It's All About Choices

Selling tobacco products can still be profitable, but retailers have to stay ahead of changing consumer preferences.

It used to be that tobacco sales were just about cigarettes, cigars and smokeless chews — not so anymore.

For today's consumer and retailer alike, tobacco is all about choices. Consumers crave more choices in terms of product alternatives, and retailers are making more choices as to the types of products that they carry, how to merchandise them and even if they choose to sell tobacco products at all.

Any discussion of tobacco sales in supermarkets has to start from the premise that the category isn't right for every retailer.

Over the past two decades, many supermarket operators have chosen to leave the category. Whether due to merchandising restrictions, age verification hassles, excessive shrink, moral grounds or extra labor costs, a significant group of operators has made the choice to forfeit what was and remains a potentially profitable category.

"It's no secret that the tobacco category has played a less significant role with supermarkets, and it would be difficult to tell any chain that they need to promote tobacco without understanding their entire business, including their objectives, strategies and tactics," admits Dave Savoca, president of Grand Rapids, Mich.-based Smokey Mountain Chew Inc. "However, the tobacco category brings in a loyal consumer and delivers high-margin products. Some supermarkets are doing a good job, and some are obviously not making tobacco a priority category. With self-serve restrictions in place, and merchandising and visibility issues to combat, the landscape has changed."

Trying to get a handle on the direction of tobacco sales, especially cigarettes, is somewhat difficult because sales dollars don't necessarily accurately depict what's going on. Because of changing federal taxes on tobacco products — which have seen a wide range of fluctuating increases of between 32 percent and 700 percent since 2009, depending on the product — what appears as a strong gain in dollar sales can actually reflect shrinking volume sales and real profits.

The scenario brings to mind a vintage cigarette ad of days gone by, which coyly asked, "Smoking more but enjoying less?" Today, the industry could pose a similar thought to retailers: "Selling more but making less?"

U.S. cigarette sales are on the decline, as they are in many developed countries. London-based Euromonitor International predicts that U.S. cigarette sales will slide about 1.3 percent in volume through 2016. As a result, operators choosing to sell tobacco products are looking to include alternatives to traditional-brand cigarettes in their product mix.

Consumers, too, are looking for more options, including budget-friendlier cigarettes, cigars (there are a growing variety of cigar products), smokeless products and even tobacco-free products.

"Essentially, it gets back to satisfying the needs of the adult tobacco consumer," Savoca says. "Chains that can offer a breadth of fresh rotated product, visibility, fair pricing, ease of purchase, and featured promotions can create both impulse and long-term consumers."

Not Just Blowing Smoke

Whether to save money or for health reasons, a growing number of smokers are looking for other methods besides traditional cigarettes to indulge their habit. Smokeless tobacco products are rising to the occasion as popular alternatives. The FDA has begun a review process aimed at ruling whether certain tobacco products, including smokeless products, can be designated as "reduced risk," since many of the harmful cancer-causing substances associated with smoking are found in the actual smoke.

The FDA review process is expected to be lengthy and quite controversial. Ultimately, these reduced- or moderated-risk products could be used by consumers to replace cigarettes, making them the growth products of the future.

Be that as it may, smokeless products account for about $1.3 billion globally and are expected to climb at about 4 percent a year, according to New York-based MarketLine. Smokeless products have gained in popularity both in the United States and around the world, especially in Europe. While European smokeless users prefer the Swedish variety (nasal snuff), Americans prefer to chew their smokeless tobacco, using either loose leaves or pouches (or the occasional plug).

Brands such as Pittsburgh-based U.S. Smokeless Tobacco Co.'s Skoal have been leading the smokeless resurgence for many years, but now are battling mainstream cigarette manufacturers that have jumped into the arena. Brand extensions of popular cigarette icons, such as Marlboro and Winston, have joined the smokeless displays.

For those consumers looking to reduce the risks of tobacco even more, a crop of new smokeless and even tobacco-free products has hit store shelves. One such product is the electronic cigarette. E-cigs mimic the look and feel of the genuine article and produce smoke that's harmless water vapor.

Other tobacco-free products that are more attuned to and amenable to merchandising in supermarkets are tobacco-free chews. "Smokey Mountain products are tobacco-free and nicotine-free, so there are no merchandising restrictions," Savoca says. "However, we appeal to adult smokeless tobacco consumers who are looking for a tobacco-free alternative, so a visible and accessible display near the tobacco set is an ideal placement."

Smokey Mountain's line of products is the No. 1-selling tobacco-free brand; its sales through the grocery channel were up 12 percent last year, according to Savoca. The company is currently featuring its new Straight flavor, which it says is doing very well at retail, alongside its best-selling Wintergreen flavor.

Rolling On

One segment that has also benefited from the search for a cigarette alternative is that of cigars, which have enjoyed a certain cachet for the past decade or so, with hand-rolled brands and cigar lounges becoming part of popular culture. For retailers that merchandise cigars aggressively, sales have increased substantially. According to PG sister publication Convenience Store News, cigar sales went up more than 24 percent through c-stores in 2009 (this included a sizable jump in the federal tax as well).

The cigar category can be divided into two segments: machine-made cigars, which often contain non-tobacco ingredients, and premium (typically handmade) cigars, made with all-natural tobacco. While the premium segment gets all of the publicity and the glitzy magazine articles as being a lifestyle statement, the truth is that the vast majority of cigar sales — about 95 percent — are of the mass-produced variety. This is especially true of the sales generated by mainstream retailers, including c-stores and supermarkets.

There have been two significant changes in the cigar market in the past couple of years. First is the growth of flavored varieties and little cigars. Flavored cigars were among the most popular products in the segment with consumers. In 2009, the FDA banned flavored cigars primarily because of their appeal to young and underage smokers. Sales that would have gone to flavored products migrated to larger regular cigars and to filtered products, where the flavor was contained in the filter.

Another change in the cigar market was the increase in the rate of taxation of smaller cigars, which often appealed to smokers who were migrating from cigarettes. These products were among the most successful in the cigar segment for supermarkets, due to their being easier to merchandise, as well as the ability to exert better control over packaging. Changes in the rate of taxation based on the percentage of tobacco increased the federal tax substantially in 2009, which led to large price increases forcing many consumers and some manufacturers out of the market. Again, many consumers switched to larger cigars.

The better-selling parts of the cigar segment for supermarkets include foil-packed products that package one or two cigars together in a foil wrapper. The foil keeps the products fresh, and consumers seem to prefer the smaller quantity as opposed to 5-packs, which are more expensive. Premium cigars, while still relatively small sellers in supermarkets, are becoming more popular in stores that have the shopper demographic to support the products.

Currently, most retailers merchandise tobacco products at or near the courtesy counter, where they can be supervised more closely. This has limited visibility somewhat, because many of the tobacco products are actually not only behind the counter, but also below eye level.

"As tobacco became less important to supermarkets, the sections became less visible and less accessible," Savoca says. "The supermarket chains that do best are those that have a dedicated and manned counter, which creates ease of purchase. Also, the section should be visible and stock an array of fresh product that is desirable to the regional tastes and trends within that given market area."

"Some supermarkets are doing a good job, and some are obviously not making tobacco a priority category. With self-serve restrictions in place, and merchandising and visibility issues to combat, the landscape has changed."

—Dave Savoca, Smokey Mountain Chew

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