Food prices have come down slightly in the past year, and gasoline prices have nearly been cut in half, loosening the wallets of 60% of cigarette smokerswho make less than $40,000 annually. According to Modi, last year at this time gasoline prices were about $3.74 per gallon, and they are currently around $2.24, with the savings equating to the price of 209 packs of Marlboros or 142 tins of Copenhagen per year.
Modi also addressed the big question on most tobacco retailers' minds, how the federal excise tax (FET) increase will impact the industry. Based on historical price elasticity calculations, he said that he expects the tobacco industry to decline 8% to 10%, which would roughly be 4% to 6% worse than the normal trend rate of decline. After the next 12 months, Modi expects industry decline rates to return more or less to normalized levels, however.
Premium cigarette brands will likely be "less affected," since price gaps between premium and discount would narrow. This is particularly true as state excise taxes increase. A state excise tax of up to 50 cents means a price gap between premium and discount of 51.9%, but a $1.50 state tax narrows that substantially to 27%, which could lift the premium market share to as much as 94%.
Modi also said that lowerfuel prices actually would be a full offset to the FET increase, with savings from year-to-yeargasolineprice changes averaging $818while the annual FET cost difference for a 10-pack-a-week smoker is $474.
"You can see the lower-income consumer has about $400 in incremental money in their pocket," Modi said. "And that's why I actually believe the category is going to be a lot more resilient to the recent round of pricing increases than what you may have seen in some prior economic cycle, or when the MSA [the 1998 Master Settlement Agreement] went through or when you had previous large shocks of excise taxes, such as in 2002 and 2003 at the state level."
The FET could also mean "the mother of all tipping points in terms of cross-category consumption" for moist snuff tobacco (MST), according to Modi. In comparing Copenhagen moist snuff to Marlboro cigarettes, the price difference before FET was $28.18 between a 3.5-can-per-week dipper ($15.12) and a 10-pack smoker ($43.30).
With the onset of the FET, and Altria's 62-cent premium MST price promotion, the difference is $36.55 per week. "We do have 30% of dippers that also smoke, and I would reckon that those 30% will likely up their MST use versus cigarettes," Modi said.
The FET could have the most "game-changing" impact on the roll-your-own (RYO) category, however. Prior to FET, RYO tax per pack was 5 cents, but it increased 2,122% when it jumped to $1. Cigarette taxes jumped 156% to the $1 tax, narrowing the price gap between a pack of Marlboros and a pack of RYO cigarettes from 117% to 54%. "While I still think roll your own will be a very good growth category, I think that the growth rate will certainly be more tepid as consumers decide that they want to go back to the ready-made cigarettes."
Another foremost concern for retailers is the effect of the consolidation of tobacco companies. And the message from Joe Teller, director of category management for Richmond, Va.-based Swedish Match (sponsors of the CyberConference) was clear: Retailers should maintain control of their other tobacco product (OTP) category.
Teller began his presentation by painting a rosy picture for OTP. The category continues to be the fastest-growing in dollar sales (up 11.9% in the NACS State of the Industry Survey of 2008, powered by CSX) and profit (up 17.1%). And OTP shoppers visit c-stores twice as often as the average c-store shopper. "If everybody continues to focus on the needs of the OTP shopper, I think there's going to be plenty of opportunities to do what this category does better than any other categoryand that's drive growth and profit to the retail trade," Teller said.
He cautioned, however, that cigarette companies entering the foraywith Altria Group Inc.'s purchase of UST Inc. earlier this year and Reynolds American Inc. purchasing Conwood Co. in 2006 and selling Camel Snuscould be a game changer.
"These companies are used to doing whatever they can do to manage their brand share in the declining cigarette business," he said. "The last thing anybody wants to see is the OTP category turn into some version of cigarettes." Cigarette sales were up 2.4% in dollar sales, but down 6.1% in profits, according to the NACS survey. And cigarette margins fell from 20.8% in 2003 to 15.4% in 2008.
Meanwhile, OTP margins increased from 23.1% in 2003 to 31.2% in 2008with one particularly bright spot being snuff. Teller said he expects that "crown jewel of the convenience industry" to continue to be the fastest-growing category in the store. While growth rates in can sales continued to be in the double digits for portion pouch (21.8%) and low price loose (10.8%), according to ACNielsen numbers. However, the decline of premium loose snuff (-4.2%) has held overall category growth down.
"The problem is that it's the only declining part of the category and the retail trade is being asked to make less and less penny profit from it as the years go by. I'm not sure that makes sense," Teller said. "It's a declining business with some serious risk that it may not come back."
He added, "If you're being asked to contract your premium margins, even lower than what they used to be, I think all bets are off and I think you're taking an enormous risk."
He said tobacco contracts could mean giving up some control, in addition to losing the penny profits.
"When the economy is in bad shape, and we need to find profit growth wherever we canlike in the fastest-growing category in the storeit doesn't make sense to let somebody else that doesn't have your best interests at heart take control," Teller said. He offered up a suggestion of bringing up the price on premium by 10 cents instead of participating in a retail program, "and that's your rebate, and you get to call the shots on what happens." He added, "I think there's a lot at stake on this. Take your premium price up 10 cents, and you don't have to lose control."
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