Is Tobacco Recession Proof?
Smoke, smokeless sales continue strong track despite economic challenges
NEW YORK -- Despite predicting that a U.S. recession could last beyond the third quarter of 2009, analyst Nik Modi said tobacco remains "economy resilient"-if not economy resistant. During a presentation at CSPNetwork's Tobacco Update CyberConference, Modi, senior tobacco analyst at New York City-based UBS Investment Research, said that tobacco has held up "extraordinarily well," despite unemployment rates that have been at their highest since the recession in the early '90s and consumer confidence that reached a 20-year low this year. [To view an OnDemand replay of this cyberconference, [image-nocss] pleaseclick here (free to retailers and wholesalers; $49 for others).]
He pointed out that although tobacco has seen some decline, it is outperforming other staples (such as beverages, food, cleaning products, beauty and personal care), and its decline rate has slipped merely from 2.7% in September 2007 to a 2.4% decline in September 2008. Modi added that with gas prices continuing to fall, the tobacco category "is a good place to be" from an in-store perspective.
One driver for the resilience? "We can't forget the fact that the tobacco consumer is extremely loyal to the category," he said.
Modi also examined year-on-year cigarette shipments, attributing a 7.9% decline in fourth quarter 2007 to the "credit crunch starting to roost" and wholesalers lightening up on inventory load. He attributed a 3.4% drop in first quarter 2008 to bans on indoor smoking, combined with wet and cold weather. He said that overall, however, cigarette shipments have been stable recently-and improving on a 2-year average basis.
But the news wasn't all positive for cigarettes. Modi predicted that a federal excise tax increase was a foregone conclusion. "The question is when and how much," he said, adding that it was likely to be seen by the end of March 2009. He said that the mid-priced segment would likely be hardest hit, since as the price gaps narrow on a percentage basis, consumers tend to trade up or trade down.
Another opportunity for c-store retailers could come from consumers migrating to other tobacco products (OTP)-with 2009 potentially being a "breakout" year for smokeless growth. According to Modi, the smokeless category continued to show accelerated growth in 2008-with moist smokeless tobacco up 8.2% year-to-date and, as importantly, both premium and nonpremium segments are excelling.
"When the retail community and the supplier community and the wholesale and manufacturer community all focus on driving a particular area or segment, it typically leads to acceleration," he said.
He further attributed smokeless success to increased smoking bans, rising stigma tied to smoking and particularly the rising cost of cigarettes due to taxes.
Conversely, the smokeless tobacco category has actually seen some price deflation. Modi attributed this to Stamford, Conn.-based UST Inc., the largest maker of moist smokeless tobacco, which has been cutting pricing through its buydown activity. "It's an interesting phenomenon, but I think it's one that's going to continue, as we move forward-especially when we talk about Philip Morris providing consumer value with the UST acquisition through synergies."
Joe Teller, director of category management for Richmond, Va.-based Swedish Match N.A. (sponsors of the CyberConference) said that continued attention to the OTP category from retailers is important for continued growth-particularly since 40% of cigarette smokers try to quit smoking at some point in time, and look for products to satisfy their nicotine urge. "My main theme is that next year I think we need to spend a little bit more time and a little bit more energy and I think what's going to happen is that we're going to get more results," he said.
In his portion of the presentation, Teller pointed out that the percentage of sales for the OTP shopper has increased from 7.8% in 2001 to 10.9% in 2008. He also said the OTP category shoppers visit c-stores 11.7 times per 30 days, almost double the 6.1 times of the average shopper. OTP shoppers also have the fourth highest basket size of all category shoppers (behind beer, packaged sandwiches and cigarettes)-with the OTP basket being $2.39 larger than the average convenience basket. He added that numbers such as those show it's critical to focus even more on the OTP category and the OTP shopper next year to help mitigate whatever "bad stuff" may continue to happen in the economy.
"Dig a little bit deeper and spend a little more time on OTP shopper. In tough times, focus on what you can count on."