Is This the End of Tobacco in C-Stores?

Tight margins, flat sales a challenge for the category

Tobacco and money

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It began with CVS. In September 2014, the chain announced it would stop selling cigarettes and other tobacco products at its stores, making it the first major pharmacy chain to do so. “Ending the sale of cigarettes and tobacco products at CVS/pharmacy is the right thing for us to do for our customers and our company to help people on their path to better health,” said Larry Merlo, president and CEO of CVS Health, in a statement at the time. “Put simply, the sale of tobacco products is inconsistent with our purpose.”

Around the same time, quietly, Costco began phasing out tobacco inventories in some of its U.S. locations, dropping from 488 to 189 stores. Attributing the change to dropping profit margins, more valuable retail real estate and increased labor, Costco began consolidating tobacco products in its Business Centers, which are tailored for local businesses and not the public at large. The chain estimated that tobacco sales as a percentage of its total business is a single-digit percentage.

Why has tobacco become such an unappealing category? Increased risk of theft, a multitude of brands, stale merchandise, labor pains, regulatory issues, rebate difficulties—the list of reasons why tobacco is a difficult inventory category to manage can go on and on and on. Retailers can be left wondering if it’s worth it, especially with continuing flat sales and a smaller customer base.

In addition to an already tight margin and flat sales, retailers now have to contend with the deluge of e-cigarettes and vaping products. What were once heralded as the savior of the tobacco industry have proven a confusing drain on an already diminishing demographic. 2015 saw a dramatic rise in sales in the vaping industry, only to result in a significant drop by year end and into 2016. This, coupled with the almost endless array of vaping delivery systems and flavor options, has pushed some retailers into inventory gluts and stale merchandise.

Are convenience-store retailers on the same path to tobacco abandonment as CVS and Costco? It’s a tantalizing thought for some. The FDA, state and local municipalities and advocacy groups are already heaping pressure on smokers with public bans, graphic warning labels and additional taxes. Public perception regarding tobacco continually pushes toward the negative. Costs per pack are higher than ever. Rebates, inventory management and resource allotment can seem ineffective. Are the tight margins worth the work?

A year after CVS stopped selling cigarettes, a new report emerged. CVS released data showing how much the tobacco ban affected the company. Although prescription sales continued to rise, general-merchandise sales tumbled nearly 8%, according to CNN Money, and the company attributed the slump to the tobacco ban.

At NACS State of the Industry every year, the prevailing wisdom is to move away from tobacco and into more lucrative, profit-margin rich areas such as foodservice. Foodservice accounted for 20.8% of in-store dollars, and 33.7% of gross profit dollars in 2015. In contrast, tobacco products contributed 35.9% of in-store dollars, though only 16.8% of gross profit dollars.

What does this mean to convenience-store retailers? Much like fuel, tobacco sales are a driving factor in customer traffic and loyalty. Those same customers who may have come in for cigarettes after a fill-up are more likely to spend additional dollars on food, snacks and alcohol sales.

By looking at tobacco inventory smartly, using tools to manage it efficiently and making informed decisions, retailers not only stand to make the most from their tobacco margins, but they can also solidify their tobacco customers’ loyalty. And with a percentage of other retailers exiting the tobacco market, that market share is available for consumption. It’s no coincidence at the same time that Costco and CVS began pulling out of tobacco sales, Dollar Tree and Dollar General both started selling cigarettes—and reaping the discretionary dollars of those customers.