By Howard Riell, Associate Editor
Several states continue to consider excise taxes for cigars and other tobacco products (OTP), while others look at raising the smoking age and enacting outright public smoking bans.
• In Massachusetts, the state budget bill, which previously was amended to include a tax increase of 170% on flavored cigars and smoking tobacco, was passed on July 7 by a conference committee without the tax increase on flavored cigars or smoking tobacco.
• In New Hampshire, the governor vetoed a proposed 74% OTP rate this past June.
• A bill in Hawaii proposing a 50-cent cap on large cigars recently failed.
• Other states in which proposed increases in OTP taxes on cigars haven’t passed this year include Alabama, Kansas, Kentucky, Louisiana, Maryland, North Dakota, Vermont and Wyoming.
• States with cigar tax bills still pending include Pennsylvania that wants to assess a 40% or 59.2% OTP tax; Rhode Island’s bill to tax little cigars as cigarettes at $3.50 per pack; Washington, which proposes increasing the OTP rate by another 10%; and West Virginia legislation, which would raise the OTP rate by at least 30%.
“With 15 state legislatures considering bills this year to raise or assess OTP taxes on large and small cigars, it indicates that lawmakers are still inclined to seek additional tax revenue from the cigar category,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “Convenience store retailers in those states with cigar tax bills still pending need to contact their state lawmakers and continue to urge them to oppose these tax increases.”
That said, the category remains a vibrant one. For the four-week period ending June 14, 2015, total U.S. convenience store sales of cigars totaled $205.6 million, a 6.37% rise over the year-ago period, according to IRI, the Chicago-based market research firm. For the 12 weeks ending June 14, sales were $603.4 million, up 6.18% over the same period in 2014. Comparably, for the 52-week period ending June 14, sales eclipsed $2.5 billion, a 4.30% rise over the previous year.
What the numbers indicate is that it is worth retailers’ while to double down on their efforts to hone the category and draw customers’ attention to it, while watching for activity in Washington and numerous state capitals.
It isn’t only lawmakers.
“We believe that FDA (the U.S. Food and Drug Administration) is targeting cigars more than legislators are,” said Mary Szarmach, NATO president and vice president of trade marketing and government relations of Smoker Friendly International. “Their major issue is flavors.”
When it comes to regulatory issues and cigars, category stakeholders are on constant watch.
“Most of the states are out of session for the year,” said Craig Williamson, president of the Cigar Association of America Inc., in early July. “We just got through Ohio last week; cigarettes got taxed, cigars did not. Anything with OTP didn’t get taxed.” In states with year-round legislatures, he added, “the threat is continual.”
Most of the legislative action thus far this year has been on taxes, Williamson recounted.
“There have been a couple of instances with tax caps that have been put in place. We’ve beaten back some smoking bans, like Louisiana and (specifically) New Orleans. We worked on that with the city council, and we were successful there,” Williamson said. “We beat back taxes in Baton Rouge, La. this year, which was good. So essentially we’ve had a really good year, and in tough states we’ve had some big fights.”
FINDING WHAT WORKS
Mike Gancedo, tobacco category manager for the Savannah, Ga.-based Parker’s chain of 40-plus convenience stores in Georgia and South Carolina, suggested that c-stores add a variety of different cigars and manufacturers to stimulate sales.
“We have expanded our offerings on the two for 99-cent products and our sales are up over 25% month-to-month over the previous year.”
Whether or not it is worth an operator’s time and effort to try and push the category is up to the category manager, Gancedo said. “We at Parker’s reset our stores several times a year to make sure we are bringing in the products our customers are requesting. By doing this we have seen increases in sales and gross profits.”
Most chains will merchandise cigars based on contracts with manufacturers, he added.
“We then planogram based on manufacturers that offer us the most guaranteed funds,” Gancedo said.
Parker’s chooses not to bundle tobacco products with any other items in its stores. “We welcome all tobacco consumers in our stores, however we do not want to entice anyone to purchase tobacco products due to bundling,” Gancedo said.
Stocking too many SKUs can also prove deleterious, however.
“If you are selling three or four for 99 cents, there is no need for the variety in the two-for-99-cents from Swisher or White Owl,” Gancedo said. “When a chain decides to bring in the three or four for 99 cents, that’s all that sells.”
His regular practice, he added, is to pull sales figures on a monthly basis and discontinue the bottom 10% in order to bring in new items.
Gancedo said premium cigars do not work in his stores.
“We get very few requests for premium cigars. We find more and more consumers are looking for two, three or four cigars for 99 cents.” With that in mind, Parker’s decided not to offer any cigars priced lower than two for 99 cents.
“Once you go to three or four for 99 cents, you lose gross profit and you potentially reduce the weekly visits of that consumer,” Gancedo said.
PRICING AND PRE-PRICING
The biggest issue that retailers face now is pricing, said Ray Johnson, operations manager for Speedee Mart Inc., based in Henderson, Nev.
“The majority of product coming out right now is pre-priced, generally at 99 cents but some as low as 59 cents, Johnson said. “That is the only category I have where the average sale is dropping. I’m selling as many sticks as I was, but my sales dollars are dropping because they keep down-selling the customer so drastically. I won’t allow anything under 99 cents, but even then I’m only using it as an in and out. It’s gotten to where it’s destroying the whole category.”
Johnson is convinced that the retail price of cigarettes is going to continue to rise, sending many consumers looking for an alternative.
“That is going to give cigars another push, so there is no reason to hold at these low prices,” Johnson said.
Bob Richardson, category manager for tobacco and electronic cigarettes for E-Z Mart Stores of Texarkana, Texas, said that like Johnson he is seeing more pre-priced cigars in his market.
“What we’re seeing is a downward spiral on the retail, where margins for Black & Mild were 50% a few years ago and now are down to 37%. People are going from a single for 99 cents to two for 99 cents. Now we see three and four. It’s a downward squeeze on our margin.”
Middleton Co., a tobacco company located in Limerick, Pa, produces Black & Mild cigars.
Pre-priced products work well for the manufacturer, Richardson noted. “But if the taxes go up and they don’t change the pre-price point we’ll have to push back and say, ‘We want un-priced so we can price it where we need to.’”
Williamson suggested that 2016 should be very similar to 2015 when it comes to cigars.
“The FDA should be coming out with the final proposed rules, which we’re going to be dealing with federally. I don’t think states will change much, especially on the tax issue. But they are always going to be looking toward the low-hanging fruit, and that would be us.”