all the proper signage to alert consumers,” LaCorte said.
Now that the Family Smoking Prevention and Tobacco Control Act that gives the FDA power over regulating tobacco, including the ability to ban candy-flavored, clove and fruit-flavored cigarettes, has been signed into law, more smokers may look to cigars for their flavor fix in the future.
Suppliers are moving swiftly to keep pace with the demand from adult cigar customers. For example, Kretek International recently introduced new Djarum Filtered Clove Cigars, developed in response to customer preference for a clove product with a longer lasting smoke and the same clove aroma and flavor found in previous Djarum clove cigarettes. Only time will tell what, if any, FDA rules will have an impact on cigar sales. So far, retailers are optimistic that the cigar category will remain strong. CSD