Tobacco tax increases aren’t going away any time soon, and their effect on convenience stores is substantial — but they’re nothing that resourceful convenience store retailers can’t handle.
Tobacco is already among the most heavily regulated categories in the store, and tax rates have gotten out of control as lawmakers in every state use taxation of a means of discouraging usage. In any given year, according to the National Association of Tobacco Outlets Inc. (NATO), there are 20-24 states that introduced legislation aimed at raising cigarette/tobacco product tax rates.
In California, for example, the gross margin on cigarettes has been cut to about 7%, rendering them almost a loss leader — a rough spot for the top-selling product category. Higher taxes also lead to increased black market sales and tax evasion.
Tobacco tax increases will take visits away from the convenience store. Combined with more people having foodservice delivered and the rise of electric vehicles, and store visits can take a big hit over the next 12 months.
Here are some strategies for overcoming the taxman:
- Top-selling brands must, of course, be kept in stock. They are a high-demand staple, and c-stores strive to avoid turning any customer away disappointed. Stocking less-expensive brands is an option.
- Promotions always play a crucial role, of course, and should continue to be used to the fullest advantage.
- Many convenience store shoppers have transitioned from tobacco to vaping products, which — though themselves under continuous attack — offer a higher profit margin.
- Americans love all-natural products. Many operators find customers willing to spend a bit more, for example, for Reynolds American’s Natural American Spirit cigarettes and rolling tobacco.
- At the same time, sales in the OTP category — pouches, loose and chewing tobacco, blunt wraps, snus, dissolvables, cigarillos — are growing in many markets.
- Another opportunity may be inducing customers to trade up to premium cigars with higher perceived value and more panache.
- Emphasis can also be placed on selling tobacco-related accessories such as lighters, cases, ash trays, air fresheners, hookahs and more.
- Expanding a foodservice program is another way of generating additional revenue to make up for drooping tobacco sales. It does, however, do nothing to solve the problem of the four to eight feet of back-counter real estate that can only be used for tobacco products.
- Retailers can also lobby against tax increases directly and through their state associations and NATO.
This time last year, convenience store owners and operators were dealt a double whammy: First they had to adapt to the recently passed federal minimum tobacco purchase age of 21; then they had to pull product in accordance with the FDA ban on most flavored electronic nicotine delivery systems (ENDS). Next, the coronavirus swept the country, and no one knew how the category would fare during lockdowns.
The biggest thing that will impact the tobacco category this year will undoubtedly be FDA premarket tobacco application (PMTA) decisions. The agency is still working to determine which ENDS will be approved for future sales and whether some banned SKUs can return to tobacco backbars.
In the meantime, c-stores can continue selling items under PMTA review.