The rising cost of cigarettes and the weakened economy continues to drive many consumers to roll-your-own/make-your-own (RYO/MYO) cigarettes. Even with official RYO tobacco sales slowing down since the federal excise tax was raised in 2009, Nielsen reports that c-store RYO tobacco sales still accounted for $68.9 million in c-store sales in 2012 (down 12% from 2011). Pipe tobacco (often used for RYO/MYO cigarettes) sales rose a whopping 65.6%, netting c-store operators $67.3 million last year.
But what makes the RYO/MYO segment unique is that it’s the only segment in OTP that requires a supplementary purchase almost every time, offering retailers a bevy of additional profit opportunities in the often-underserved tobacco accessories segment.
“From a retailer standpoint, it’s probably the one category that consistently gets you an add-on purchase almost every time,” says Leonard Wortzel, RYO and pipe tobacco brand manager for Tucker, Ga.-based Scandinavian Tobacco Group Lane. “Out of anything in the OTP category, there are more consistent opportunities to do an add-on purchase with RYO and accessories.”
To make their own cigarettes, most consumers use papers or tubes, with more experienced consumers also using filters, injectors and/or RYO machines. Aside from requiring a small footprint, the accessories category also offers retailers the ability to make generous margins while keeping prices low because accessories are not subject to the same state and federal excise taxes as other OTP products.
And according to Dennis Williams, national accounts manager of OTP for wholesaler Harold Levinson Associates, Farmingdale, N.Y., the accessories segment is one that appeals to a wide base of consumers, thus benefiting retailers big and small.
“We are seeing accessories consumers across every market, across every customer base,” he says. “When the retailer takes it in, it’s selling. Retailers who provide this for their customers are seeing tremendous growth.”
Despite all these benefits, many retailers’ accessory offering is limited to just one or two SKUs of rolling papers. Fortunately, Wortzel and Williams have joined others in the accessories game to decipher the many perks—and limited challenges—of the segment in a lesson on how retailers can benefit by accessorizing their tobacco set.
Enjoying the RYO/MYO Boom
By their very nature, tobacco accessory sales are explicitly linked to RYO/MYO tobacco sales, which have seen dramatic increases over the past several years thanks to steep state and federal excise taxes on machine-made cigarettes. Because of these excise taxes, the average price of a pack of cigarettes has more than doubled since 1998, going from $2.09 to $5.55 per pack, R.J. Reynolds Tobacco Co. estimates.
“As cigarette pricing has continued to rise to a point where that consumer has looked for alternatives, it’s driven them into the make-your-own category,” says Williams. “Consumers need accessory products in order to make their own cigarettes.”
Further driving consumers toward RYO alternatives has been the recession, which not only put many tobacco consumers out of work, but also forced even employed individuals to think twice about expenses such as cigarettes.
“Since the economy has been low for the last few years and more people are unemployed, they have time and need to save money,” says Ross Haynes, vice president of sales and marketing for Russell Springs, Ky.-based Tantus Tobacco. “Some of these consumers may not have been in the demographic before but have found themselves in this situation.”
This has resulted in a perfect atmosphere for the RYO/MYO tobacco market—and thus accessories products—to thrive.
“Traditionally, our consumers were the ones who could not afford to buy a pack of cigarettes,” says Tamas Malacsina, marketing director for Glenview, Ill.-based Republic Tobacco. “But as cigarette prices continue to increase, we see more and more smokers switching to this category, not because they can’t afford to buy a pack of cigarettes, but because they don’t want to pay $6 to $10 for a pack.”
Still, even with a significantly lower price point, rolling or making cigarettes is a more complicated, time-consuming process—and there are certainly other options within the OTP section that price below cigarettes without the time and skill RYO/MYO products require. Yet for a growing sector of consumers, this process is part of the appeal.
“There are consumers out there that prefer rolling or making their own cigarettes,” says Lou Maiellano, a former tobacco buyer for Sunoco and president of Sevierville, Tenn.-based TAZ Marketing & Consulting Group. “It’s an experience there that they enjoy, and there’s a culture there.
