Three Months into SCHIP
CSP-UBS convenience store survey unveils category's winners, losers
[This is the first story in a three-part series analyzing the effect this spring's federal-excise-tax hike has had on tobacco retailing thus far. Watch for more in CSP Daily News this week.] OAK BROOK, Ill. -- "We have seen an increase in pack sales, and this is related to higher pack prices from our competitors."
"Customers have traded down to lesser price points."
"Middle price brands are losing share to lower price more so than higher price brands.
"Consumers moving either to premium or fourth-tier brands."
"Roller-coaster-ride premiums [image-nocss] down just over 10% for the first 10 weeks, now back up 8%."
Retailers have spoken.
Three months have passed since the tobacco manufacturing and retailing communities were rocked with an unprecedented across-the-board tax hike to finance a national children's health insurance program.
With the federal excise tax spike of April, a maze of speculation centered on the long-term viability of roll-your-own products, some cigar lines, mid-tier cigarettes and the affordability of cigarette cartons and higher-count other tobacco products (OTP). [ Click here to read CSP magazine's coverage.]
As reflected in the quotes above, retailers continue to sell cigarettes, moist smokeless tobacco and cigars. The tobacco category has taken a hit, and some brands are bent over from a rugged body shot. But the tobacco industry is alive and well, thank you, and convenience-store retailers, though down in total volume, remain unbowed over their rightful seat as the nation's tobacco merchant.
In an exclusive report by CSP Daily News and UBS Tobacco Analyst Nik Modithe first significant survey to study the FET's effect on the c-store channelseveral critical findings are emerging: 90% of survey respondents say cigarette trends have performed in line or better than expected. That said, there have been certain shifts: Premium and fourth-tier brands continue to hold their stakes, while the mid-tiersegment has lost important market share. Retailers are scaling back inventory due to the higher costs. More than one-third of those retailers surveyed said they have reduced shelf space for cigarettes. "What we're seeing is that the traditional price-to-volume relationship has held up," Modi said. "Over the past few decades, the price-to-volume relationship has been about -0.3x for cigarettes. That means for every 10% increase in price, volumes fall by only 3%. Based on feedback from the industry and a look at recent scanner data, it seems that nothing has really changed."
Looking at who's gaining and hurting from the FET, Modi said the answers are clear: "Lorillard is by and far the clearest winner among the Big Three (via share gains).
"The segment really taking a hit is the middle tier, where Reynolds American has a big chunk of its cigarette portfolio" Modi continued. "With that being said, they are seeing some good growth on their Pall Mall brand due to a 'pulse promotion' that ran for much of the June quarter."
The survey included 10 questions examining how the convenience channel specifically is responding to the FET increase and what effect the tax has levied on the channel.
Responding were more than 50 chains, operating upwards of 20,000 convenience stores and representing a cross-section in size and demographic and featuring many of the industry's biggest outfits.
Remarkably, while volume appears to be down between 5% and 10%, retailers remain optimistic about the short- and long-term prospects of their No. 1 in-store category. Underscoring this spirit is the natural resilience of the c-store channel and also the run-up time that enabled retailers to eliminate slow-selling SKUs and recalibrate inventory to avoid the one-time floor tax.
Weeks before the FET increase of April 1, retailers told CSP Daily News of plans to scale back cartons, push promotions and drive discount brands, as well as OTP.
True to form, many are seeing the successes.
"Our sales and dollar profits are showing good increases due to changes we have made," one survey respondent wrote.
"Some [consumers]," another retailer said, "have traded down to a lower priced alternative, but most have returned to their original product. Others have cut back on how much tobacco they use."
Tomorrow, CSP and Nik Modi examine the effectiveness of Altria's discounts on Skoal and Copenhagen. Modi will deliver a complete report of the survey at the sixth annual CSP Tobacco Category Review Meeting, August 5-6. Space is limited. Click here to learn more.