Cigarettes Remain On Top

cigarettes at convenience stores

Although smoking rates have been on the decline, cigarettes remain a leading performer for convenience stores.

In 2016, convenience stores captured 85% of all sales through sales from just six categories: Cigarettes, packaged beverages, candy, beer, salty snacks and other tobacco products (OTP), based on the latest research data from the Nielsen Co.

According to the National Association of Convenience Stores (NACS) State of the Industry (SOI) data projections, cigarettes and OTP comprised 36% of in-store sales in 2016, ahead of foodservice (21.7%), packaged beverages (15%) and center of the store sales (9.8%).

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NACS’ SOI report indicated that smoking rates in the U.S. continue to decline, thus chipping away at cigarette’s share of in-store c-store sales, which dropped from 36.9% in 2011 to 31% in 2016.

And though tobacco products, including cigarettes, were more than a third of in-store sales dollars, they accounted for only 18.2% of gross profit dollars, NACS reported. To muddy the numbers more, the development of new tobacco products to accommodate consumers moving away from combustible tobacco is also affecting total market figures.
Some industry analysts anticipate a long-term average decline of 4% in cigarette volumes as tobacco manufacturers continue to develop newer products such as iQOS smokeless cigarettes to maintain revenue levels.

Those manufacturers include Altria Group, parent company for Philip Morris USA, which reported this past May that domestic cigarettes shipment volume declined by 2.7% in the first quarter.

Of course, legislators continue to have a say on how easy it is for cigarette consumers to purchase tobacco. For example, California’s cigarette tax this April 1 increased by $2 a pack under new tobacco policies passed by state legislators last November. This more than tripled the state’s former 87-cent-per-pack cigarette tax.

A recent survey by New York’s Wells Fargo Securities found that, despite California’s tax hike and the continued volume deceleration of the cigarette industry, products from larger manufacturers continue to be strong sellers in c-stores.

Based on results from Wells Fargo’s “Tobacco Talk” survey of retailer and wholesalers representing roughly 25,000 convenience stores in the U.S., retailers expect Newport to gain more than 70 base points in market share and win even greater shelf space in 2017, according to Bonnie Herzog, managing director-equity research, beverage, household and personal care, tobacco and c-stores for Wells Fargo Securities. Retailers expect Marlboro to maintain share leadership and gain between 10 and 20 base points in market share in 2017.

“We believe Reynolds American Inc. (RAI) remains strongly positioned for share gains, leveraging Newport to drive faster growth across its portfolio and meaningful margin expansion,” Herzog said. “However, there are signs of widening price gaps and downtrading, which will likely impact mid-tier brands the most. This is due to rising gas prices and other wallet pressures affecting lower income groups.”

With London’s British American Tobacco’s (BA) recent $49.4 billion takeover of RAI, it remains to be seen what impact, if any, this will have on the cigarette segment in c-stores.

“There’s little you can do with Altria and Phillip Morris, who fight with R.J. Reynolds for space,” said Eric Huppert, co-owner of Team Oil Travel Center, located in Spring Valley, Wis. “If I have 10 square feet for cigarettes and they have access to a wholesaler, they know how many packages they sold and how many their competitors sold. If they say they’re 60% of our market, they get 60% of our back space. If they don’t get this space, then we don’t get the product discounts.”

Huppert claims the price fixing atmosphere created by cigarette wholesalers favors them and consumers at the expense of c-store retailers.

“The wholesalers will give us a bigger buy down or X amount for a carton of cigarettes if we sell them for the price they give us, and it’s such a low margin,” said Huppert. “By giving away cigarettes at this margin, we draw in more customers, but if all four stores by us do the same deal, it’s the wholesalers that are benefitting as well as the smokers. I have a full rack or 150 packs of cigarettes I’ll be trying to sell that I paid $7.50 a piece for and have to sell for $6 a pack to get them out of here because it’s all about volume.”

Team Oil’s grocery sales are about $15,000 a week, with between $8,000 and $9,000 in cigarettes.

“This means I’m making a 10% margin on the cigarettes versus 30-40% on the rest of the grocery items,” said Huppert. “Cigarettes are as close to gas [in terms of being a low-margin, high-volume product] as it gets.”

The fact remains that travelers get disgruntled with higher prices compared to where they live, he said, and people will go out of their way to find the cheapest cigarettes. Still, Team Oil Travel Center’s sales remain consistent, with cigarette sales not being impacted by e-cigarette or vapor products.

“Regardless of the economy, the vices like cigarettes and booze still sell,” said Huppert. “Very few smokers that try electronic cigarettes stay with them; they’ll typically go back to traditional cigarettes.”

Kizer Couch, co-owner of Bend, Ore.-based The Growler Guys, which has seven retail locations in Oregon and Washington State, also has seen no significant changes in his cigarette business.

“Cigarette companies are always changing descriptions, pricing structures and buy downs to compete with each other, but nothing noteworthy is happening right now,” Couch said.

The stores’ biggest sellers are Camel and Marlboro, both in regular hard packs.
“This is because both brands are doing a lot of promotions, with Camel discounting on the 99s and Marlboro discounting on its new off flavored packs like Blacks,” said Couch. “We’re not seeing any impact from e-cigs or new regulations.”

What many experts are saying is it’s the continued hike in excise taxes having the most impact on c-store cigarette sales and the segment as a whole.

“The net result is more cigarette smuggling,” said Michael LaFaive, director for fiscal policy at the Center for Public Policy, based in Midland, Mich.

So far, the campaigns to cut these taxes have not been successful, although regulations have been introduced. To put it in perspective, the average excise tax on a cigarette pack was 38.9 cents in 1999 and in 2017 it’s $1.60. According to the Washington, D.C.-based National Association of State Budget Officers, states have increased tobacco taxes about five times as often as they have raised alcohol taxes between 2000 and 2015, with more than 130 increases in the last 17 years.

The result has been smokers going to states with the cheapest excise taxes to purchase product. For example, California residents can cross the border to pay significantly lower per-pack excise taxes in Oregon ($1.32), Nevada ($1.80) and Arizona ($2).

Also, there is evidence that those with a strong prevalence to smoke who cannot support their habit are turning to illegal trade.

“Raising excise taxes on cigarettes has unintended consequences and will not reach the intended goals,” said LaFaive. “Instead, the imposed taxes are undermined because it creates an incentive to find an illegal way to obtain these items.”

Looking ahead, the cigarette segment is expected to stay on its current course, despite increased competition from newer products like iQOS, and Grinds, a coffee product looked upon by some analysts as an alternative to smokeless tobacco.

Although 11% of Team Oil’s R.J. Reynolds’ sales are from VUSE products, the e-cigarette brand isn’t the most consistent seller for Huppert.

“When a smoker is a smoker, they want a cigarette,” he said.