NEW YORK -- As the title of a recent CSPNetwork CyberConferenceIs OTP the New Cold Vault?implied, various factors in recent years have set the stage for an explosion in sales of cigarette alternatives, much like the energy-drink phenomenon of the past few years.
The presenters, Joe Teller of conference sponsor Swedish Match North America, Nik Modi of UBS Warburg and John Strickland Jr. of Wayne Oil Co., asked attendees if they knew how much OTP was growing, and were they prepared to maximize the opportunities it provides?
Teller [image-nocss] showed AC Nielsen Total Convenience data demonstrating that since April 2006, there had been monthly double-digit growth in moist smokeless tobacco (MST) can volume, spiking in the 16% range for the last three months of 2006. Five-year Nielsen numbers (2001-2006) showed a compound can growth in c-stores of 7.8%.
UBS estimates showed a 40% drop in average annual cigarette sales per store from the period 1997-2005 to 2006 and a projected decrease to 2010. Modi said the point is not that cigarette customers are moving to OTP, but that cigarettes might be losing its right to store space.
I think MST has been growing more from taking share from chewing tobacco, plugs and twists. So what we're seeing is the consumer migrating to cleaner forms of the product, said Modi. Some say, How can the category grow, isn't it already spaced properly?' Well, yes and no. You have some shelving out there that some of the majors have put into the stores, but more importantly, there has been no shelf space taken away from the cigarette category. I'll be a betting man and say that over time OTP starts to take some share from cigarettes.
The trio said the similarities between the energy-drink growth and OTP potential were striking: higher penny profits, retailers slowly expanding space for the products, consumer migration, and the entrance to the category of major suppliers (Coke for energy drinks, Philip Morris for OTP).
According to the 2005 Willard Bishop Convenience Superstudy and UBS estimates, the true gross profit per unit was 6.8 times higher when comparing energy drinks to packaged beverages, while the switch from cigarettes to smokeless tobacco has shown to generate 3.5 times the true gross profit.
Philip Morris USA is close to testing its own moist smokeless product, said Modi, while RJ Reynolds' one-year-old Camel Snus may have earned wider test distribution.
The competition from the major cigarette suppliers can be a good thing, said the presenters. Beverage Digest numbers showed that when Coke and Pepsi entered the energy-drink category in 2003 and 2004, it drove up sales of Red Bull and Hansen Natural's Monster Energy drinks. Euromonitor LLC data showed a sales boost in the energy-drink category from 24% to 35% after the giants' entry.
One of the most dramatic figures presented by Modi, tobacco analyst for UBS Warburg, New York, was the disparity between the weekly true profits generated per square foot of shelf space by moist smokeless and the amount of space allotted to it. According to the Willard Bishop Superstudy, moist smokeless made $53.43 per square foot (compared to cigarettes' $44.87) but occupied 2.9 square feet of space, rankings of third and 20th among product categories, respectively.
Modi followed that with monthly c-store trip-frequency numbers supplied by a 2006 NPD Group study. OTP customers made double the number of trips as the average c-store customer and led all categories of shopper, with cigarettes one trip behind, 13.3 trips to 12.3.
Another highlight was growth by product price. Leading the overall growth was the value/price category, which showed a 29% boost in sales (24.9% for premium loose), and a 77% share of the can growth. In other words, for every increase of one can of premium loose, there was a 4.1-can boost in value/price.
More importantly, according to Willard Bishop and a 2005 Rose Research Attitude and Usage survey, value/price customers make 56% more trips to the store than the premium customer, and thus spend 55% more per month on other c-store categories.
Strickland showed how these figures relate to his company's experiences. Smokeless tobacco in his 15 stores accounts for 56.3% of OTP sales; growth in the 123-SKU category was 19% in 2006, he said. Goldsboro, N.C.-based Wayne Oil stores get the products from behind the counter with a spring-load merchandiser for uniformity and a clean presentation, and Teller that self-serve can mean several growth points.
This allows our staff to quickly identify any out-of-stocks, said Strickland. Our out-of-stock rate is down to about 4%.
Cigars, which make up 33.8% of Strickland's stores' OTP sales, grew at a 17.3% rate. In general, AC Nielsen numbers showed total cigar sales increased by 14% in 2006, led by little cigars (cigarillos) at 17%, and flavored cigars at 16%. Flavors and single-cigar sales drove the cigar dollar growth at 26% and 52%, respectively.
You have to be very careful with flavors; everybody seems to come out with the same flavors relatively quickly, Strickland said. Look at what you sell, take the package deals that have multiple offerings in a package and that helps you clearly define which flavor, which brand you should go with.
Teller made several suggestions to retailers who have yet to commit to OTP, or to those who could improve category sales.
Set more aggressive sales goals. Re-examine sales space and visibility of category and product pricing. Maintain strong commitment from supplier, wholesaler and retailer on re-stocking. Pursue 95% market coverage, especially for larger or faster growing segments. Price competitively to build loyalty.Coffee and prepared foodsthese are destinations for a lot of chains, and you can really tell as soon as you walk in the store. You can see all the money that's been invested in the fixtures, the racking, the signage, the space, the labor that supports it all. Shoppers of these categories are really being catered to, and it's obvious, said Teller, senior manager, category management for Swedish Match. Are you treating (OTP) as a destination category? If they walk into your store, how long would it take for them to find the section? Would they know that you're serious about being in the OTP business?
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