The Pace of OTP

High visit frequency and large basket size emphasize importance of snuff, cigars

NEW YORK -- If nothing else, the importance of the other-tobacco-products category got a healthy shot in the arm last week when Reynolds American Inc. announced its acquisition of smokeless-tobacco company Conwood. And that importance came through loud and clear on CSPNetwork's How's Your OTP Business? CyberConference.

Historically, the OTP category has been grossly underappreciated in my opinion, but not anymore, said Zane Power, category manager for ConocoPhillips, Houston. Today, it's vital to maximizing your store profitability. [To view an OnDemand [image-nocss] replay of the CyberConference, including Power's Six Steps to Grow OTP, click here.]

Power's opinion was supported by ACNielsen and NACS data that shows OTP is the No. 4 category in convenience stores in terms of dollar sales and has the second-highest growth rate. In the moist-snuff segment, which makes up almost 63% of the category, most of the growth is coming from the low-price subcategory.

While the [moist-snuff] category as a whole is up about 8% overall, the low-price segment within that is up nearly 50%, said Mary Willis, senior manager of ACNielsen, Chicago, and portion-pouch is the other segment that is seeing growth. So while premium is the biggest segment at about two-thirds of the volume, the growth is coming almost exclusively from low-price. Low-price makes up 92% of the actual growth, with the portion-pouch making up about 8% of the growth. What's driving that is an increase in the level of good quality in low-price alternatives. The quality has really improved over time.

Similarly in cigars, two segments are driving most of that category's growth, according to Willis. Cigars overall are up 14%, she said. The segments with the largest growth are the natural-leaf segment, up 23% vs. a year ago, and the flavor segment, which is up 24%.

While that growth certainly is important to Power, who dedicates about 4 linear feet of wall space to OTP, he's even more excited by the prospect of drawing more loyal OTP customers into his stores.

The OTP consumer keeps coming back and keeps coming back again and again to my store, he said. He's loyal to our store because he knows that we have his product. But don't take him for granted because he's more loyal to his product than he is to you or your store. If you let him down and you don't meet his needs, he may go look somewhere else.

OTP customers visit c-stores 13.0 times per month, according to data from The NPD Group, Houston. That's more often than any other category buyer and twice as often as the average customer, who visits a c-store 6.4 times per month.

And, Power said, that customer is spending more per visit. The OTP snuff user or cigar user is usually buying a multitude of other items in the store, he said. He's getting something to drink. He's getting something to eat. The market basket isn't just the total of the [tobacco] item itself, like beer is.

OTP customers have the sixth-highest basket size, at $9.31, of all c-store category buyers, according to The NPD Group. That amount is more than $2 higher than the average c-store market basket ($7.05).

With an OTP customer, they're usually buying something else, Power said. And because they're in my stores as frequently as they are, I'm making a lot of money each time they come in.

Tobacco stock analyst Bonnie Herzog of Citigroup will discuss the recent changes in the industry landscape during a Tobacco Update CSPNetwork CyberConference on Tuesday, May 16. Click here to register.