Cigars, MST & E-Cigs for 2012?

Modi, Teller make their predictions in exclusive CSP webinar (Part I)

Melissa Vonder Haar, Freelance Writer

Nik Modi (left), Joe Teller

OAK BROOK, Ill. -- It may not be a sea-change, but retailers are buying into the need to reassess their cigarette-dominated back bar.

"A lot of retailers have already made the wholesale changes to take two square feet of space away from cigarettes and allocate it to OTP or snuff," said Joe Teller, who suggested most convenience stores should be aiming at a 70:30 ratio of cigarettes to other tobacco products within the next two years.

Teller, director of category management for Swedish Match, joined UBS senior tobacco analyst Nik Modi in the Tobacco Update CSPNetwork CyberConference on Wednesday.

[To view an OnDemand replay of this CyberConference, please click here (free to retailers and wholesalers; others, $49).]

For his part, Modi has long predicted that cigarettes could account for less than 50% of the overall category by 2020. "I think it's beneficial to be ahead of the curve," Modi advised.

With cigarette sales declining at an annual 3% to 4% clip, it may no longer be realistic or profitable to dedicate 80% of category space to cigarettes.  For certain, cigarettes remain the lifeblood of a tobacco set, but Teller and Modi cited promising numbers to support an investigation into alternative tobacco offerings.

"I think we're going to have a pretty strong year in MST and cigars," predicted Teller, who projected 4% stick growth in the next 12 months for cigars and 7% to 8% in MST can growth.

For cigars, the numbers are a little confusing: packs and large sticks saw double digit losses in both sales and volume between this year and last, and although single stick volume is up 13% from last year, their dollar sales only increased by 4.3%.

"Stick volume is growing very quickly for single cigars," Teller explained. "The dollars aren't quite there because of extreme competition."

That competition has intensified in part due to the introduction of two and three stick foil pouches. While foil pouches have become the norm, Teller suggested there's a market for both foil packs and single sticks and sees an opportunity for growth by carrying both options in key products.

"I'm projecting a return to growth for cigars," Teller said, summing up the category.  "The trends have gotten progressively better for each month going back to October of last year."

Although the numbers have been consistently strong for MST, Teller predicted there's even more to get excited about based on impressive increases in sales:  while premium loose sales fell 5.8% between 2010 and 2011, those losses were more than covered by whopping gains in low price loose and portion pouches, whose sales increased by 13.4 and 26.8% respectively.

"It's been pretty much nothing but consistent growth," Teller said. "That's what this category does."

E-Cig Opps

Just as smokeless has experienced consistent growth since the Big Three tobacco companies invested in the category, Modi suggested e-cigarettes could see the same kind of boom now that Lorillard has acquired blu ecigs.

"Smokeless increased because the majors got involved," said Modi. "It happened with energy drinks category as well--when Coke and Pepsi entered, it helped the category."

Modi highlighted several selling points for e-cigs: they're economical (pack a day smokers could save an average of $1,200 annually), environmentally-friendly (while worldwide cigarette smokers throw out 4.5 million toxic cigarette butts a year, most e-cigs can be easily recycled), employer-friendly (cigarette smokers will spend an average of 64 minutes a day on breaks), and present a modified risk (e-cigarettes contain around five ingredients compared to the more than 7,000 chemicals in cigarettes).

E-cigs remains in its infancy, but Modi sees great potential for growth, especially with Lorillard in the game.  "In the end, these e-cig companies don't have much legislative clout," he said. "I think it's going to be a good thing for the entire category."

Whether it's e-cigarettes, cigars, MST or other products, both Modi and Teller predict that in 2012, OTP will be a growing player in the tobacco category.

[Read in tomorrow's CSP Daily News and Tobacco E-News what Modi and Teller have to say about hot-button legislative issues and other key tobacco items.]