CHICAGO -- There was no shortage of positive news from last week’s NACS State of the Industry Summit (click here for the full story). From falling gas prices to soaring in-store purchases, 2014 was a great year for the channel. But perhaps the most shocking news was the fact that, for the first time in years, cigarette sales did not decline. In fact, NACS data showed same-store cigarette sales grew by 0.1%, leading Kevin Smartt, CEO of the Austin, Texas-based Kwik Chek Food Stores Inc., to proclaim “flat is the new up.”
“We’ve seen declines in tobacco for a long time,” said Billy Milam, president of the Atlanta-based RaceTrac Petroleum Inc. “Normally I’d say this figure is flat, but I’ll take a 0.1% increase in a declining category.”
And despite increased competition from dollar stores and mass merchandise, convenience stores still account for the majority of tobacco sales: per Nielsen and IRI, 86.9% of cigarettes and 91.8% of other tobacco products (OTP) sales happen in c-stores. By comparison, grocery accounts for 6.7% of cigarette and 5.8% of OTP sales, drug accounts for 6.4% of cigarette sales and 2.3% of OTP sales and mass merchandise had a 0% share of both segments.
"We clearly dominate cigarettes, OTP and beer," Smartt said.
Still, the news wasn’t all rosy. Though the tobacco category continued to lead in NACS’ in-store sales (with 35.9% of sales), it dropped to third in terms of profits (17.3%). The drop is largely due to cigarettes, which offered a 13.54% gross margin percentage, versus OTP’s 29.25%.
“When we put a retail lens and look at gross profit dollars, cigarettes do not reign supreme,” said Smartt. “Happily, flat is the new up … however, there continues to be compression on cigarette margins.”
Indeed, NACS reported a 2.6% decrease in same-firm cigarette margins and a 0.39% decrease in gross margin percentages.
When broken down by the five regions NACS tracks, it was somewhat similar: cigarette sales were up in every region except the Northeast (down 2.4%) and the Midwest (down 0.1%); gross profit dollars were down in every region except the Central, where profits actually rose by 2.1% (by comparison, the Southeast saw profit dollars decline by 9%).
It would appear that premium brands are driving virtually all growth in the segment. Nielsen showed premium cigarettes had an 80.4% share of the segment with a 0.4% increase in sales (units were down 1.2%). Branded discount cigarettes (14.5% share) saw no change in sales and a 1.3% decrease in units; Sub-Gen/Private cigarettes (4.7% share) saw decreases in sales and units (2.7% and 4.4% respectively); Fourth Tier ( 0.4% share) was also down in sales and units (4.5% and 1.1%).
While it would be easy to focus on the declines, Smartt warned against writing off the importance of even miniscule growth in cigarettes.
"When a $5.3 billion category in our channel goes flat after years in decline, that's impactful,” he said.
Unlike cigarettes, OTP saw increases in both sales and margins: same-firm sales were up 4.9% in 2014, with a 1.3% increase in margin percentages. Gross margin percentages were down 1.05%.
“Smokeless still has the lion’s share of sales,” Smartt said of the specific segments within OTP. “But e-cigs have the highest growth rate.”
According to Nielsen, smokeless tobacco accounted for 60.4% of c-store OTP sales (with sales up 5.2%, units up 0.7%); cigars had a 28% share (sales up 0.4%, units up 5.1%); e-cigarettes were in third with a 7.7% share (sales up 11.7%, units up 13.3%); papers, pipe/cigarette tobacco and all “other” OTP segments were negative in both sales and units.
Perhaps the most positive news regarding tobacco came from a question posed by Smartt: “Have we (finally) hit the low-point in cigarette sales?
The NACS data certainly seems to suggest so. Over the last five years, same-firm cigarette sales-per-month topped out in 2010 (at $53,953) and declined through 2013 (at $51,252); 2014, however, showed a slight rebound (at $51,348). IRI data indicates that the turnaround in cigarette sales happened around the same time gas prices started to drop: specifically in October 2014.
“When fuel got to $3.20 a gallon, that’s when cigarette sales surpassed last year—and haven’t looked back since,” said Smartt. “This inspires a ‘wait-and-see’ outlook for 2015.
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