Flare Up

As New York clinches lead in state cigarette excise taxes, retailers brace for full impact

Samantha Oller, Senior Editor/Fuels, CSP

ALBANY, N.Y. -- Nearly two weeks after New York grabbed the title of having the highest state excise tax in the nation, the impact has not yet fully landed, but state c-store retailers expect a scenario similar to that witnessed in Wisconsin and other states hit by hefty tax hikes. On June 3, the state of New York implemented a $1.25 hike on excise taxes, bringing the per-pack tax total to $2.75 and the average retail price over $7.

"We have seen a decrease in sales since the excise tax increase went into effect," Henry Bays, general manager for NOCO Energy Corp., Tonawanda, N.Y., told [image-nocss] CSP Daily News. While it's still too early to get a solid figure, Bays estimated that sales of packs dipped 10% to 15% during the first week, with that percentage varying by day.

"The first day it wasn't off that much, the second day it was off more," he said. "So I do feel there will be a decrease in sales that will continue for a while until…people become adjusted to the price."

With its 35 stores situated in the greater Buffalo market, NOCO competes with Native American stores for cigarette customers' business, which, combined with high gasoline prices, are just a couple factors adding a unique wrinkle to this New York story.

"Depending on the proximity [the stores] have to Native American shops, I think that the pack dropoff will lessen somewhat," Bays predicted. "I think as time goes by, there will be a decrease in packs somewhere in the single-digit range." He pointed to Wisconsin, where he learned through conversation with state retailers, a $1 increase per pack in the excise tax resulted in an initial 15% to 16% drop in sales, which has since settled to 5% to 6%.

While NOCO has a fairly robust foodservice offering and strong beverage sales to fall back on, built up under years of pressure from rising cigarette-excise taxes as well as competition with Native American retailers, other retailers in the state will likely have a rougher landing.

"As we've said all along when it first became apparent that this was under consideration, this could well be a death warrant for single-store mom and pop c-stores," said Jim Calvin, president of the New York Association of Convenience Stores (NYACS). "All c-stores in New York are going to be impacted severely—some more than others." He expects those closest to Native American tribal stores and near border states with lower excise tax rates to suffer the most.

"Many single-store operators are already teetering from various tax and regulatory decisions made by state of New York," said Calvin. "Because of the current motor-fuel environment, for those who do sell gas, a large amount of capital is tied up in inventory.… While they're making very little profit on gas, there's already a cash-flow problem for all c-stores."

And in New York City, which has the highest combined state and city tax rate in the nation at $4.25 per pack, prospects are even bleaker. "The vast majority are single-store enterprises and very small in terms of square footage," said Calvin. "They don't have a lot of options readily available as far as product categories to substitute or replace cigarettes as a driver of retail traffic, and as a sales generator, and as a source of gross profit. They have been suffering for a long time and will suffer even more. Overall, it's going to be pretty ugly."

It's still too early to fully gauge the impact of the excise tax increase on cigarette sales, Calvin said, although initial, anecdotal reports from his members cite decreases of 10% to 35% or more. "But there's no question there was an immediate drop in sales from most c-stores and that some have, as predicted, experienced a very severe drop in sales and foot traffic," he said.

Meanwhile, just over the border in Connecticut, at least one retailer is seeing an initial uptick in sales, thanks to the state's lower excise tax, still considerable at $2 per pack. Kevin Paige oversees two Butthead's Tobacco Emporium smoke shops within five miles of the New York-Connecticut border, as well as a drive-thru c-store. "We're already starting to see a migration coming into Connecticut for up to $15 in savings," he said, noting that New York customers are making a 15- to 20-mile trek for the savings. Although it's still too early to gauge the full impact of the New York tax increase on his sales, "we're mainly seeing customers come in for the cigarettes, just because that was the straw that broke the camel's back."

For his part, Bays plans to not make any drastic changes to NOCO's tobacco sets. "We're really going to stay our course," he said. "I feel that smokers will continue with their brands. Some people will buy down into the fourth-tier level to save money. From what I read and what I feel, most people who smoke one brand stay with that brand."

Other retailers—those vulnerable single-store operators—will have to buckle down yet again, seizing on the excise-tax challenge as an opportunity to hone their business. "Unless something changes, such as the governor deciding to enforce the law requiring collection on taxes on sales of cigarettes and motor fuel by Indian tribal stores to non-Indian New Yorkers.… No. 1, we will see a lot fewer c-stores," predicted Calvin. "Where we'll lose most is single-store mom and pops. No. 2, stores that survive are going to have to be leaner and meaner…in terms of being very aggressive at cost-cutting, meticulous at category management and extremely savvy when it comes to marketing and sales, product selection, and managing resources, facilities and labor. It's just going to force them to become better operators."