At last month’s NATO Show for tobacco retailers, the exhibition floor was lined with hookas, vaping products, e-liquids and rows of electronic cigarettes. The world of e-vaping, more than $2 billion strong, continues to inspire interest and bold forecasts.
Within a decade, some predict, vaping—or e-puffs, as I like to call it—will outpace cigarettes in total U.S. sales. That may be true.
But I must confess that though I am no smoker, at least of the combustible variety, my heartstrings were tugged on by a frustrated cigarette maker. The supplier, an industry player for more than two decades, readily acknowledges that cigarette consumption is declining and that today’s cigarette battle is one for greater market share in a diminishing pie. That said, the person shared some exasperation about his experience at the NACS State of the Industry Summit and The NATO Show.
“You look around here and you get the impression that no one smokes anymore, that cigarettes are dead and that you should pull out your cigarettes and replace them with electronic cigarettes and foodservice,” the person said. “I’m not fighting facts, but there are other facts. And the No. 1 is that cigarettes are still the largest seller in c-stores today.”
Point well taken. Based on the latest SOI data, cigarettes once again contributed in excess of 30% of total in-store convenience revenue, more than double that of the No. 2 category, packaged beverages.
And there is a very important nuance. We speak in generalities, in national numbers. But as NACS showed, it’s even more important to look at regional numbers, and of course those of your own company. So while cigarette sales fell 5% in the Northeast, the West, South Central and Southeast saw a dip of roughly 1%.
I bring this up because there is a critical balance you must maintain. True, the 25% cigarette margins and sweet marketing allowances may be presents of the past, but it is equally true that cigarettes remain your singularly largest category, both as a destination and as a driver of market basket. Rarely do I see customers purchase a single pack of smokes without adding a lottery ticket, gum, mints, beverage or bite of some sort.
So you have some interesting questions to consider. First, if you’re going to expand your e-cigarette presence—a move we strongly endorse—what do you pull from the backbar? Do you cull from other tobacco products, which continues to grow at a healthy pace of 5% to 6%? Do you knife into third- and fourth-tier cigarettes, or winnow the space given to tobacco accessories?
The answer, of course, is not one-size-fits-all and depends on your market, your opportunity costs and how the customer perceives you. At the same time, the answer also is not to carry your cartons of cigarettes to the altar and sacrifice today’s profits for tomorrow’s predictions.
I also respectfully confess I’m tired of the “cigarettes vs. foodservice” discussion. Why is it one or the other? Each occupies a completely different slice of the store: Foodservice headlines your perimeter while tobacco dominates your backbar. Investment in one should not come at the expense of the other. In fact, based on conversations with many industry consultants, I would suggest that most operators are lazy when it comes to maximizing their tobacco opportunities, often failing to apply strong category-management tools and allowing for dust-collecting products to absorb valuable shelf space.
“We get it,” one retailer recently told me. “We know cigarettes are not the future and that we’re known as the seller of sin. But a lot of people are still smoking, and as long as I’m making a good penny and I’m giving my customer what he wants, I shouldn’t feel guilty about it, nor should I feel morally obligated to stop selling it.”
Another operator, who was attending The NATO Show, was amused by the relatively small space cigarettes occupied at the event. “I wonder what the floor will look like next year?” she said.
I actually was excited by what I saw. E-cigarettes and vaping represent the first major breakthrough in the total tobacco category in decades. It may, as Wells Fargo analyst Bonnie Herzog believes, be that magic bullet we all wish for.
Even so, it is premature to close the casket on a category that has been our industry’s gold.
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