Post on 15-May-2018
C S P October 2013 161
“I ’m excited to gather with
my fellow tobacco nerds,”
q u i p p e d o n e re t a i l e r
attending CSP’s 10th annual Tobacco
Category Review Meeting. “My coun-
terparts don’t always get the world we’re
dealing with.”
Truly, no category except perhaps
fuel offers retailers the most potential
sales while also boasting the regulatory,
taxation and squeezed-margin minefield
that goes along with it. Indeed, even after
giving a detailed presentation about local
regulatory issues, NATO executive director
Thomas Briant had to cut into another
speaker’s session with the news that New
York City had just announced intentions
to try to limit—or even ban—the sale of
many electronic-cigarette products.
Yet despite the many challenges in the
category, its importance to c-stores can-
not be understated. It was this question
of tobacco’s overall value to the channel
that Don Burke, senior vice president of
Pittsburgh-based Management Science
Associates (MSA), addressed during his
general session.
To explore this concept, Burke used
MSA and Paradigm Sample’s custom cci-
Panel data, a mobile research panel that
captures consumer shopping patterns
and is particularly useful for tracking the
behavior of the millennial segment.
“In this case, we looked at about 3,400
different visits to a c-store and what shop-
pers did on those occasions,” Burke said.
On the surface, tobacco did not appear
as crucial a category as others: Of the 15
categories tracked, tobacco was only the
fourth most purchased, falling behind gas
and other fuel, packaged beverages and
candy, gum and mints. When the cciPanel
buyers visited a c-store, they purchased
tobacco 21% of the time, compared to a
55% purchase rate for gas and fuel.
However, when Burke looked at how
much tobacco consumers were spending,
the category’s true importance began to
emerge. Sixty-seven percent of the time,
cciPanel’s average c-store shopper spent
less than $10; 20% of the time he or she
spent $10 to $20; and 13% of the time
it was more than $20. There was a per-
ceivable shift toward larger baskets when
MSA looked at tobacco consumers, who
spent less than $10 43% of the time, $10
to $20 32% of the time and more than
$20 25% of the time.
“Compare that to any other category
and it really is the strongest,” said Burke.
“That’s saying to you that your tobacco
purchaser has the largest cash purchases
per ring of any shopper in your store.”
And though some of that increased
basket could certainly be attributed to
the cost of tobacco itself, the cciPanel
data also shows that tobacco consumers
tend to purchase from a variety of other
categories within the store. Prominent
add-on purchases included gas and
fuel (which tobacco consumers also
purchased 52% of the time), packaged
beverages (35%), candy, gum and mints
(17%) and lottery/gaming (15%).
“The point about a tobacco purchaser
is that they will become involved in that
convenience shopping experience,”
said Burke. “They shop throughout the
store—much more so than the shoppers
in any other categories.”
This fact was even more apparent
when MSA broke down how consumers
of different segments within the tobacco
category interacted with the store. While
premium-cigarette shoppers tended to
purchase a wider variety of products
(interacting with 22 of the 27 categories
MSA tracked), large-cigar shoppers had a
strong tie to the important beer segment,
presenting retailers with a great potential
to increase sales.
“There’s a strong relationship—par-
[roundtable report]
A Inhalation
Retailers take in ideas on regulations, e-cigs, importance
of tobacco shopper
By Melissa Vonder Haar mvonderhaar@cspnet.com
ticularly on the weekends—between
cigars and beer,” Burke said, pointing out
that weekend consumers buying large
cigars were more likely to pick up beer
than any other category besides packaged
beverages. “If you have some cross-mer-
chandising opportunities, ways on the
weekend of putting the cigars on display
near the beer aisle, you’re probably going
to sell more.”
As valuable as those add-on purchases
and cross-merchandising opportuni-
ties are, perhaps nothing highlighted
tobacco’s importance to convenience
stores more than the cciPanel data on the
frequency that tobacco shoppers visited
c-stores. Roughly 10% of the cciPanel’s
average consumers visited a store on a
daily basis, but 16% of tobacco consum-
ers were daily shoppers. Thirty-seven per-
cent of average c-store consumers visited
two to three times a week, yet that number
was 55% for tobacco shoppers. And 23%
of average consumers visited once a week;
for tobacco, that figure declined to 16%.
