Within the ever-evolving spectrum of tobacco and nicotine products, the roll-your-own/make-your-own (RYO/MYO) category doesn’t get tons of airplay. Yet in 2014, the segment performed pretty well in the c-store channel: While RYO tobacco dollar sales were up a modest 1.3%, according to IRI, lower-taxed pipe tobacco dollar sales were up 22.8% year over year, with unit sales up 21.2%.
So why doesn’t this segment garner more attention?
For one, there are the big-picture numbers. Yes, pipe tobacco dollar sales grew to $71.8 million in sales last year. But compared to IRI’s reported $52.5 billion in cigarette sales, $5.5 billion in smokeless sales and $2.5 billion in cigar sales, the RYO/MYO figures are easy to overlook.
In short, it’s about 1% of the industry’s tobacco sales. And yet it’s a big-picture mindset that RYO manufacturers point to when explaining why retailers should care about this segment—and are missing an opportunity if they don’t.
“I call it category ‘missed’ management,” says Steve Sandman, president of Glenview, Ill.-based Republic Tobacco Co. “The foundation is a lack of understanding about what our category actually means to the entire department.”
Or, more important, an understanding of what RYO/MYO—or loose tobacco—means to its users. Sandman describes these value-driven shoppers as “fiercely loyal” to the segment.
“We say it’s a one-way door: Once a consumer starts making their own cigarettes, they tend to stay.”
It may be one of the smaller segments, but with its loyal crowd and promising profit margins, RYO/MYO has a valid case in convenience, according to Sandman and fellow manufacturers.
On the Loose
Loose tobacco is hardly a new category. Sandman describes the segment as having “historical trends” with significant growth dating back to the first auto recession of the late ’80s and early ’90s, when workers laid off from auto plants needed to save money.
It spread from there, and few would argue that the tax increases from the State Children’s Health Insurance Program (SCHIP) haven’t played a role. Passed in 2009, SCHIP effectively raised the federal excise tax on cigarettes 158% from $19.50 per thousand cigarettes to $50.33 per thousand. SCHIP also drastically increased the excise tax on RYO cigarette tobacco from $1.10 per pound to $24.78 per pound—a 2,159% jump.
The excise tax on pipe tobacco, on the other hand, grew from $1.09 to only $2.83 per pound. And many RYO/MYO consumers quickly realized pipe tobacco works just fi ne for making their own cigarettes.
Alcohol and Tobacco Tax and Trade Bureau (TTB) data shows that prior to SCHIP, about 25 million pounds of loose tobacco were being sold per year. By 2011, that figure had jumped to 40 million.
“Certainly there is more loose tobacco being sold today than has been consumed in decades,” says Leonard Wortzel, vice president of marketing and product development for Scandinavian Tobacco Group Lane, Tucker, Ga.
But the news isn’t completely positive. Don Burke, senior vice president of Pittsburgh-based Management Science Associates (MSA), points out that recent low gas prices have had a potentially negative effect on the category: MSA data shows loose tobacco shipments across tracked channels are down 10% in the first half of 2015, with cigarette tobacco declining 12% and pipe tobacco down 8% vs. this time last year.
“These results suggest that some loose tobacco purchasers may be returning to ready-made cigarettes, with lower gasoline prices allowing for increased discretionary spending,” says Burke.
Still, TTB data shows that loose-tobacco sales have held steady since the jump in 2011, nearing the 45-million-pounds-sold mark in 2014. That means someone, somewhere, is profiting from this category.
“I’d point to that jump from [25] million pounds (in 2009) to 40 million pounds (in 2014) as consumers began to experiment with a variety of tobacco,” says Sandman. “Some retailers love that info because they’ve captured that growth—other retailers haven’t. There’s an opportunity for everyone to really capture this smoker.”
The Price Factor
But to capture them, retailers must first understand them.
“Broadly speaking, historically, this has been about a consumer who primarily would be looking for a way to enjoy tobacco at a reasonable price,” says Wortzel.
