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Category Management Handbook

Money to Burn

More discretionary income shakes up the tobacco category

Lower gas prices and higher minimum wages are likely to put more jingle in low-income consumers’ pockets and help drive tobacco sales in c-stores this year.

While 2016 is unlikely to bring a repeat of last year’s impressive cigarette sales, “the outlook is constructive,” says Vivien Azer, an analyst with Cowen and Co., New York.

“Given that cigarette volumes fall every year, normally you would expect after a very good year that you would have a tougher year,” she says. “But we’ve actually raised our outlook for cigarettes.”

Industry cigarette volumes are expected to fall 3%, vs. 4% predicted previously, and Cowen anticipates 2% to 3% growth in moist smokeless tobacco.

Fourteen states began 2016 with higher minimum wages, and more increases are coming. While analysts know how low gas prices play into tobacco sales, the effect of higher minimum wages is not as well understood. The latest increases “are not very well balanced geographically,” overindexing in the West and the Northeast, Azer says.

If low-income consumers continue to find themselves with more discretionary income, discount cigarette brands could be challenged. “What we’ve seen over the past two years is broad-based trade-up in the cigarette category, where consumers are switching out of cheaper cigarettes and buying more premium cigarettes,” Azer says.

She expects continued sluggish e-cigarette sales and says category managers need to be mindful of inventory levels as well as brand proliferation at the point of sale. In vaping, newer open systems that let consumers mix flavors and nicotine strength are doing well, but there may be limits on expansion in c-stores.

“It’s very SKU-intensive because there are so many different flavors out there,” she says. “And you have direct competition from vape shops.”

IRI shows c-store cigar volumes increased 9% in 2015. Susan Sayre-Earley, marketing and promotions supervisor for Par Mar Stores, Marietta, Ohio, says the company plans to move allowed products from behind the counter to the sales floor. “We tested both on the floor and behind the counter and found that consumers want to smell and touch what they are buying,” she says.

Par Mar Stores saw so much success last year in offering cigar foil packs in limited-time flavors that it plans to add extra inventory to each location in 2016. But it will take a custom approach.

“Tobacco is not cookie-cutter and needs to be managed by location and/or marketing areas,” Sayre-Earley says.


Cigarette Sales

Smokeless Sales

Cigar Sales

CMOY Tobacco: Ruth Ann Lilly

CMOY Tobacco/OTP: Matt Hieb

View the full 2016 Category Management Handbook

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