Howard Riell, Associate Editor
With cigarette sales continuing their seemingly irreversible decline, c-store operators are making up lost dollars with electronic cigarettes and, most recently, refillable vapor tanks.
Driving that business forward, however, is a bit trickier than traditional cigarettes, requiring better merchandising and an increased knowledge base among store employees.
The trend is undeniable. Sales of e-cigarettes and refillable vaporizers more than doubled to $1.7 billion in 2013, or 1.7% of the estimated $100-billion nicotine products market. Bonnie Herzog, manging director, beverage, tobacco and convenience store research for Wells Fargo Securities LLC, has projected e-cig sales could reach $10 billion by 2017.
The category has experienced some slippage as e-cigarette dollar sales declined 7.5% for the period ending Aug. 2, driven by a net pricing decline of 15.5% and unit growth of 9.4%, as reported by Wells Fargo.
“It’s certainly flattened out,” said Leo Vercollone, president and CEO of VERC Enterprises, of the e-cigarette market. He suggested the category is edging towards maturity already.
“It has only been around for three years,” Vercollone said. “We saw tremendous growth during the first two-and-a-half years, and it’s flattening out now. It’s had a great run, but it seems it is not maintaining that run. I think it’s still an evolving product as far as the technical aspect. I think we’ll understand more about the legs that will carry it in the future, so stay tuned.”
VERC Enterprises is a private chain of 26 convenience stores in eastern Massachusetts and New Hampshire.
“Sales are flattening out, but that’s (alongside) vaporizer growth,” said Phil Daman, president of the Smoke Free Alternatives Trade Association (SFATA) in Washington, D.C., referring to recent e-cig sales. “We think it’s going to see a resurgence, especially as there is more and more awareness as larger companies continue coming into the marketplace and driving marketing and advertising dollars, and product to the shelves through distribution.”
Like Daman, Vercollone sees gathering momentum in the vapor-tank products arena following on the heels of electronic cigarette purchases. “The vapor-tank product has been around for about a year. It’s having an initial run-up, too,” Vercollone said, adding that he is left to wonder whether the tanks’ popularity is due solely to their newness, or will prove sustainable over time. “Is this the wave of the future? I don’t know.”
Vercollone, whose company operates convenience stores and Mobil/Gulf gasoline locations throughout eastern Massachusetts and New Hampshire, said he doesn’t attribute the decline in e-cig sales to burdensome regulations.
“I think it’s because the smoker has tried it, or pieces of it, and some of them said, ‘We like it’ and some of them have said, ‘We’re going back to cigarettes,’” Vercollone said.
Vercollone remains committed to e-cigarettes in his stores.
“We were one of the first ones to get on the bandwagon. We’ve seen tremendous growth and we have a loyal following. But to everyone’s point, we are experiencing flat sales,” he said.
Growth in the vapor tanks is welcome, but is coming on a still-small base.
“So I think we’re going to continue to look at it, continue to monitor it and, if it warrants expanded use, we will do it,” Vercollone said. “If the sales reflect that it is declining, then we’ll retract on it.”
Unlike most products that he sells in his stores, Vercollone noted, this category spurs a lot of customer questions.
“As with anything, we have to be in a position to talk to them about it,” Vercollone said. “And sometimes that’s difficult when we’re trying to be convenient and fast and have no lines, so we have to be very delicate with how we handle this.” His company’s size permits more of the hands-on approach the category calls for. “In a chain our size, we manage it very closely because we can,” Vercollone said. “I think the single-store operators can be in a better position to do that. The larger operators will struggle on this piece.”
Employee training, not surprisingly, is paramount.
“First of all, this product is as much about employee education as any product I’ve seen,” Vercollone said, which means educating frontline employees is a necessity. In 25 VERC stores, Vercollone has an appointed e-cigarette/vapor “captain,” who is expected to serve as the resident expert.
“We look to keep them educated about the product, to understand the product, so that (the category) continues to evolve,” Vercollone said. “That e-cigarette/vapor captain educates the rest of the associates. If a customer comes in with a question and an associate doesn’t know the answer, he or she will direct the customer to the e-cigarette captain.”
Vercollone also has a specialist at his corporate level. “My tobacco category manager is also my e-cigarette category manager, so she is very involved in understanding more about the global end of where this product is going, and keeping the captains educated.”
“We think that the open-tank system is something that will actually do very well for convenience stores,” Daman said. “It is selling well, especially on the eastern seaboard, and we think the opportunity is ripe for open tanks to be market entrants at a much larger level in the c-store environment.”
Repeat sales will continue to grow, Daman added.
“For the open tanks the c-store environment is very well-suited because consumers need to repurchase their tanks and the liquids that they put into those tanks frequently,” Daman said. “So it’s really something that the c-store market will do well with because it has loyal repeat customers, once they find the brand they like.”
Vapor Tanks Wait Their Turn
The same consumers who like e-cigarettes are discovering vapor tanks, and many prefer them.
Bonnie Herzog, managing partner, beverage, tobacco and convenience store research for Wells Fargo LLC, estimated that tanks and e-cigs have a combined market of about $2.5 billion, and believes that tanks will overtake the latter in the next decade.
Retailers, she said recently, are starting to discontinue or take shelf space away from e-cigs to make room for tanks, “given their attractive growth and margins.”
Phil Daman, president of the Smoke Free Alternatives Trade Association (SFATA), pointed out that one major manufacturer of open-tank units got its product onto shelves in Rite-Aid pharmacies in August.
“Very soon, hopefully, we will see c-stores begin to carry those things, as well, because those open tanks are something that consumers have shown they like,” Daman said. Retail prices should also be coming down. “The bigger companies are starting to be able to mass produce them at a lower cost, making them available to more people,” he added.
Success at retail with vapor tanks begins with only carrying products with childproof caps, said Daman. “That is going to be helpful to them. By doing that they are going to be able to avoid violations and be able to sell more product. People very often worry about the liquid getting into the hands of children.”
Retailers can gain a secondary benefit from the child-proof packaging by merchandising it prominently to drive home the message that the store is safety conscious. “Put them in front,” Daman said. “They don’t have to put it on the back shelf in the tobacco center because it’s not regulated like tobacco, at least not yet, and we don’t believe it should be at all.”
SFATA suggests that retailers stock no more than the six most popular flavors and two most popular nicotine strengths.
“You don’t want to have too much inventory on that shelf space,” Daman said. “That might be zero milligrams of nicotine and some other level. A lot of people have started buying zero milligrams of nicotine as they use the product and wean themselves off of nicotine.”
Because the tanks require some explanation, they should be placed near the point of purchase where employees can answer questions, Daman said. Signage there and at the pump can help bring in new customers. “Create a pathway to purchase from there to the store, and have it prominently displayed at the register where someone who is knowledgeable can tell the consumer all about it. And yes, that requires some training,” he said.
Being careful to avoid sales to minors is critical, Daman added. “It would definitely hurt their business if they didn’t card. You need to make sure that everyone is of the age of majority. You can’t sell these products to minors, and you can’t market them to minors.”
Retailers also hurt their chances for success within the category with poor placement, Daman said.“I see folks who put the e-cig and vapor products on the back shelf, low down, so no one knows they’re there,” Daman said. “They sit there and people may come in and ask, but they don’t maximize their sales. By not advertising and promoting them, and not putting them in a place where people will know about them, they can really kill sales.They don’t move if you don’t know they’re in the store.”