By Pat Pape, Contributing Editor.
Tobacco customers and products are changing. Convenience store retailers must adapt to maintain category sales.
It’s no secret that traditional cigarette use is declining. According to Gallup research, about 20% of Americans smoke at least one cigarette each week, which is down from the all-time high of 45% in 1955.
Since the start of the 2000s, smoking has dropped 9% among people ages 18-29 and 5% among those 30-49. It dipped slightly among 50-64 year olds, but remained steady among people aged 65-plus. Despite those figures, tobacco (cigarettes and other tobacco products) made up more than 42% of convenience store revenue dollars (excluding fuel) in 2012, according to the 2013 NACS State of the Industry (SOI) report.
While controversy continues to surround the use of tobacco, the products are legal, in demand and contribute to revenues throughout the entire convenience store industry. So how does a retailer best merchandise this all-important category for maximum sales?
Perplexing Products
It’s challenging for retailers to do something on their own to generate additional tobacco sales, admits Larry Hauck, vice president of marketing for Garb-Ko, which operates 80 7-Eleven stores in Michigan and Indianapolis.
As a result of mandated advertising restrictions, “it’s also difficult for cigarette manufacturers to generate additional sales for the total category,” Hauck said. “They do have the ability to do discounting and things like that to boost their own brands, but that doesn’t drive the whole category. It just allows them to capture some extra market share.”
Furthermore, much of the information customers receive about new products these days comes from store sales associates. “They are the ones required to be educated on cigarettes and able to tell people the details,” Hauck said. “They have to be an expert on everything.”
At Square One Markets, a nine-store chain in northeast Pennsylvania, management assigns one tenured employee to serve as the “tobacco captain” at each location, operating as a subject matter expert on the various tobacco offerings.
“Our training program will include time spent with the tobacco captain so employees are educated on the different products,” said Lisa Dell’Alba, president of Square One Markets. “When someone comes in and asks for a can of Skoal or Copenhagen, you have to know your facts. Otherwise, you’re frustrating your customer.”
Adequately training team members is critical, agreed Andrea Myers, executive vice president at Kocolene Marketing, which operates 11 convenience stores and 18 tobacco stores in Indiana and Kentucky, and she encourages team members to upsell customers.
“When traditional cigarette customers come into the store you need to ask them ‘would you also like a pack of electronic cigarettes for those times when you can’t smoke?’ Maybe they’ll say no or maybe they’ll say yes,” Myers said. “A lot of education needs to happen out there with consumers. That’s something we’re constantly working on—training our team members about snus and electronics, so they can help our customers.”
Key Brands, New Products
Proper merchandising involves stocking and showcasing the top brands that customers want. “This is sometimes difficult given the contracts that retailers typically need to sign,” said Bonnie Herzog, managing director of beverage, tobacco and consumer research for Wells Fargo Securities. “It’s something retailers have to figure out.”
C-store operators must consider the entire tobacco set—not just cigarettes-when allocating shelf space.
“There are other categories in tobacco that are growing faster than cigarettes, such as smokeless, cigars or electronic cigarettes,” Herzog added. “Maybe retailers can allocate a little more space to those faster-growing categories.”
In order to keep customers coming back, no category of tobacco can be neglected. “You must have electronic cigarettes, snuff, cigars and filtered cigars,” Myers advised. “It’s a broader spectrum now. Make sure you carry the right products in each tobacco segment. Make sure you are into alternative tobacco products, such as snus and electronic. People are smoking traditional cigarettes less, but they’re still using tobacco.”
The buying habits of tobacco customers have changed over the past few years, and it’s the convenience store industry that must adjust to those changes. “A lot of the cigar business has gone to the single and two–pack packages where a few years ago it was the five-pack that was in demand,” Myers said. “Where a person used to buy two packs of cigarettes, now they’re buying one pack of traditional cigarettes, plus an electronic cigarette. Consumers like options, so we need to have them.”
Good Marketing, Fewer SKUs
Hauck believes that tobacco companies could better market cigarettes if there was more uniformity in the category.
“There should be some marketing consistency so store associates know what they’re selling,” Hauck said. “There are so many price points out there today. At one time, every pack of cigarettes cost the same. Then generics came on the market, but they all retailed the same. Now there is no such thing as tier 1, 2 and 3 cigarettes that all have the same cost. It’s difficult for anyone to know the price of cigarettes today.”
A basic practice of good tobacco merchandising is keeping SKUs low, he said. “Trying to drive the business with 150 different packages just doesn’t work in today’s environment. Of course, if you have a customer that wants Brand X, get Brand X for them.”
Due to the limited space in the typical convenience store, many locations don’t have room to showcase fixtures from every brand, said Myers, and that problem is growing with the popularity of electronic cigarettes. “The toughest part of the electronic cigarette is deciding on which ones to carry,” she said. “If I carried every e-cigarette that has been presented to me, I wouldn’t have room for anything else in the store.”
When it comes to e-cigs, Hauck believes a store only has room for the top sellers. “Can a store handle 10 varieties of electronic cigarettes?” he said. “No. That’s too much to ask a retailer. I suspect the answer is closer to three or four.”
Drive-Through Tobacco
Though you might not suspect it at first glance, a c-store drive-through window can drive tobacco sales. At least, that’s the case with the Pak-A-Sak chain based in Amarillo, Texas. When drive-through windows were installed at several Pak-A-Sak locations, tobacco sales jumped by 25%.
“Wherever we have drive-through windows, our cigarette sales are significantly higher,” said Brian McKee, vice president of merchandising and co-owner of the 20-store chain. “We went back to a couple of our stores that did not have drive-throughs and added them. That really improved sales for us. It showed that the drive-through doesn’t cannibalize the sales that you already have. It actually increases sales. ”
Pak-A-Sak recently opened its ninth store with a drive-through. It’s the chain’s first location to feature two pick-up windows serving time-crunched customers.
For many reasons—finances, space and zoning—not every store can be retrofitted with a drive-through window, but McKee is sold on them and said all future Pak-A-Sak outlets will have them. “People just want to use a drive-through,” he said. “They want to stay in their car, get their stuff and go, and with a quick item like cigarettes or other tobacco, it’s the perfect fit.”