Taking into account the amount
tobacco consumers spend, the variety of
other categories they shop and the fre-
quency of their shopping trips, Burke’s
data solidly showed what many retailers
already know: Tobacco consumers are
invaluable to the business.
“Not only are they buying more, but
they’re visiting your store more often,”
Burke said. “This is a critical point in
understanding how very important
tobacco shoppers are in this channel.”
Keys to ‘Big Electronic’ SuccessThe importance of the tobacco shopper is
likely to only increase as more consumers
turn to the margin-friendly and yet-to-be
regulated electronic-cigarette segment. As
managing director of beverage, tobacco
and convenience store research for New
York-based Wells Fargo Securities LLC,
Bonnie Herzog has been far from shy in
her enthusiasm for the nascent segment,
going so far as to call herself a “bull” for
the category.
“E-cigs remain the biggest excitement
for 2013, according to our survey respon-
dents,” said Herzog during her “Industry
Trends and Insights: An Analyst’s View”
session.
And this excitement is growing now
that Big Tobacco is getting into the game.
Lorillard Inc. was the first, acquiring blu
eCigs in April 2012; R.J. Reynolds Tobacco
Co. recently announced plans to take its
Vuse digital cigarette national; and Altria
Group Inc. is about to start test markets of
its new MarkTen offering.
Yet, with more than 200 private e-cig-
arette companies already on the market,
the question remains: Who will be the
C S P October 2013162
Retailers
Certified Oil Co.Wayne Wills
Country Fair Inc.Jim Kupniewski
Cumberland FarmsAnne Flint
Family ExpressRyan Fasel
Forward Corp.Lundy Edwards
Power Mart Corp.Sam Odeh
Royal Buying Group Inc.James Conrad
Shop Rite/ Tobacco Plus StoresSusan Dorsett
Smoker Friendly/GasamatTerry Gallagher
Speedy StopNatalie Teinert
Sunoco Inc.Steve Jones
The Pantry Inc.Kevin Taylor
Tri Star ServicesRick Staley
Tri-State PetroleumFrank White
Suppliers
CB Distributors Inc./21st Century SmokeCarlos Bengoa, Mark Hopkins, Pat Johnson
Commonwealth- AltadisMike Di Donato, Brion Gillett
General Cigar Co.Chris Rohr
Harbor Industries Inc.Mike Detenber, Craig Neuhoff
Kretek InternationalPatrick Hurd
Logic Technology Development LLCChris Colon, Miguel Martin
Nat Sherman Inc.Vic Coons
National Tobacco Co.Steve Clark
Nicotek/Metro Electronic CigaretteDavid Hoffman
NJOY Electronic CigarettesVito Maurici, Jim Presley
Republic TobaccoMark Lopofsky
S&M Brands Inc.Greg Chapman, John Greene
Scandinavian Tobacco Group-LaneGreg Hixson
Swisher InternationalMark Humphreys
Tantus TobaccoRoss Haynes, Joe Nicolaus
Vapor CoutureMark McLeod
Participants in CSP’s 2013 Tobacco Category Review Meeting,held Aug. 7-8 in Chicago:
Bloomberg Strikes Again: NATO’s Tom Briant gives an unexpected update on regulation and taxation of e-cigarettes in New York.
C S P October 2013164
dominant player in this profitable space,
especially if—or when—the FDA issues
regulations?
“With the Big Three entering, there is a
good chance that they will win, along with
several of the private companies that are in
the market today,” said Herzog. “I do think
with regulations, the barriers to entry do
increase. It increases the cost of entry. It’s
something to think about.”
Clearly, companies such as Lorillard,
Reynolds and Altria have plenty of experi-
ence dealing with both regulatory issues
and the highly competitive tobacco mar-
ket. The fact that they have ample funds
to support e-cigarette endeavors, as well
as relationships already established with
retailers, may also help solidify their slots
in the space.
However, Herzog doesn’t believe this
automatically means the e-cigarette seg-
ment will mirror that of traditional ciga-
rettes, in which Altria’s Marlboro brand
has long been the market leader.
“The market share will be different
than what it is with traditional cigarettes
today,” she said. “It’s potentially a great
opportunity for Lorillard. I think Loril-
lard’s purchase of blu was very smart.
They paid $135 million just over a year
ago, and it’s already contributing to their
bottom line.”
Meanwhile, she was surprised to see
Altria enter the market so quickly with
MarkTen. It’s possible that the move may
have had more to do with strategy than
the product itself.
