A Natural OTP Opportunity

Consumer demand grows for high-margin premium OTP options

natural products

Brought to you by Inter-Continental Trading Co.

In recent years, buzzwords such as “clean,” “local” and “craft” have risen to prominence in a number of convenience-store categories. Consumers have repeatedly demonstrated that they’re willing to spend money on more premium and natural products, as shown by booming craft-beer sales and an increased interest in locally sourced food.

Tobacco is no exception. Nielsen data shows superpremium cigarettes have enjoyed double-digit growth in units and dollar sales over the past year.

According to Tom Burns, a sales and marketing executive for Inter-Continental Trading Co., Mount Prospect, Ill., the phenomenon is not limited to cigarettes. It’s occurring in OTP as well.

“It would seem that tobacco and healthy are polar opposites,” he said. “(But) tobacco is absolutely one of those categories where customers see ‘premium,’ see ‘all-natural,’ and that grabs their attention.”

Though the trend is admittedly being driven by younger millennials, these natural OTP offerings are grabbing the attention of consumers across the board. Ben Reinhart, vice president of merchandising for Seymour, Ind.-based Kocolene Development Corp., says his smoke-shop customers aren’t the stereotypical demographic for superpremium OTP. However, he says, “Even though the demand is minimal, it is growing.”

Lower prices at the pump and an improving job market likely are contributing to that demand.

“There’s a little extra money in people’s pockets because of that,” Burns said. “Trends show that, when gas prices come down, consumers will go for more premium products.”

To address this trend, there’s a number of “craft” manufacturers popping up throughout tobacco, as well as established companies producing more natural premium product lines. Inter-Continental, for example, is offering a preservative and additive-free line of premium pipe tobacco and filtered cigars, OHM Au Naturalle.

“That’s the key: taking a product and making it with better ingredients, better manufacturing processes,” Burns said of the company’s OHM Au Naturalle line. “People gravitate toward that cleaner label.”

The Case at Retail

As to the retail benefits of investing in superpremium OTP products, Reinhart said it’s simple: “They provide higher rings and higher margins.”

While varying state and local excise taxes make it difficult to pin an exact figure on the margins superpremium pipe tobacco and cigars offer retailers, Burns said the retail price on such products tends to be several dollars higher than nonpremium options.

“It is significant,” he said. “With a premium line, consumers expect to pay more, which means you can build in a higher margin.”

The segment, however, is not without its challenges. As with any segment not called “cigarettes,” those challenges boil down to space and education.

“There’s a challenge in finding space because you’re committing to a premium filtered cigar that doesn’t have the market size that cigarettes have,” Burns said of the spatial limitations.

Manufacturers can help justify the space by offering coupons and promotions to help attract new customers to the segment, Reinhart said.

“This lets the consumer try the product before making the decision to pay more for it,” he said.

In terms of education, the challenge with premium natural pipe tobacco and cigars in convenience is that these products, as Burns put it, require “a bit of salesmanship” with consumers.

“If a customer is going to pay more for a premium product, he or she wants to understand the benefits that make that product worth it,” Reinhart said.

As such, Burns said “probably the biggest thing” Inter-Continental can offer is ongoing education for both consumers and retailers, “from the person behind the counter all the way up through management.”

For all its challenges, perhaps the biggest case for superpremium OTP is that demand will almost certainly continue to grow—especially as the economy continues to recover and health-conscious millennials become higher earners.

“This has been trending for years,” Burns said. “[Consumers] certainly aim for healthy and good for you. If you can have products that are more natural, more premium, that’s an easy path.”