“Reasonable” may be an understatement: RYO manufacturers estimate that customers save anywhere from $25 to $50 per carton, depending on state and local excise taxes. That can add up to savings of $1,000 to $2,000 per year.
“This is a very economically sound way to make cigarettes,” Sandman says. The savings are real and should not be underestimated. But those who live and breathe RYO will tell you it’s not only about the dollars and cents saved. For example,
Wortzel points to an increased interest in customizable and self-made products occurring across the spectrum of consumer goods.
“RYO/MYO definitely plays a part in that kind of craftsman, customization macro trend,” he says. “Even if you’re buying a larger-known brand, in the end, you’re making this product yourself.”
Perhaps even more so than with a Coke Freestyle machine, RYO/MYO gives its consumers the opportunity to craft their own experience.
“The customization of MYO cigarettes is really appealing to consumers,” says Sandman. “They really like to experiment, even to the point where many consumers actually buy a variety of tobacco and blend them together to make their own personal blend.”
And though the stereotypical RYO consumer might not have all that much in common with the average Whole Foods shopper, both customers have expressed an interest in simpler, less mass-produced products—even if one is shopping for tobacco while the other is picking up kale.
“The ability to see, feel and smell the quality of the tobacco they’re smoking plays a huge part,” Wortzel says. “They really see that as the last ‘real’ cigarette. To them, machine-made cigarettes are generic products made for the masses, and that’s not who they are.”
A Passionate Customer Base
Ultimately, understanding and appreciating the RYO/MYO consumer begins and ends with the financials.
“RYO consumers will give you 52 reasons as to why they like to make their own cigarettes, which are valid. … But when push comes to shove, it’s the economic factor that drives consumers to this category, and it’s the economic factor that usually keeps them in this category,” says Sandman.
This is good news for retailers because the economic need breeds a consistent, passionate customer base. It’s one of the main reasons manufacturers point to when asked why c-stores should invest in loose tobacco. “This is a very passionate consumer group,” says Wortzel. “It’s not as many consumers as those buying machine-made cigarettes, but you will lose these consumers if you don’t carry the staple of their purchasing habits.”
It’s not just about preserving existing customers, either: John Tomlinson, director of purchasing and merchandising for Obetz, Ohio-based Englefield Oil Co., cites “attracting shoppers that used to go to smoke shops” as one of the biggest benefits the RYO/MYO segment offers retailers.
Besides smoke shops, MSA’s Burke has observed another channel successfully making a play for the loose-tobacco consumer. While c-store and tobacco-shop RYO volumes are down year over year, MSA data shows dollar stores are up by more than 100%, with 20% more dollar-store retailers carrying loose tobacco this year than last year.
Loose-tobacco customers might not spend the most dollars—but why hand them over to dollar stores?
“To capitalize on meeting the needs of the tobacco consumer, it’s probably smart to have a loose-tobacco option,” Burke says.
Covering the needs of the RYO consumer is especially rewarding given the high profit margins the segment offers compared to the rest of the tobacco category. Numbers from the NACS State of the Industry Report of 2014 Data puts loose-tobacco margins at 26.1%, about on par with smokeless-tobacco margins (27.9%) and significantly higher than cigarette margins (14.6%).
But RYO/MYO isn’t just about the tobacco. Unlike other tobacco segments, loose tobacco all but requires additional accessories purchases.
“It’s one of those categories where there’s more opportunities for a larger basket sale,” says Wortzel.
This is where the real profits lie. Because there’s no tobacco in accessories such as papers, tubes and rolling machines, they are not subject to excise taxes and tend to boast much higher margins. In fact, cigarette papers offer the highest profit margin of any tobacco product (51.2%), SOI data shows.
“Retailers who are in this category would much rather sell a carton of tubes and a bag of tobacco than a carton of premade cigarettes,” Sandman says. “The gross profit’s higher and the margins are significantly higher.”
Burke agrees: “That is the No. 1 reason that a retailer will want to have an offering in this category. When it’s sold, the profit level is strong.”
