The Balancing Act: Premium vs. Value-Priced
The right little-cigar plan-o-gram can keep profits growing
OAKBROOK TERRACE, Ill. -- Little-cigar margins and profits are shrinking, but strong volume shows the category holds great potential for convenience store retailers who strike the right balance of premium and price/value options. Premium cigars may comprise less than 30% of little-cigar sales volume, but their profit margins can be as much as 10 times greater than value brands. (See related story “ Capitalizing on the Premium Segment.”)
The numbers support the case for a stronger focus on premium brands. Despite a sales decline of nearly 8% in the first 10 months of 2013 compared to the same period in 2012, monthly volume averages an impressive 550+ million products sold (27.5 million 20-count packs). While 70% of volume comes from price/value options, some experts assert that retailers devote adequate attention to the premium segment. Premium-priced little cigars account for more than 24% of small-cigar category unit sales, with an average of 82.3 million premium little cigars—more than 4 million 20-count packs—sold per month (Tobacco and Trade Bureau).
“Too much emphasis on lower-end value items will devalue the little-cigar category and strip away profitability,” said Lou Maiellano of TAZ Marketing & Consulting Group. “Consumers want to save money, but they also want quality products.”
According to LaRese Armstrong, brand manager-little cigars for Scandinavian Tobacco Group, premium offerings are vital in the little-cigar category “to help c-stores maintain margins and create upsell potential for existing and newly created little-cigar enthusiasts.”
The logic behind a premium strategy is clear. “Premium brands account for over 36% of all dollar sales in the category, so you can have fewer SKUs and less stock, but still maintain excellent margin,” Armstrong said. “The premium brands may have slower turns than the value options, but they remain a very viable part of the category because they bring a loyal consumer base.” She added that Winchester, the original little cigar, has the best dollar-velocity-to-turn ratio in the category, making it the most profitable brand to stock.
Joe Teller, senior manager, category management for cigar-maker Swedish Match North America, advises retailers to consider premium brands such as Al Capone Filtered Cigars and Djarum Little Cigars that often get left out of plan-o-grams because they are not owned by major cigar manufacturers. “Very few cigar manufacturers bring these premium brands up for discussion and potential placement in plan-o-grams. These brands are worth a look as they are very high priced and continue to grow,” he said.
Teller also urges retailers to understand trends in their marketplaces to ensure the most profitability. “Most retailers don’t carry the best price/value brands because they aren’t aware of regional preferences, which is vital to selling lower-end products,” he said.
“Volume may be shifting from premium little cigars to price/value products, but retailers are leaving gross profit on the table if they don’t carry the best brands in both of these segments,” Teller said.
It’s not easy, Maiellano said, but “you want to be sure you are giving premium little cigars the attention they deserve. Frequent re-evaluation of your plan-o-gram is a must.”