The competition: This is how many convenience store operators once viewed tobacco shops.
It’s easy to understand why. While cigarettes have been historically important to both channels, tobacco outlets have not been limited by self-service restrictions and typically have space to stock more SKUs than a c-store operator could dream of. And, as tobacco-centered operators, they have the luxury of training their staff to be experts in the finer details of the category.
Though this is still true today, retailers operate in a different world, one filled with legislative landmines on the national and local level; one in which anti-tobacco advocates target not just manufacturers, but also retailers; one in which social pressures, taxes and regulations have led to steep declines in cigarette sales, resulting in squeezed margins for the tobacco retailer.
In other words, a world in which tobacco shops and c-stores often find themselves on the same side.
That was certainly the belief of the founding members of the National Association of Tobacco Outlets (NATO) in 1997.
“The tobacco industry is so disliked, regardless of if you are a tobacco store, c-store or any other channel,” says Mary Szarmach, president of the NATO board and senior vice president of trade market and government relations for Smoker Friendly, Boulder, Colo. “The only way we will be able to continue selling these legal commodities is if we join together to battle the legislative issues that are attacking our industry daily.”
The similarities between the channels are all the more apparent as smoke shop and c-store owners begin to blur the lines: All of Smoker Friendly’s 86 company-run locations focus on tobacco, with 22 also offering fuel and other c-store staples.
Likewise, Lufkin, Texas-based Brookshire Brothers started out as tobacconists but now operate 32 c-store locations as well. Phil Metzinger, the company’s vice president of specialty beverage and tobacco, believes these convenience locations often benefit from its tobacco-shop strategies, and vice versa.
“I work closely with [the convenience] side of the business,” he says. “Tobacco really is the commonality; there’s a real tie.”
Retailers don’t have to operate stores in both channels to learn from the other side. These opportunities, such as networking at NATO events or seeking out individuals who have worked on both side of the fence, abound.
Andrew Kerstein, who owns and operates the Matawan, N.J.-based Smoker’s Haven chain of tobacco shops, is just one example of someone who has moved between the worlds of convenience and tobacco. Kerstein says he still uses strategies from his days as a c-store operator, making sure to stock popular products at the far end of the store so consumers have to walk past other potential impulse items on their way.
As the retail and regulatory environments present further challenges to the tobacco retailer, Kerstein—who served as the NATO board president through 2013—believes there is plenty the two sides can learn from each other. “There is much value in sharing strategies across retail segments,” he says.
Here are just a few strategies from tobacco-shop retailers—and c-store retailers who also operate tobacco shops—that might just work for a c-store.
Managing a Brave New World
One trend that spans both c-stores and tobacco shops is the explosion in popularity of OTP, driven by huge varieties and new products. Metzinger argues that this phenomenon is not unique to tobacco.
“Look at what restaurants are doing today with the diversification in wines and craft beer,” he says. “There’s so much variety that’s not just flooding the market but doing extremely well. Variety is a huge opportunity, and it’s something that tobacco outlets put a big premium on. We want to be the retailer who has it all.”
Andrea Myers, president of Kocolene Marketing, Seymour, Ind., has observed this shift, as well as the challenges it presents to her company’s mix of c-stores and tobacco shops.
“The constant change of the category means a constant change of space requirements for the category,” Myers says. “Six years ago, a 4-foot roll-your-own set was sufficient for a tobacco store; now we have stores that have 14 to 16 feet.”
Having the footprint to house a 16-foot RYO set seemingly gives tobacco shops an advantage over c-stores. That’s why retailers such as Kocolene leverage their tobacco shops as a kind of retail test market for c-stores: Myers says she won’t put tobacco products into her convenience locations until they’ve proven themselves at the tobacco shops.
This has been especially important in developing the emerging (and constantly evolving) e-cig segment.
“People are really into trying this category. It’s almost a whole new customer for us,” says Myers. “More recently, we are seeing the switch from disposables to kits. I think people have tried the disposables, figured out the brand they like, and are now buying the kits.”
But will this translate to the c-store side? Though Metzinger says disposable electronic cigarettes are still performing well at Brookshire’s c-stores, the company also brought in blu’s rechargeable kits after seeing how well the units were selling in the tobacco shops.
“These kits—which have a $30-plus ring—are a very nice item and margin for a convenience store,” he says.
The emergence of vaping products and e-liquids is another phenomenon that started in tobacco shops but might just trickle down to the c-store side. Like Brookshire, Smoker Friendly is still seeing higher volumes in disposables. However, Szarmach says, “The new vapor products are high-margin and selling like crazy.”
Metzinger views the vaping products as a huge opportunity, stocking—and selling—more than 30 flavors of e-liquids at his tobacco shops.
“With kits and cartomizers, tobacco and menthol flavors were really about 90% of what we sold; the flavors didn’t take off,” he says. “But when we got into the vaping products, it was a different story. It really surprised me.”
