If increased cigarette shipments are any indication, category sales could be robust in 2016.

By Howard Riell, Associate Editor

This past October, the Alcohol and Tobacco Tax and Trade Bureau reported that cigarette shipments for the first half of 2015 had increased from the same period the previous year—the first year-over-year increase in cigarette shipments since 2006.

Over the last few years, a 3-4% volume decline has been normal. Reynolds American and Altria are up more than 40% and 12%, respectively, in 2015.

REASONS TO BELIEVE
In November, Wells Fargo LLC reported that the overall combustible tobacco environment continued to remain robust, with help from strong manufacturer net pricing, up-trading by customers to more premium brands thanks to lower gas prices and a stable competitive environment.

According to some industry analysts, the spike in cigarette shipments is primarily due to lower gas prices, which have left consumers with more money in their pockets. If retail gas prices remain low, most expect to see better-than-trend cigarette volumes continue into 2016.

For the 52-week period ending Nov. 1, 2015, Chicago-based IRI’s Infoscan review shows convenience store sales of cigarettes reached $55.6 billion, an increase of 6.4%. By contrast, sales of smokeless tobacco reached only $6.1 billion, but rose by 8.31%. Electronic smoking devices topped $712 million, rising by 6.2%.

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities, predicted that tobacco consumers will continue to opt for premium brands, having a favorable impact on the category. “We also expect strong manufacturer pricing in 2016 to continue, which should generate robust profit growth,” Herzog said.

Vivien Azer, managing director with the Cowen Group Inc., noted that in mid-December, cigarette volumes declined 0.4% in the four-week period, decelerating from the 12-week trend of 0.8% declines. Cigarette sales grew 3.4%, accelerating from the 12-week trend of 2.9% growth.

“Given these favorable trends, we remain constructive on the category as volumes remain resilient through the first two months of the fourth quarter of 2015,” Azer said. At the same time, the electronic cigarette segment remained in decline, with 12-week dollar sales down 15.7%.

CHANNEL SURFING
Moti Balyan, chief operating officer of Macland Investments’ Mac Chevron in Woodland Hills, Calif., which operates 40 convenience stores, said cigarette sales at his stores are doing very well. “Sales are up over last year.” He credits the strong performance to one factor. “It’s because we have the lowest everyday price. Price is still the key.”

The average carton price at his locations is about $56, he said. “But there aren’t that many people who are buying cartons. They are far more likely to buy by the single pack. The average pack price is between $5 and $5.50, which he said is about $1 per pack less expensive than nearby 7-Eleven stores. “My cigarette margin is very low, around 14% or 15%.”

Mac Chevron’s consumer base is a mixed bag, he added. “We don’t have any specific community that we serve, although I will tell you that not that many young people are smoking nowadays.”

While promotions can indeed help move product, Balyan noted, pricing helps more.

“The promotions are only at certain times, but we keep the lower price throughout the year anyway,” he said.

Balyan predicts cigarette sales will at least hold steady in 2016 because at least one alternative product appears to have trailed off. “The electronic cigarette craze is over, so people may have switched back to the regular cigarettes.”

“The cigarette prices are going up big time,” said Janet Traylor, a spokesperson for Albert Daigle Oil in Jennings, La. “(Sales) are also going down because many people can’t afford it.”

Daigle took a cigarette price increase of eight cents earlier this year, and on top of that had to further increase prices an additional 10-15 cents per pack less than three months ago, she said. The c-store’s average per-pack price is $5.50.

The situation is being alleviated somewhat by buy-down money supplied by the tobacco companies, Daigle added. “Customers can get 75 cents off a pack. It helps them out.”

Not surprisingly, Traylor’s projection for 2016 hinges strongly on price trends. “I think that if prices keep up the way they are, and unless they come out with cheaper brands, you are going to keep having a decline.”

There are three means to help fuel cigarette sales in a c-store, Balyan said.

“More customer service, lower the product price and stock fresh product,” Balyan said.
He added a fourth: clean bathrooms. “People love it,” Balyan said. “Those who smoke are the highest spenders; they spend the most time and the most money in the store, and they like the clean bathrooms.”

AN ACTIVE CATEGORY
Sean Higgins, director of marketing for Hutchinson Oil Co., based in Elk City, Okla., reported his company’s cigarettes sales have, for the most part, been steady. “I don’t believe ours have died down or anything. They seem to have been on the same pace for us. It’s definitely a huge factor in our stores; it is an active category for us,” he said.

It is that volume that convinces him that sales through 2016 should keep pace, Higgins added. “I don’t see them dying down any time soon.”

Interestingly, Hutchinson Oil has seen electronic cigarette sales remaining strong even as the category nationally is in decline. “I have noticed that e-cigarettes have been a trend lately,” Higgins said. “People are seeing that as an alternative to regular smoking.”

Higgins sees one of the keys to growth in cigarettes during the year ahead will involve offering consumers something new and different.

“We’ll be seeing if there are some new flavors or even some new brands that we would want to expand on that might grab some more attention, something like that,” he said.

LOOKING AT LEGISLATION
That cigarettes continue to fare as well as they have is noteworthy due to, for one thing, the ongoing legislative assault. More than three years after California voters nixed a dollar-per-pack increase in the state’s cigarette tax, it appeared that voters would have another chance to decide the issue.

According to the San Jose Mercury News, the state’s 2016 ballot will likely include a proposed $2-per-pack tax increase, which for the first time would include electronic cigarettes.

Much of the emphasis is on the age at which Americans can purchase tobacco products. According to the National Association of Tobacco Outlets:

• Senate Bill 602, which increases the legal purchase age to 21 for tobacco and electronic smoking devices, passed the Assembly Health & Senior Services Committee Dec. 10, 2015.
• Also last December, the Boston Public Health Commission held a public hearing on a proposed ordinance that would, among other things, increase the age to purchase tobacco products to age 21 from 18.
• Cleveland City Council voted to adopt an ordinance raising the legal age to purchase tobacco products and electronic cigarette/vapor products to 21 from 18.