Gradual Change

Exclusive survey shows OTP and emerging segments growing, cigarettes slipping.

Mitch Morrison, Vice President of Retailer Relations

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Guess what? For all the doom and gloom about the economy and government regulations, your entrepreneurial vigor continues to resonate. You’re eager to grow your business and take an active approach in further diversifying your tobacco sets and, for tobacco shops, to not only bolster your core inventory but to also expand your non-tobacco fare, and in some cases even remodel your sites.

The second annual NATO-CSP Tobacco Survey, sponsored by Swedish Match, shows a retail tobacco environment that continues to evolve but remains robust. While cigarettes continue their gradual decline, existing and nascent other tobacco segments seek to gain share and perhaps even tap into a new adult customer.

Consider the following:

  • Industry Growth: You remain very invested in your business despite growing external challenges. Three-fourths of tobacco shops and four out of five convenience stores say they have grown store count or remained the same over the past three years.
  • New Segments: While still just a blip in the total tobacco set, snus are achieving broader acceptance. Eighty-six percent of c-stores and 81% of tobacco shops are carrying at least a minimal number of SKUs. And more than onefifth of both retail segments are showcasing a significant selection of snus, with at least 11 SKUs. At the same time, electronic cigarettes (e-cigs) are slowly capturing space within your sets: Nearly 90% of tobacco shops and slightly more than 70% of c-stores reported carrying at least one SKU.
  • Business Challenges: When we asked you which regulatory and commercial activities concern you most, you didn’t hesitate. State and local taxation is top of mind. For c-stores, manufacturing marketing agreements also stood out as a critical concern. And for tobacco shops, the potential expansion of FDA jurisdiction to cigar and pipe tobacco stoked serious concerns.

A Strong Industry

For the 2012 exclusive tobacco study, 141 respondents participated—75 c-stores and 66 tobacco shops, making up more than 15,000 sites. The businesses represent a cross-section of demographics based on region, volume and store count.

While diverse in business model, the companies face many of the same challenges and worry about looming issues: graphic warnings on cigarettes, increased FDA store inspections, taxation, the early rise of alternative tobacco products such as nicotine-based creams and gums, and a shifting model wherein cigarettes continue to decline despite remaining both formidable and profitable.

Many of these issues, such as the decline of cigarettes and growth of OTP, are not new, but rather are ongoing issues, much like a serial novel. Others, from emerging categories to radically new manufacturer contracts, are spurring uncertainty and represent great opportunity and risk.

In that spirit, our study shows some interesting spreads within both the tobacco shop and c-store channels.

For instance, 31% of tobacco outlets did not carry moist smokeless tobacco (MST), albeit most of those were stores doing less than $1 million in tobacco sales. Conversely, more than one-third of the channel was heavily invested in MST, carrying anywhere from 60 to 300 SKUs.

MST remained a question mark for c-stores as well. One in five convenience respondents did not carry MST and, like tobacco shops, these operators trended toward a smaller size. The good news for MST makers is that more than 70% of the convenience channel is carrying 21 to 100 SKUs, suggesting that moist smokeless, a stronger growth segment in the c-store channel over the past decade, has become an anchor of the industry’s tobacco sets.

Based on the nature of their respected operations, it is no surprise that some segments get great play in tobacco shops, whereas they barely have cracked into the convenience arena. This, many say, is due to several factors: space; that tobacco shops are adult-only venues where products can be touched and demonstrated, whereas in c-stores they’re typically behind the counter; and that tobacco outlets draw a different consumer, if not a different consumer occasion.

The two segments that underscore this wedge between retail channels are pipe tobacco and roll-your-own/make-yourown (RYO/MYO).

According to the survey, tobacco shops averaged 46 SKUs of RYO/MYO, while c-stores averaged only five SKUs, with 43% not carrying any. And for total pipe tobacco, tobacco shops averaged 54 SKUs, with the majority standard and the rest being hookah. As for c-stores, nearly half the respondents said they did not carry any pipe tobacco.

Forecasting 2012

We asked you to look into your crystal ball and forecast how the various tobacco segments would perform for you in 2012. Specifically, would they grow, decline or remain flat?

If your predictions are accurate, both tobacco shops and c-stores will enjoy a strong year, with recent trends continuing.

Almost half of you thought cigarette sales would continue to decline in 2012, though 21% of tobacco shops and little more than one-quarter of c-store operators said they expected cigarette sales to grow. Both channels are bullish about cigars, MST and newer opportunities in e-cigarettes and snus.

And now something to think about. We asked you a bunch of questions:

  • What is your most significant product of the past 12 months in cigarettes, cigars and MST?
  • How concerned are you about restrictions to RYO filling-station machines?
  • What about FDA oversight of tobacco? Was it as bad as you feared? Worse? Have we just seen the beginning of what will be more onerous restrictions, or is the tax revenue generated by tobacco too great for the FDA to ever threaten?

There’s a lot to be said about tobacco. One thing we can all agree on: There’s never a dull day in this business. 

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