Retailers and consumers alike are buzzing about electronic cigarettes as the industry’s greatest potential game changer.
Although a nascent category with but a fraction of 1% of total tobacco share, e-cigs offer reasons for excitement: Wells Fargo’sQ4 2012 Tobacco Talks survey cites an estimated annual growth of more than 20% and as much as a 25% edge on gross-profit margins compared to regular cigarettes.
No wonder so many retailers are getting into the electronic-cigarette game. Or are they?
“If a retailer is only carrying one electronic cigarette, they are not really in the business,” says Lou Maiellano, a former tobacco buyer for Sunoco and president of Sevierville, Tenn.-based TAZ Marketing& Consulting Group. “You’re in the business when you have at least thereto five brands. You need to have variety. Consumers have different preferences of feel and taste profiles.”
Until recently, Dallas-based AlonBrands Retail was one of those retailers “not really” in the electronic-cigarette business. But then in 2012, William Slattery joined the company as tobacco category manager.
“When I started, we only had one brand of electronic cigarettes (NJOY)in the stores,” Slattery says. “Through conversations with many people, I’ve come to view electronic cigarettes as an opportunity—not just for incremental sales, but as a point of difference.”
Though e-cigs remains a niche, Slattery envisions it as a mainstream purchase:“There are a lot of conveniences that the tobacco consumer has lost over the years. Electronic cigarettes can give consumers some of those conveniences back, and more.”
Looking at the competition, Slattery saw an opportunity. Lacking were retailers, whether c-stores or other retail channels, offering the variety necessary to establish themselves as true destinations for electronic cigarettes. It has become his mission to do just that for Alon Brands.
“I’m creating a destination for electronic cigarettes within our stores,” says Slattery, echoing Wall Street analysts such as Nik Modi of UBS and Bonnie Herzogof Wells Fargo in comparing the subcategory to energy drinks when they first burst onto the scene. “It’s a new type of product that will take time to gain traction. But as traction grows, I’m going to make sure Alon Brands stores are known as a place where consumers can get them.”
In a remarkably short amount of time, Alon Brands has seen the benefits of establishing itself as such a destination, including a more than 100% increase in sales and units year over year. Alon’s journey from a dabbler in electronic cigarettes to an electronic-cigarette destination isn’t merely a profile of one retailer’s success. It’s also a road map for how other retailers could enjoy similar success in this new electric realm.
Keys to the Kingdom
When Slattery started looking at ways to distinguish Alon Brands from other sellers of e-cigs, it became clear that carrying a wider variety of brands was the first step.“Although other companies sell electronic cigarettes, most don’t offer the variety we’ve brought to Alon stores,” he says.
But choosing the right brand to partner with can be a daunting task, especially considering Maiellano estimates more than 380 e-cigarette companies are selling in the United States.
“Two things that really need to be stressed are whether or not the company has a solid marketing base and financial stability. Do they exhibit stability?” Maiellano says.
Alon’s successful history with NJOY made it easy for Slattery to trust in the Scottsdale, Ariz.-based manufacturer. To decide which other brands to bring on, he spoke with a number of companies and enlisted advice from tobacco analysts and manufacturers before settling on three others: Nicotek, Wheat Ridge, Colo.; FIN, Northbrook, Ill.; and blu eCigs, which was acquired by Greensboro, N.C.-based Lorillard Tobacco Company last April.
“While I believe each company offers an excellent product and carries a good reputation, each also has unique attributes that made them desirable to bring into Alon Brands,” says Slattery, citing Nicotek’s distinctive product mix, Fin’s ability to market not just its products but electronic cigarettes as a whole, and blu’s attractive merchandising solutions and established customer base.
But it’s not just about offering a variety in brands. To establish Alon Brands as a true e-cigarette destination, Slattery also had to offer an assortment of products. And this may be, for now, Alon’s point of distinction among c-store operators.
