According to widely-accepted economic theory, if fewer people start smoking and more adult smokers seek to quit each year, which has been the trend, then demand for cigarettes should decrease and sales revenue should follow suit. But according to recent figures, that scenario isn’t what’s happening right now.
“Cigarettes have done better for the same six-month period than the previous year,” observed Anna Bettencourt, category specialist for VERC Enterprises, which operates 24 convenience stores throughout Massachusetts and southern New Hampshire.
“Our cigarette sales volume and units are up; 2015 was a favorable year for us even though smoking is trending down,” said David Dill, vice president of sales and marketing for Jacksonville, Fla.-based Gate Petroleum, which operates 67 retail locations state-wide.
Apparently, these c-stores are not isolated cases. IBISWorld research revealed that annualized tobacco industry revenue rose 1.2% in the previous five years. Tobacco dollars are projected to experience 1.3% growth in 2015, when IBIS World tallies those numbers.
According to Nielsen data cited by Wells Fargo Securities LLC, there was a 3.1% gain in cigarette dollar sales for all retail channels during the four weeks leading up to Jan. 23, 2016. “We expect strong manufacturer pricing and profit growth to continue this year,” said Bonnie Herzog, senior analyst.
However, some of the improved sales performance can be attributed to price hikes. Wells Fargo noted a 3.8% pricing increase for cigarettes earlier this year.
There are several reasons why price hikes haven’t negatively impacted cigarette sales, especially for convenience stores. One, while price can deter customers from purchasing snacks or foodservice items, smokers tend not to let cost dissuade them from cigarette purchases. Another factor is that people find themselves with larger amounts of disposable income, partly due to lower fuel prices—also allowing c-store patrons to enjoy a premium cigarette brand versus a basic one.
“Gas is a dollar cheaper now than it was the previous year, which helps,” said Bettencourt.
In fact, some analysts suggest the boost to people’s wallets has prompted smokers to upgrade to premium brands.
“We sell more premium rather than generic and I’m seeing that trend continue. So I would definitely think that consumers having more disposable income is helping drive premium business as well as other sales in the store,” Bettencourt said.
Yet another reason why c-stores are recording gains is that convenience stores are a preferred destination for tobacco purchases. According to IBISWorld, the channel, including fuel retailers, comprises one-third of the cigarette market segmentation.
“C-stores have become the go-to place for those kinds of purchases,” said Dill. “When CVS exited the category, maybe sales for us picked up because we absorbed the impact.”
Still, not everyone is convinced this momentum will carry over year after year. Not only is the smoking population shrinking, but there are increasing taxes, too.
“What concerns us is the tax disparity between states when you bump up against a border like we do with Georgia. Stores there already have a tax benefit over Florida and any increases would amplify that situation,” Dill said.
How regional regulations impact the category is yet to be seen.
“More and more towns have considered changing the legal tobacco age from 18 to 21,” added Bettencourt. “That would eliminate three years of legal smoking, so I think cigarettes will be either flat or experience a decline in the future. I would not expect growth.”
Stay tuned to Convenience Store Decisions‘ March issue, where we delve into 38 in-store categories to identify emerging trends and garner retailer analysis to forecast what operators can expect for 2016 and beyond.