Cigarettes remain a staple of c-store business despite the constant scrutiny the category attracts.
By Howard Riell, Associate Editor
Despite increasing regulations and an incremental erosion of its once wide consumer base, cigarettes in the past year have shown a remarkable ability for bouncing back.
Cigarette sales at convenience stores for the 52 weeks ending July 12, 2015, were $54.5 billion, according to IRI, the Chicago-based market research firm, a 4.78% increase. Unit sales also rose by 2.57% during the same period, to 8.7 billion.
Cowen and Co. reported in August that cigarette sales grew 3.1%, an acceleration from the 12-week trend of 2.1% growth. “Given these favorable trends we remain constructive on U.S. volumes, though we acknowledge comps get tougher later in the year,” it said.
“To the surprise of many, c-store cigarette sales increased slightly in 2014 over 2013 as reported by NACS (National Association of Convenience Stores) in its 2015 Fact Book,” said Steven Montgomery, president of b2b Solutions LLC, a Lake Forest, Ill.-based retail consulting firm. “I am not sure if that was a reflection of higher retails or channel shifting. This increase was in spite of the fact that the Centers for Disease Control and Prevention reported that 9 billion less cigarettes were sold in the U.S. in 2014, versus 2013.”
Big Tobacco is even seeing some financial relief of another kind after the end of the Tobacco Transition Payment Program that forced cigarette, cigar and smokeless producers to make 10 years of payments to farmers—averaging about $1 billion annually. Manufacturers such as Altria Group, Reynolds American and Lorillard made quarterly payments to help farmers cope with the deregulation of tobacco farming that occurred in 2005. The payments ended in September 2014.
Coupled with healthy category sales, convenience stores are positioning themselves to take advantage of the more robust combustible tobacco market.
“(Cigarette sales) are actually kind of growing right now for us over the last 6-8 months,” said Brian McKee, vice president of purchasing and merchandising and general buyer for Amarillo, Texas-based Pak-A-Sak Inc., which operates 21 convenience stores. McKee credited lower gas prices, at least in part. “They might have people able to smoke a little more. Maybe they have a little extra money in their pockets.”
To build on that sentiment, Pak-A-Sak stores are offering still more savings, with 50 cents off a two-pack on every brand, a promotion McKee has been running continuously for the better part of two years. “Other than that, it’s just a matter of putting them up on the back bars, letting consumers see them and buy them, and going from there.”
Local demographics are helping to spur sales, as well, McKee explained. “Our stores are in suburban, largely residential areas, so there are lots of people who are lifelong smokers.”
ON THE MOVE
Another factor in the chain’s favor is its drive-through windows, which McKee credited with helping drive cigarette sales.
“One of our biggest things is our drive-through,” McKee said. “Our drive-through stores do a whole lot more cigarette business than our non-drive-through locations. That’s where a lot of our growth is coming from.”
The convenience that attracts consumers for other categories works with tobacco too, McKee has found. “People don’t want to get out of their cars. This makes it convenient for them, where they can just drive up to our window and get their packs of cigarettes and go.”
McKee said that while tobacco legislation has not derailed cigarette sales, lawmakers remain a burden with which retailers have to deal.
Overall, it remains a competitive category.
“Like everything else, it’s getting more competitive,” said Alex Tiseo, president of Pik ‘N Run Inc., a Port Charlotte, Fla. company that operates five Pik ‘N Run c-stores. “As some of the bigger players move into the area, like Wawa and RaceTrac, they do their bundling and value packaging and it just puts more stress on the small guy to compete, to either match them or not. You have to make that tough decision.”
Price, of course, remains a crucial factor.
“Obviously, the biggest thing that most retailers are (facing) is, do you want to drop the price and advertise it?” Tiseo said. “You go up and down some of the major thoroughfares and what do you see posted in the windows? Cigarette specials. Circle K even puts it on the fascia of their buildings in certain areas where it’s allowed. Everybody wants to lead the category down and try and do volume, and they are squeezing the middle guy.”
Tiseo said he doesn’t see legislation regulating the sale of tobacco hurting business in a major way going forward.
“That’s been around forever. It’s nothing new,” Tiseo said. “They‘ve been putting cigarettes can kill you right on the box for decades.”
Transitioning cigarette smokers who are swayed to switch to other tobacco products (OTP) is proving another challenge to the category.
“A very low percentage of smokers are changing from regular cigarettes to e-cigs,” said Ken Patel, a Schaumburg, Ill.-based 7-Eleven franchisee and president of FOAC (Franchise Owners Association of Chicagoland). “Tobacco companies are trying hard to lure the customers with coupons and also coming to stores to hand out coupons and doing mailers to homes.”
At the same time, however, retailers continue to try and entice consumers who are open to switching, Patel added. “Prices of regular cigarettes will force people to quit regular smoking and turn towards vape.”
As many states look to boost annual budgets by raising taxes on tobacco, retailers will continue to be affected.
“Certainly the numerous tax increases that have occurred have been very detrimental to cigarettes sales in certain areas,” Montgomery said. “A prime example has been the city of Chicago, which has the distinction of having the highest cigarette taxes in the country. Today the taxes in Chicago are $6.16 per pack—Chicago ($1.18) plus Cook County ($3) plus Illinois ($1.98). I don’t know the net impact on the number of cigarette smokers, but I do know that retailers have found their customers much prefer to buy their cigarettes out of the city, and preferably out of the county, as well.”
How can c-stores increase cigarette sales? Many states now have minimum pricing at both the wholesale and retail levels.
“This means the retailers have little to no ability to gain share by offering cartons—too expensive for most customers anyway—or discounting multi-pack purchases,” Montgomery said.
One way to buoy sales is simply by being in stock. “Retailer may not realize how many customers will change stores before they change cigarette brands,” he added.