“I’m not convinced [MarkTen] is
going to be their final product, but I
think it gives them a voice in this category
to have conversations with the regula-
tors,” Herzog said. “They do have a prod-
uct; they couldn’t go to the table without
that. I don’t think [MarkTen] is their
endgame. I still wouldn’t be surprised if
[Altria] bought a private company.”
The big appeal of a private e-cigarette
company comes down to a very impor-
tant factor for consumer products such
as e-cigs: brand. And though Lorillard,
Reynolds and Altria may have more
money and established relationships,
many electronic-cigarette players have
years on Big Tobacco when it comes to
brand development.
“I certainly give some of the private
companies a lot of credit for building
some strong brands already,” said Herzog.
“I think it’s ultimately very important to
have a strong brand. That will be the key
to success. This category is a consumer
product; don’t underestimate that.
“There’s still certainly plenty of room
for some of the other players we all know
of,” she continued. “It will be interesting to
see how that all shakes out.”
Pre-K Plan WarningPlayfully introduced as a true “superhero
of our industry,” NATO executive director
Briant has developed a stellar reputation
for educating tobacco retailers on state
and local tobacco regulations threaten-
ing their business. However, this year,
Briant’s cautionary tale was not local,
but national.
Briant put the spotlight on President
Obama’s pre-K expansion proposal. And
like Herzog on e-cigs, Briant is certainly
interested to see how this plan “shakes
out.”
Announced earlier this year, the initia-
tive would expand preschool education
to all low-income 4-year-olds. The $75
billion project would be funded by a 93%
increase in both the cigarette and OTP fed-
eral excise taxes. Cigarette and little-cigar
taxes would go up by 94 cents per pack,
from $1.01 to $1.95; chewing tobacco
would go up to 97 cents per pound and
moist snuff to $2.91 per pound; pipe
tobacco would go from $2.83 per pound to
Deep Breath: Kristi Prior of CSP welcomes attendees to the roundtable.
C S P October 2013166
$5.64; and RYO would be devastated,
going from $24.78 per pound to $47.82
per pound.
“These are significant increases, almost
doubling tax rates across the board,” Briant
said.
One need look no further than 2009
to glimpse how such increases could
cause significant problems for tobacco
retailers. When cigarette excise taxes were
raised by 62 cents per pack, the Federal
Trade Commission (FTC) reported that
volumes fell by 13% through 2010.
“The president almost doubling the
tax is going to have an even more sig-
nificant impact on cigarette and OTP vol-
ume,” said Briant. “It’s just an estimate,
but the increase would probably result in
more than a 13% [volume] decline across
the board.”
While most retailers are aware that
doubling excise taxes will have a definite
effect on their business, there are plenty
of aspects about Obama’s pre-K initiative
the public is not aware of.
‘What’s not widely reported is the fact
that the states have to pay a significant
percentage [of the pre-K funds],” Briant
said. “It increases every year. In years one
and two, a state needs to contribute 10%
of the federal funds they receive for this
program. By year 10, the states have to
put in three times the amount the federal
government’s putting in. And after year
10, it’s all up to the states.”
This means that if a state needs $100
million a year to cover the program, the
federal government will cover roughly
$90 million of the costs during the first
two years, with the states contributing
just $10 million a year. However, come
the 10th year, the state will be on the
hook for $75 million, with the federal
government covering only $25 million.
“The unanswered question is: Where
are the states going to find that money?”
Briant said.
And while Secretary of Education
Arne Duncan has been traveling to
Republican-governed states such as
Georgia and Michigan to try and garner
support for the program, NATO is doing
its part to make sure such governors
know the steep cost that would come
along with the proposed pre-K expan-
sion.
“We’re issuing letters saying this is not
going to work—and that states had better
take notice because they’re going to be on
the hook for significant funding going
forward,” he said.
It’s a fight that’s far from over: Most
Republican governors may like the con-
cept of expanding pre-K education, but
not if it means raising taxes to do so. Simi-
larly, House Republicans are very cool on
the idea of raising taxes again, especially
after agreeing to an earlier tax increase (on
the wealthy) earlier this year.
“This is going to be significant if it gets
any traction,” Briant said. “That’s the real
question: Will it get any traction?” n
Value Add: Don Burke of MSA shares data on the value
of the tobacco consumer to convenience stores.