”Whether it’s because of economic circumstances, the RYO experience or an increased awareness of the category, more consumers are opting for the make-theirown option, leading to a surge in accessories sales. “From everything we can tell from our own numbers, there have been incredible (sales) gains,” says Wortzel. “Starting in 2009, the numbers started climbing incrementally year after year; they have only recently begun to slightlytaper. But when I talk about tapering, it’s still double-digit growth.”
And these accessory products experiencing such growth are not limited to low-ticket papers and tubes. Also included are filters, injectors and RYO machines that wholesaler Williams estimates can retail anywhere from $2.99 for a hand-held model to $89.99 for an electronic machine.
“These products allow consumers an alternative to traditional cigarettes,” he says. “It’s made it much easier today for the consumer to get into the category seamlessly because of the different types of machines and products. There are starter kits available that allow consumers to use a simple injector or roll-yourown machine, and then they can trade up to bigger, faster machines as they get comfortable.”
Majestic Margins
As if double-digit sales growth and the strong potential for add-on purchases weren’t enough, the accessories segment also boasts healthy profit margins.
“RYO/MYO accessories offer much higher profit margins than cigarettes and other OTP products,” says Malacsina. “Average retail margins are over 30%, compared to cigarette margins that are generally below 10%.”
This estimate may even be a bit conservative: Williams believes it’s closer to 35% to 40%, and Wortzel predicts retailers could be making as much as 50% margins on products such as rolling papers and tubes.
“It’s printing money on these rolling papers,” Wortzel says. “A retailer can take substantial margins, depending on how fast they want to move the product.”
As consumers become more comfortable with the RYO/MYO category, the potential for profit margins only increases for retailers as consumers move from lower-priced rolling papers to more expensive—and margin-friendly—accessories.
“More people are investing into higherpriced table-top injectors vs. inexpensive hand-held injectors as they are becoming more committed to this category,” says Malacsina.
Williams agrees: “We’ve found that consumers start with a lower-end type machine and step up. You’re seeing profits on some of those higher-end machines of $70 to $90.”
The reason behind such profitable margins—for items big and small—is that, because accessories do not actually contain tobacco, they are not subject to any of the state and federal excise taxes that drive up the prices (and thus drive down margins) on cigarettes and OTP. And because pipe tobacco is not regulated by the FDA or subject to the federal excise tax, the RYO/MYO category continues to grow.
“We believe, because of this excise gap, there are more people rolling and making their own cigarettes today since the birth of the machine-made cigarette,” says Wortzel. “Until there is excise equalization, there will continue to be growth.”
This difference in excise taxes is a big issue for the RYO/MYO segment, which makes it difficult to track the exact number of consumers who are making their own cigarettes. Because only RYO/MYO tobacco is subject to the federal excise tax, many consumers opt to purchase lowerpriced pipe tobacco for their RYO/MYO needs. The fact that official RYO tobacco sales have been declining since the 2009 tax increase at least begs the question of whether or not RYO accessories will continue to grow were pipe tobacco to be taxed the same way.
“Anytime there’s some type of new tax—whether it’s on cigarettes or any tobacco product—it’s a challenge to maintain the previous sales levels,” Maiellano says. “History would suggest there’s the potential to be a decline (in RYO/MYO sales). If there’s a price increase and all products are equal, where do these customers go? Only time will tell.”
Still, others believe that both the accessories and RYO/MYO segments will continue to surge, even if the government begins to tax pipe tobacco, because there’s still so much room for growth.
“Absolutely—I think we’ll see continued growth,” says Williams. “There are still a tremendous amount of retailers who haven’t gotten into the (accessories) category yet. Retailers who are not in this category are not only losing out on the RYO consumer, but on the additional profits that accessory products allow them to get.”
Spatial Challenges
With so many benefits, one might question why any retailer would overlook the accessories segment. Yet with cigarette contracts and an expanding option of popular OTP products crowding the backbar, the most significant challenge in building a robust accessories set often comes down to finding room to accommodate the extra SKUs.
