As part of the President’s Budget for Fiscal Year 2017, a new program called Preschool for All has been proposed with funding coming from an increase in both the federal tax on cigarettes and a tax increase on other tobacco products (OTP), including cigars.
Currently the federal tax on cigarettes is $1.01 per pack, the proposed budget would see that increase to $1.95, which would include little cigars. In addition, other tobacco products, including cigars, would see their respective federal taxes increase to match how cigarettes are taxed.
For cigars, this would increase to 102.2% of the wholesale price, capped at 93.72 cents per cigar. This would mean the tax rate would increase to 93.72 cents per cigar. Currently, cigars are capped at 40.26 cents per cigar, according to the International Premium Cigar & Pipe Retailers Association.
Disproportionate tobacco excise taxes, which directly affect purchase price, have traditionally inspired consumers to substitute cigarettes with less expensive little cigars. However, increasing taxes and regulations threaten to stunt this evolving convenience store segment.
In the 52 weeks ending Nov. 29, 2015, c-store cigar sales rose 5.8% to $2.6 billion, compared to the same period in 2014.
In addition, retailers are watching for the results following the comment period on the U.S. Food and Drug Administration’s (FDA) proposed deeming regulations, and what restrictions might affect the cigar segment.
“Hopefully, every segment will be treated differently, and I think (flavored) little cigars will be treated differently than premium cigars,” said Craig Williamson, president of the Cigar Association of America.
Downward pressure isn’t only being enacted on the federal level. Some states are endorsing their own policies on cigar sales.
Along with Florida, Pennsylvania is the only state currently with no state excise tax on cigars. But in the budget submitted by Democratic Governor Tom Wolf for fiscal year 2015-2016, cigars would be taxed at a rate of 40% of wholesale value.
Efforts to raise proposed cigar tax rates in the Keystone State also include a $1 per pack increase in the state’s cigarette tax, taking the levy from $1.60 to $2.60. The new tax on other tobacco products—also 40% of the wholesale value—would apply to smokeless tobacco, large cigars, loose tobacco and e-cigarettes.
CALIFORNIA WAY
In Santa Clara, Calif., Kris Kingsbury is marketing director of Robinson Oil Corp., which operates 34 Rotten Robbie locations and c-stores in the greater San Francisco Bay Area. Kingsbury is very knowledgeable about California municipal tobacco regulations such as the one on the books in the city of Hayward that restricts the sale of cigars—especially cigarillos and little cigars. The law precludes the sale of individual cigars or those sold in packages of small quantities.
Hayward officials also enacted an ordinance in 2009, banning all smoking in areas owned by the city, including streets, sidewalks and other public places.
Despite the restraints enacted by local officials, the cigar segment has been an able performer for Rotten Robbie. Kingsbury said varying selections and flavors in the marketplace have occurred, including expanded product lines and LTOs. New products on the market include the LEX12 cigar product line, which added Temptation (Apple) and Red Krush (Cherry) in February 2016.
However, Rotten Robbie still has its standbys.
“Our work-horse brand is Swisher,” Kingsbury said.
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.