Brookshire’s c-stores will follow this lead, but Metzinger says it will be different for every retailer. “It’s something that each operator is going to have to consider,” he says. “I think you’ll see these vaping-style products in convenience stores. They may not carry 30 flavors, but they’ll have some options and do quite well.”
“All these shifts still resulted in more gross profit dollars,” Myers says. “It’s all about managing the shifts.”
Cigarette Conundrum
While there’s a lot of excitement surrounding products such as electronic cigarettes, e-liquids and even “old” standards like MST, that excitement isn’t quite making up for lost cigarette margins on the c-store side.
What about in tobacco shops? Yes and no, especially when you consider how reliant the channel has been on carton sales.
“[E-cig] cartridge refill sales are nowhere near the ring of a carton,” says Metzinger. “A carton of cigarettes in Texas is $50 to $60; an e-cig cartridge is not anywhere close to that. It’s a much better margin, but the dollars just aren’t there.
“With tobacco shops, there’s a lot of little specialty things that you carry, but the dollar sales are still tied up in premium cigarettes,” he continues. Cigarettes account for nearly 80% of sales and 50% of the product mix at his smoke shop locations, he says.
If cigarettes are important to the c-store channel, they’re essential to the tobacconist, as evidenced by the sheer volume of SKUs. Kocolene’s smoke shops average more than 300 cigarette SKUs (as opposed to 225 in its c-store locations), and Metzinger says it’s at least 250 for Brookshire.
The extra space allows these tobacco retailers to carry more than just premium brands, with a big focus on value, third- and fourth-tier brands. As with OTP, cigarette consumers are demanding diversity, which can be difficult to manage.
“Tobacco preferences vary so much from store to store that even within my small six-store chain, I have products I cannot keep in stock in one store and can’t give them away in another,” says Kerstein of Smoker’s Haven.
“To me, it comes down to having the right variety,” Metzinger says. “We’ve always done a very good job with third- and fourth-tier cigarettes, and we’ve tried to keep the very best of what’s out there stocked. There are some strong offerings, though they tend to be regional in nature.”
For the West Coast-dominant Smoker Friendly, this means a heavy concentration of private-label brands. Brookshire has found success with lines such as Pall Mall, Seneca, Pyramid and Altadis’ recently revamped Montclairs.
Myers says Kocolene customers’ preferences vary from store to store, especially considering her company has sites in Indiana and Kentucky, but the trend is clear.
“Throughout the past several years, the average has swayed toward fourth tier vs. premium,” she says.
It’s a lesson that should resonate on the c-store side, even if an operator can’t stock quite as many fourth-tier options.
“There are still people dabbling in the (cigarette) market,” says Metzinger. “Consumers are willing to experiment, so you have to stay close to the market to remain relevant.”
Relying on Relationships
While space is certainly an advantage smoke shops have on the c-store channel, perhaps the channel’s biggest edge is its personnel. A tobacco-savvy clerk is especially valuable when it comes to getting consumers to dabble in new, higher-margin products.
“The people at our locations are really the most important asset that we have,” Metzinger says. “Continually bringing in good information and training to those people who run the registers is a key part of growing our business: it’s the pathway to having a satisfied consumer who will come back and try new things.”
It’s more challenging given the difference in time expectations between the c-store and tobacco-shop consumer. Myers believes c-stores should try to leverage the employee-consumer relationship, even if there’s a time limit on that interaction.
“C-store shoppers want in and out; tobacco-store shoppers like to mingle and chat, usually,” she says. “If you can train your c-store staff to talk about new tobacco products during the transaction, it helps sell more items.”
Metzinger agrees: “It’s definitely something that’s been able to carry over into our convenience stores. We’re trying to keep our employees as correct and abreast of what’s current as possible, on both sides.”
And it’s not just the employee-consumer relationship that tobacco shops rely on. Kerstein says he equally values relationships with tobacco manufacturers.
“Data is not as readily available as it may be for other product categories,” he says. “In many cases, you are forced to rely on the recommendations of the sales staff of the cigar manufacturers. So the relationship you build with those salespeople is crucial to the success in operating a tobacco store.”
Though data may be easily available in the standard c-store tobacco segments, as more retailers look to boost margins by entering new areas such as premium cigars and vaping products, building honest relationships with manufacturers and wholesalers could be key.
“Don’t be afraid to test new products or even new category extensions,” says Myers. “As long as you partner with vendors who will stand behind that product, there shouldn’t be much of a risk to you.”
And maybe there’s one more relationship that will be important to the future of tobacco operators: the relationship between c-stores and tobacco shops. After all, if anti-tobacco advocates and lawmakers are lumping the channels together, why shouldn’t c-store retailers and tobacco shops become allies in both legal battles and business?
“We’re in the midst of a very negative environment,” Metzinger says. “There’s a strong entity of people in this country who just don’t like tobacco and are trying to fight it. But I’m an optimist. I think there are better days ahead.”
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