Easy to Manage
Despite the potential of making strong margins while stealing away some customers from the competition, many retailers are understandably hesitant to invest too much time or space in such a small piece of the overall tobacco pie.
“Some of the objections are ‘We don’t have room for that,’ or ‘It’s too many SKUs’ or ‘I’m not sure my customer understands this,’ ” Sandman says. “I would tell you that none of those are true. It’s an uncomplicated category; the product moves and it’s an easy category to manage.”
While it may seem like the segment requires a lot of real estate and SKUs, retailers such as Englefield Oil have been successful dedicating as little as 2 square feet to the basics.
Wortzel says offering one mainstream tobacco and one mainstream menthol pouch will cover the majority of RYO/MYO consumers. Because of the subcategory’s profit margins, it’s worth offering some sort of selection of papers, filtered tubes and simple rolling or injector machines, Sandman says.
“It doesn’t take a lot to at least let consumers know you’re playing within the category,” Wortzel says.
Still, finding any space on an increasingly crowded backbar is no simple task. This is particularly true with RYO.
“All the other accessories that go along with make-your-own are required to enhance sales in this category,” Burke says. “It’s typically why a lot of the sales are handled through tobacco outlets: It’s a lot of SKUs for a convenience store to carry when it’s such a small percent of the tobacco category.”
“Our biggest challenge with this category is finding room for it,” says Tomlinson of Englefield Oil. Manufacturers could help by coming up with ways to merchandise loose tobacco on an OTP rack on the bottom shelf, he says.
Wortzel sees a different solution: “When you really look at the whole category, make sure the SKUs you’re carrying are actually producing.”
There’s not much retailers can do about the required number of premium-cigarette facings they must have. But Wortzel suggests looking at the rest of the OTP category and analyzing what’s truly performing from a sales and profits standpoint.
“You may have more space than you think,” Wortzel says. “If there are products that really aren’t carrying their weight, there are likely some RYO products that would carry more.”
“The question is, are you selling all the categories?” Sandman says. “These are higher margins than cigarettes and there are endless merchandising solutions.”
Perhaps the more compelling question is: Are retailers willing to risk losing this consumer? Unlike other shoppers, the RYO/MYO customer is willing to go out of their way to shop the segment.
“These consumers will not come to your stores and buy premade cigarettes if you don’t have make-your-own, the same way a customer that comes in looking for a pizza isn’t going to buy prime rib,” Sandman says. “They’ll simply find a store that has what they’re looking for.”
Know Your RYO
With various styles of tobacco in different packaging and seemingly endless accessory options, the RYO/MYO category may seem daunting. But it’s really not that complex. Here’s a quick rundown of the category must-haves.
RYO machines
Because making cigarettes completely by hand can be a messy and time-consuming process, many RYO/MYO consumers prefer to use injector or rolling machines to speed things up.
“Machines allow you to take the tube, put it on the machine, put the tobacco in the machine and crank it or slide it to inject the tobacco into the tube,” says Sandman. “It’s pretty easy. Somebody that’s adept at this can make a pack of cigarettes in a very short period of time.”
Papers and tubes
Cigarette papers are exactly what they sound like: papers consumers use to roll their own cigarettes. But there’s also a more advanced option in filtered tubes.
“For lack of a better description, they’re empty, as no tobacco is contained in them,” says Steve Sandman, president of Republic Tobacco Co., Glenview, Ill. “There’s a filter and there’s the tube where the tobacco is placed.”
Loose tobacco
RYO/MYO customers use both cigarette and pipe tobacco to make their own cigarettes. Other than a drastic difference in how the products are taxed, is there really a difference? It depends on if you’re a consumer or manufacturer.
“Roll-your-own tobacco is not viewed as much different from pipe tobacco from the consumer standpoint,” says Don Burke, senior vice president of Management Science Associates, Pittsburgh. “Legally, of course, there is a difference for manufacturers. But for consumers, there isn’t a great deal of a difference.”
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