Modi was joined by Joe Teller, director of category management for Swedish Match North America, Richmond, Va., which also sponsored the session. To set the stage, they delved into the challenges due to the economy, both in terms of unemployment and underemployment. [To view [image-nocss] an OnDemand replay of this CyberConference, pleaseclick here (free to retailers and wholesalers; others, $49)].
Said Modi: "Unemployment was high, especially on the construction side...savings rates were going significantly higher and people were spending less...gas prices were starting to rise as we saw the stock market starting to improve and investors were starting to buy risk assets, which is driving up the price of oil. And you had all the massive price shocks from the federal excise tax [FET], not to mention what was going on with the FDA."
He said, "One year ago, when all of this was taking place, it sounded horrific, but we think price elasticityrelationships that have been prevalent for the last 30 or 40 yearswill still hold up. And that's exactly what we saw."
According to Modi, retail cigarette prices last year were up 25%, volumes decreased about 8%, in line with the historical relationship. Also, the Big Three tobacco companies had significant profit growth in spite of the FET and the lower volumes. Profits increased by 10%.
With price elasticity, "as long as this relationship holds up, retailers, wholesalers and manufacturers can make more money as prices go higher."
In c-stores, a year ago, "it was a tough place to be for the low-income consumer.... We had deteriorating consumer confidence. What we're seeing now is a reversal.... I think that the high-income consumer this year is going to feel some pain because of the stock market, whereas the low-income consumer is going to see some relief. We're starting to see convenience store traffic already starting to come back into the positive, up 17.3%, and average visit frequency up 11.4%."
Consumer confidence is now rising for the lower-income consumer, much more than it has for the higher-income consumer, he said.
"We've seen an uptick in initiatives to tax products outside of cigarettes. Now, that may be some relief to many [c-store operators] who are saying finally some other categories are taking on the tax burden. But this isn't necessarily a good thing, because if your consumer is buying cigarettes and Mountain Dew, the fact that Mountain Dew prices are going up because of a sugar tax could impact your cigarette sales," said Modi. "So it's important to understand cross-elasticity between different categories."
He said he does not think menthol will get banned. It generates more than $14 million in tax revenue. "This is a meaningful amount of money for a government that is looking for money." If it is banned, a huge underground market will be formed, he added, and the scientific evidence "is just not conclusive."
Modi moved from the present to the future, offering some projections on the changing breakdown of tobacco products. Currently, on a national basis, cigarettes make up 79%, cigars 10% and smokeless 11% of the "profit pool." Assuming profits grow in line with category volume trends, cigarettes will be down 4%, cigars up 5% and smokeless up 7%. In 2015, cigarettes would be 69%, cigars would be 14% and smokeless would be 17%. By 2025, other tobacco products (OTP) could surpass cigarettes: cigarettes 45%, cigars 22% and smokeless 33%.
"So there is definitely an evolution taking place in this industry," Modi said. "People are using the same amount of nicotine, they are just changing the delivery form."
He told retailers, "It's time to get ahead of that shift and make sure you're more of a total tobacco enterprise.... It's time to evolve at the retail level, which many of you are in the process of doing, but should probably think about accelerating."
Both manufacturers and retailers will be driving that shift, said Modi. "For the retailers out there that have the forward-looking knowledge and incentive to do it, it makes sense to do it before the major [tobacco companies] make them do it. We know the categories of smokeless and cigars are under-spaced. So there's an opportunity to change that. There are a lot of nonproductive SKUs across the entire tobacco category; the federal excise tax going up has made people cognizant of the cost of carrying those slow-turning inventories, so perhaps it makes sense to take a view on what brands they should be carrying and maybe accelerate some of that rationalization to free up more space for more productive assets."
Teller said Swedish Match has seen this shift coming. "It has been happening for a number of years. We think it's getting a little bit faster now," he said. "There are a lot of retailers out there that are already pushing this and are already aware of it.... There are a lot of smart retailers out there already pushing the right buttons.... There will be risks for those that don't move quicklythe risk would be losing the cigarette smokerthe total tobacco consumera valuable shopper in their stores."
His overview of unemployment corroborated Modi's. "If you are blue collar, or if you work outside, or if you are young, or you are a minority or you are a man, the unemployment rates have been very high.... The unemployment rate for men is two points higher than it is for women. I've heard this referred to as not a recession but a 'he-cession.' So I wonder how it is that OTPparticularly cigars and moist snuffhave done as well as they have."
He added, "We're at a historical high for the length of time people have been without a job, and it has hit blue-collar workers and it has hit people that shop at c-stores and buy OTP. It seems odd that there has been such duress on this consumer, but still such good performance overall."
A poll taken during the CyberConference asked, "Is your overall total tobacco category (cigarettes plus OTP) growing, declining or staying about the same in unit volume?" The responses: 78% said yes, it is growing; 14% said no, it is declining or staying the same; 7% said they were not sure.
"Cigarettes are declining; cigars are coming out of FET in pretty good shape, and snuff growth has really started to take off.... There's so much cross-category usage between smokeless users and cigarette smokers," said Teller.
Cigarettes and OTP "show really good growth in both sales and gross profit. OTP is growing the fastest in dollar sales and the second fastest in profit.... The unit growth and can growth in snuff is just fantastic. And the cigar unit volume has continued to go up," he said.
Moist snuff category growth is on an upswing in recent months, said Teller. For most moist snuff users (68%), snuff is a planned purchase, the primary reason for entering the store. "These guys aren't just gassing up and leaving," he said.
Over the years, c-stores have gained much momentum as the preferred purchase location of moist snuff, largely at the expense of supermarkets and mass merchandisers. "The channel already has the loyalty of the consumer," Teller said.
Compared to the average shopper, OTP shoppers visit c-stores more frequently, spend more per trip, represent 2.7% of shoppers and drive 6.1% of inside sales. "They are a low-household-penetration category, but they overdeliver. They are very valuable shoppers to convenience stores. It makes sense to try to do a good job with these guys," said Teller. "They buy a lot of other things."
OTP shoppers continue to rank No. 1 in trips per month to c-stores (12.2 visits) and visit c-stores twice as often as the average convenience shopper (6.6 visits). "It has a lot to do with the nicotine occasion shifting around between smokers and dippers," he said. Cigarette shoppers rank No. 3 (10.8 visits). And OTP shoppers have the fourth highest basket size ($9.47) of all category buyers, almost $2 higher than the average convenience basket ($7.59). Cigarette shoppers rank No. 2 ($10.67).
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