Tobacco Back Bar Optimization Shuffle

With subcategory growth, what will be phased in, what will be phased out?

Samantha Oller, Senior Editor/Fuels, CSP

Joe Teller

NEW YORK-- When it comes to growth opportunities in tobacco, remember this mantra: The trend is your friend. That was the message of the recent CSP Tobacco Update Webinar, during which presenters shared a status report on the latest developments in cigarettes, electronic cigarettes and other tobacco products (OTP).

Much of the webinar focused on the explosive growth of e-cigarettes, and what impact potential FDA regulation might have on the category. It also calls into question how e-cigarettes will get phased into the back bar, and what will come out.

Nik Modi, tobacco analyst for UBS, New York, noted there is plenty of opportunity for more consolidation between the many e-cigarette brands, and that low-performing cigarette SKUs may be pulled to make space.

"It should come from cigarettes," concurred Joe Teller, co-presenter and director of category management at Swedish Match North America Inc., Richmond, Va., manufacturer of Longhorn moist snuff, White Owl cigars, Red Man chewing tobacco and General snus. "For every one of these e-cigarettes sold, it's the equivalent of one to two packs of cigarettes. It is cigarette smokers who are buying these, and everybody agrees this will be some type of wholesale shift from smokers of regular cigarettes to e-cigarettes."

To continue this discussion of category management, Teller shared a few tips on optimizing the tobacco set. While he focused specifically on cigars in his examples, the exec noted these best practices work regardless the category.

"Whether you're talking about space expansion or redoing current assortments, it doesn't matter--it's the same thought process," said Teller. He advises retailers to examine the following areas:

  • Overall market trends. "You've got to get a feeling for what's growing and what's declining," said Teller. "This will help you figure out where not to add items, and how to beef up your assortment, taking local market trends into account." For example, in cigars, the stick volume and share of volume of natural leaf and unflavored have expanded, as manufacturers put their focus on these segments in anticipation of potential FDA action against flavored cigars.

"It doesn't mean pipe and flavored are down in stick volume," he said. "It just means they've given share as something else becomes bigger in the category."

Teller expects the FDA's pending decision on menthol-flavored cigarettes will point to the fate of flavored cigars. "If they will continue to be allowed, then I wouldn't worry too much about wintergreen and mint smokeless tobacco; probably wouldn't worry too much about sweet cigars," he said. Fruit flavors, however, would be at risk of going away--a development that Teller predicts will happen.

"If fruit flavors do get banned, there will still be a lot of good options," he said. "I don't think it is going to affect category stick volume at all. But manufacturers and retailers just have to be ready for when this happens."

  • Market coverage and fragmentation. Market coverage--or the percentage of market, category or segment sales accounted for by items in a set--is also a way to measure shopper satisfaction. "Generally you want to see if you can increase market coverage if you have space to include the items, assuming there's growth in the segment you're talking about," he said. Fragmentation describes the number of items required to hit a certain market coverage percentage.

"Natural leaf and flavored are highly fragmented--there's so much growth, new items in natural leaf; flavored cigars have so many new flavors," said Teller. "Unflavored and pipe are much less fragmented, and it takes fewer to hit 80% market coverage." Sweet is the least fragmented segment. By package types, foil pouches and single sticks are highly fragmented.

  • Sources of growth and volume. "You want to fish where the fish are," said Teller. "We want to add items to segments showing growth for you, and cut back in segments you're seeing a decline."

For example, growth in two segments--sweet and flavored--is all coming from foil pouches. Here, Teller recommends keeping a few legacy packs, core singles and represent the best options for foil pouches and sweet flavored. Natural leaf is showing growth in single sticks and foil pouches, so carry the top brands in both pouches and sticks.