“Develop the different segments within that category,” Maiellano says.“You need to be in the cartridge business; cartridges are where the high margin is and where you can actually develop consumer loyalty. Disposable, express kits, starter kits: You need a cross-segment of the whole offering.”
As such, Alon’s product mix includes both disposables and starter kits, along with a wide variety of cartridges and flavors.“We offer a mix of everything,” says Slattery. “Our goal is to appeal to as many consumers as possible.”
Although Slattery had the product mix to appeal to a wide variety of customers, he recognized it was equally important that those consumers could easily find the products in all of his stores. With that in mind, he set about creating a permanent, consistent home for the category.
Prior to the expansion, Alon’s electronic cigarettes were merchandised on the counter. Many retailers may struggle with where to fit an expanded electronic cigarette offering in an already crowded back bar; however, Slattery didn’t have to take any space from his existing tobacco set to create kind of offering he wanted. This is largely due to blu’s custom electronic-cigarette rack, which is 2 feet wide and the same height as the average backbar. Slattery was able to move the blu rack in next to his current back bar without sacrificing OTP or cigarette space.
“When you go into our stores, it’s there, it has a presence, it has its own home right behind the counter,” Slattery says of the racks Lorillard has provided to merchandise all of Alon’s electronic-cigarette offerings.“Regardless of what you come into the store for—if you’re a tobacco consumer, if you’re coming in for a candy bar—when you go to the register, you’re going to see that rack and know we carry that product. We gave it a large enough footprint that it has a presence in the store.”
With more than 300 locations, the company found difficulty in fitting the rack in every location. But Slattery recognized the value in creating consistency for his customers, examining and measuring each location beforehand to ensure they all could accommodate the electronic cigarette rack behind the register. Slattery says it was “absolutely critical” that a customer could go into any location and know exactly where to find electronic cigarettes, a category that now makes up roughly 18% of Slattery’s total tobacco set
Maiellano agrees with the strategy.“You’ve got to be able to have someone walk into your store and know where it is,” he says. “You want to have consistency throughout your chain.”
And while it may seem like a lot of work, Slattery was amazed at the speed in which his vision for electronic cigarettes became a reality.“The pieces fell together very, very quickly, and before I knew it, I had what I felt was the right product mix and merchandising to establish Alon Brands as an electronic cigarette destination.”
An Electronic Windfall
Although Slattery could not cite exact sales numbers for his e-cig section, he calls early results “impressive.”
“I’m surprised to see that it’s done so well so quickly, having only had it in a few months,” says Slattery. “I thought it was something that we’d put in and have to work on. It’s exceeding my expectations.”
Perhaps even more promising: These increases are not coming at the expense of Alon’s traditional tobacco business. In fact, Slattery reports tobacco cigarette sales were actually up during that time period.
“I do not believe there is any cannibalization,” he says. “I believe those sales dollars to be incremental dollars, as we haven’t seen declines in any other segments.”
For his part, Maiellano feels most retailers who put in this kind of due diligence can reap similar rewards. “Retailers need to make sure that this category is given emphasis, and there has to be some education with the sales force,” he says. “The retailers that give it space and attention will see their business grow exponentially.”
Slattery believes an increased public awareness of the product has also helped his cause, explaining that multiple customers have expressed excitement over being able to get electronic cigarettes in his stores as opposed to online.
“There really is a demand for the product,” he continues.“People are buying it, they know about it, and now they know they can get it at my stores. It took very little time from when we put it out there to start seeing sales skyrocket.”
And though Slattery is confident that he’s established Alon Brands as a destination for electronic cigarettes, he’s not going to rest on that reputation—an important lesson for any retailer looking to build a successful e-cigarette business. With new products entering the scene every day and more regulations all but certain, it’s crucial to give the segment plenty of attention.
“For me now, it’s about trying to stay ahead of the curve and not get complacent,” says Slattery, “to continue to growth is segment to make sure it’s a healthy part of my tobacco category.”
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