The Natural Cigar Advantage
Swedish Match's Joe Teller breaks down the growing natural leaf business
NEW YORK --It's not an easy time to be in the tobacco business, especially as a convenience store operator. Cigarette sales, both units and dollar, are declining, dollar stores are aggressively going after what little bit of the cigarette business remains, the black market is only growing as state and federal taxes rise and even electronic cigarettes--the great growth story of recent years--took a turn for the worse during the latter months of 2013.
Swedish Match's category management director Joe Teller certainly understands and sympathizes the challenges facing retailers in the tobacco business.
"It's still the Wild West in this business and it's even crazier than it's ever been," he said during Tuesday's Swedish Match-sponsored CSP Tobacco Update webinar. "There are pressures c-store operators are dealing with."
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But Teller wasn't examining these woes just to bring down retailers and wholesalers attending the event.
"I bring all this up only as an opportunity to think about one of the good old standbys of OTP: the regular cigar category," Teller said. "It's an area that's kicking out a lot of growth right now. It's a small, but important opportunity."
The Nielsen data shows that cigar units and sticks have been enjoying steady monthly growth over the past two years: as of March 2014, both units and stick sales of non-little cigars sales were up nearly 12% in large c-store chains.
"It's been gangbusters in cigars," Teller said, noting that the segment is not without its challenges. "There's more new players than ever, making it a complicated business. Dollar sales are a little harder to come by because of the price competition."
The price competition is especially steep in the homogenized tobacco leaf (HTL) cigar business. While HTL cigars have typically dominated c-store sales, a flood of manufacturers and products has forced a race-to-the-bottom in terms of pricing and also made the segment increasingly challenging to manage.
"There's no end to the HTL brands that are out there, which makes it a more difficult business for c-store operators because it's so fragmented across all these brands and products," said Teller. "There's a lot to manage, yet the price point keeps going lower and lower."
The same cannot be said of a smaller, but growing, area of the cigar business.
"One interesting way for retailers to attack this is with natural leaf cigars," Teller suggested.
While natural leaf cigars are machine-made, and thus relatively inexpensive to make like HTL cigars, they are wrapped in an actual tobacco leaf. This requires actual human beings that to smooth out the wrappers and verify the quality, giving the products a more premium look that Teller said appeals to image-conscious young adults.
"There's a premium feel to natural leaf that HTL doesn't have," he said. "This makes natural leaf products a little more impervious to all the deep discounts going on in the HTL world."
The prominence of foil pouches has also boosted natural leaf sales: while Teller said that Swedish Match did will with natural leaf single sticks, it was when the company moved to pouches that their natural leaf business "exploded."
"There is definitely consumer demand for these products and consumers want the foil pouch," Teller said, citing Nielsen data that showed natural leaf pouch volume growing by more than 150% in large c-store chains in April 2014. "The faster a retailer can transition to natural leaf foil pouches, the faster they're going to get this growth."
Even better? Unlike HTL cigars, only a few manufacturers are in the natural leaf business, making it significantly easier for retailers to control.
"Because of the preference and perceived premium nature of a cigar, they are a little bit less affected than all the (price) craziness going on with HTL," Teller surmised. "Furthermore, there aren't that many natural leaf brands: two thirds of the natural leaf volume is concentrated from the top two brands. This sub-segment is easier to manage, with fewer brands and fewer flavors."