Toward that end, Williams recommends retailers carry a variety of tubes, papers, filters, injector machines and electronic machines. Although such products are not required to be merchandised behind the counter (as cigarettes and many OTP products are), he points out that the majority of c-store retailers choose to house accessories on the backbar because they are indeed a part of the OTP set.
“At a minimum, we believe retailers have to allow one 4-foot shelf,” says Williams. “It will cover all the items that they need.”
Wortzel believes that, because of space limitations, many operators are also challenged to provide a proper selection, saying that retailers need “adequate space, and make sure you provide adequate variety. The challenge is to prevent getting pegged down into one or two brands.”
While many retailers will carry a small selection of rolling papers, many suppliers believe this is nowhere near enough to meet the demand of the true RYO/MYO consumer.
“Retailers who carry a good mix do so much better than those who only carry limited selections of the RYO/MYO category,” says Malacsina. “Consumers will buy their tobacco, tubes and accessories at the same place, so if a retailer doesn’t carry the whole RYO/MYO category, they are missing out on high incremental sales and profits.”
As a former retailer and consultant, Maiellano agrees that retailers who are in the RYO/MYO segment will benefit from carrying a wider offering of accessories, including machines. However, he also points out that it’s not a segment that will work for every retailer or at every location.
“If I’m a retailer, I know I’m going to have locations where I’d be open to a more extensive offering when it comes to roll-your-own, which would include expanding my offering when it comes to accessories,” he says. “I’m not saying that it’s something I would put everywhere, but I do believe retailers should look at those markets where they could expand accessories to meet the needs of their consumers.”
The good news for retailers is that many accessories manufacturers recognize the spatial challenge and are doing their part to lessen the footprint required to build a true accessories set. “As a manufacturer, we—and I’m sure others—have been doing things to ensure our products can fit in a more and more compact space,” says Wortzel, pointing out that Scandinavian offers a small “fish bowl” merchandising option for its rolling papers that can be placed on the counter, as well as a rolling paper carton with adhesives that allow it to be placed on the wall. “We’re looking to find fixtures that get stuff up and out of the retailer’s way.”The even better news is that retailers who agree to try out an expanded accessories set are reaping the benefits. Though this admittedly niche player will never come close to the kind of sales generated from OTP heavyweights such as cigars and moist smokeless, it’s certainly paying off for operators who devote a little attention to the segment.
“If a retailer will allow us a whole shelf, we’ll put in a small section of accessory products,” says Williams. “Then when they see the success and the profitability, retailers figure out right away the benefit of these products.”In other words, sometimes it pays to accessorize.
In Search of the Connoisseur
While both the RYO/MYO and accessories segments are typically associated with value-driven consumers, Leonard Wortzel, Scandinavian Tobacco Group Lane’s RYO and pipe tobacco brand manager, has observed another, perhaps surprising, tobacco consumer entering the category.
“There is another segment of true cigarette tobacco smokers that are connoisseurs,” he says. “They could care less about the price they’re paying.”
While one of Scandinavian’s premium RYO offerings, Peter Stokkebye, retails at a higher price than the company’s popular RYO Bugler Tobacco, Wortzel says that Stokkebye—and other high-end loose tobaccos—are increasing in sales volume, thanks in part to the rise in premium RYO/MYO consumers.
“There is a subset of consumers out there who may have been machinemade cigarette smokers but now are looking for a different experience,” says Wortzel. “They don’t want some generic, machine-made tobacco.”
This type of consumer is drawn to making their own cigarettes because they get to actually touch and smell the tobacco, controlling the amount and blend that goes into each cigarette they smoke.
“They’re probably not doing any tubing with this tobacco, but more and more of that segment is becoming aware of finding a better way to roll and craft their own high-quality cigarette,” Wortzel says. “It’s very comparable to the craft or micro beer drinker. There is this little subset that’s occurring where folks are taking a little bit of this tobacco and little bit of that tobacco to create their own blend. It’s a small subset, but it’s out there.
”Which means there’s an even wider base of consumers for tobacco accessories.
“While you’re not really attracting that mainstream consumer, you are consistently and continually now attracting both the extreme value consumer and the premium consumer,” says Wortzel.
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