MST = MVP?
MST shifts from niche to differentiator in tobacco sets.
It came seemingly out of nowhere. Where once moist smokeless tobacco (MST) blended into the background of the c-store landscape, the category has become a key differentiator with consistent growth. Over the past 10 months, the category has enjoyed “surprising” doubledigit growth, says Joe Teller, director of category management for Richmond, Va.-based Swedish Match N.A. Nielsen data shows 12% growth over the past six months, a surge partially fueled by smokers turning to MSTs as smoking restrictions and pressures to stop smoking have increased. The percentage of dippers who also smoke is now at least 50%, according to Teller, a percentage that has doubled since 2006.
Another factor is the country’s 3-year-old economic downturn, which actually has benefited MST. While consumer wallets have stiffened, cigarette prices went up 10% last year; meanwhile, MSTs experienced only a 3% increase. “Maybe moist snuff prices are going up at or even below the rate of inflation,” Teller said, “but cigarette prices are increasing three times as fast.”
The tobacco industry has jumped on the MST bandwagon by launching new products to gain share. “The market is still pretty small in comparison to cigarette use, and it’s growing—so there really isn’t a clear winner yet,” says Christopher Collins, an associate at Fitch Ratings, Chicago.
While cigarettes accounted for 35.8% of c-store sales, MSTs and other tobacco products (OTP) accounted for only 3.7% in 2009, according to the NACS State of the Industry Report of 2009 Data.
U.S. Smokeless Tobacco Co. (USSTC) alone launched 10 new products for Skoal in the first quarter of 2011. Richmond, Va.-based Altria acquired USSTC in 2009, and Greg Mathe, Altria spokesperson, says the company continues to learn about the category. “We know the smokeless category is growing, so we have to figure out what adult consumers are looking for,” he says. One area the company is focusing on is snus and pouch products. Last year, Altria’s biggest arm, PM USA, expanded Marlboro Snus nationally to build product awareness and trial. The company also recently began shipping two new varieties of Marlboro Snus and two of Skoal Snus. Camel Snus, from R.J. Reynolds, also sweetened the pot with two new styles of larger pouch products. In an exclusive CSP tobacco cyberconference earlier this year, UBS Securities tobacco analyst Nik Modi indicated there have been mixed messages surrounding snus’ long-term viability as a category. Underscoring his optimism of the smokeless product, he compared the dawning of snus to the introduction of MSTs in general, saying that in 2004 nobody really was talking about moist smokeless. “That category took off like a rocket ship,” and Camel Snus today is the same size as Kodiak smokeless tobacco, he said. Modi feels the category is legitimate and will rely on clerks educating consumers about what the product does: “That will really help catapult the category to be a lot bigger and more meaningful for your profits.”
Another potential opportunity for smokeless has Glen Allen, Va.-based Star Scientific paving the way. At press time, the company had applied with the U.S. Food & Drug Administration to market an MST product as having “modified risk.” The company did not return phone calls by press time. An FDA OK could spur an entirely new tobacco segment, analysts say. “All the companies are interested in the modified-risk space,” says Collins of Fitch.
Like any other category, amid the opportunities lie potential troubles. While MSTs don’t have to deal with the smoking bans on cigarettes, they do face similar taxation issues.
Pamela Villareal, a senior policy analyst for the Dallas-based National Center for Policy Analysis, examined taxation of smokeless tobacco for a recent study. “Typically, states want to raise revenue with tobacco tax, but they also want to try to discourage smoking,” she says.
Comparing packs of cigarettes with 1.2-ounce cans of snuff (standardizing for the different ways smokeless is taxed), she found that six states—Iowa, Maine, North Dakota, Oregon, Utah and Wyoming—actually tax more for smokeless than for cigarettes.
For some retailers, hefty state taxes might push customers to cross state borders to get a lower price. In Pennsylvania, for example, there is no tax on smokeless—while bordering Ohio charges a 17% levy.
For manufacturers, the taxes can mean a widened price gap. While many states base the excise taxes on smokeless by weight, some base it on the manufacturer’s list price, creating an “unfair price advantage” for lowerpriced products, according to Ken Garcia, spokesperson for Altria, whose USSTC products skew premium. In 2009, Texas switched from taxes based on list price to weight. While Scott Campbell, category manager for Victoria, Texas-based Speedy Stop, was concerned about the increase his 104-store chain faced, sales remained steady—showing the strength of the category. “Texas has always been a strong MST state,” he says. Also facing retailers are OTP contracts, which might offer short-term incentives but could “backfire on the retailer” because they potentially compromise OTP’s relatively small space within the tobacco back-bar. “Locking up space for certain brands and limiting variety for others in a relatively small amount of space,” says Teller of Swedish Match, “has the potential to hold down sales in a category growing as fast as it ever has—at least so far.”
Being Best in Class
The MST segment accounts for 56.7% of the OTP category, according to Nielsen data through January. And most of those purchases are planned, Teller says. “So [for] a big majority of dippers, the reason they open the c-store door to walk inside at all is to buy OTP,” he says.
Teller explains what distinguishes best-in-class MST operators: “They are actually branding and creating a name and a logo and a theme for tobacco inside their stores.”
Best-in-class retailers carry an average of 64 SKUs of MSTs. The number of SKUs has doubled over the past seven or eight years, according to Teller. Campbell’s Speedy Stops happen to have those 64 SKUs. He says he applies basic category management principles to his set: “If it doesn’t sell, we get rid of it, of course. I review the category about twice a year and make changes.” Campbell also meets another bestin- class number, selling an average of 300 cans per week. He says 65% of those cans are premium. Explaining his stores’ success, he says, “Obviously, with MSTs it’s very important to the consumer that it’s fresh, and our people at the store do a very good job of ordering properly and keeping the freshest products in.”
Campbell estimates MSTs account for 4% to 5% of Speedy Stop’s total store sales. “I think we’re successful because we’ve established ourselves as a low-priced leader in the tobacco category, and we advertise as much as we legally can through outdoor signage,” he says. “We just let people know we have a fair price on tobacco products.” Mathe of Altria agrees that pricing competitively and communicating what’s available are important, but he emphasizes space and assortment.
“We talk with retailers about making sure … they have the right products to meet consumer expectations, the right space to accommodate and have these products available and not have out of stocks,” he says. “We know how tobacco consumers are. They’re brand-loyal, and they bring their market basket purchases with them.”