OTP Presents Opportunity for Success at Retail

A conversation with Bill Noah from Scandinavian Tobacco Group

Brought to you by Scandinavian Tobacco Group.

Cigarettes and other tobacco products (OTP) were once seen as an “us-versus-them” situation, but as more consumers seek out craft, artisanal products as an alternative to traditional smokes, OTP offers convenience stores a unique opportunity to drive profits revenue in a tightening market.

“The time is now to upgrade your tobacco set,” says Bill Noah, director of sales and operations at Scandinavian Tobacco Group. “There are more opportunities now than ever before to showcase innovative, craft and premium OTPs like handmade cigars, quality pipe tobacco and roll-your-own.”

Compared to traditional cigarettes, the profit margins for OTP are simply hard to pass up—whereas a pack of cigarettes might bring in 50 cents, just one pouch of two premium cigars can earn up to $3 or even more in some cases. And, the sale of just one premium cigar alone equals the sale of about five to seven smaller products.

“The high margins are going to help c-stores drive revenue in the future, especially in the tobacco category,” says Noah.

Millennials and smoking-age Gen Zers

Offering craft, artisanal alternatives to traditional cigarettes can also help retailers grow new customer bases by targeting two key demographics—millennials and Gen Zers of legal smoking age. According to CSP’s 2016 “Consumer Study: Examining Regional Differences at C-Stores,” 28% of c-store shopping millennials bought tobacco products in the past month, second to Gen Xers at 31%.

And while 86% of those millennials reach for traditional cigarettes, 35% bought cigars—a figure second to Gen Zers (ages 18–23). Thirty-six percent of Gen Zers, in comparison, purchased cigars, according to the report. Clearly, there’s growth opportunity.

Offering variety

Variety is also key as well when it comes to OTPs and younger generation consumers; 53% of that group want a variety of tobacco products, while 44% said they would explore smokeless tobacco, according to the CSP report.

“If you look at c-stores today, you’ll see a much wider variety of beer and craft beer, and of course, a much wider variety of food and foodservice offerings,” says Noah.
“The tobacco industry, in my opinion, has been slow to respond. OTP items have not always traditionally been in c-stores, but now they are starting to find their way in as consumers seek out premium craft products of all kinds.”

The good news is, c-stores don’t necessarily need to invest in a humidor or fancy equipment to offer these products, although visual merchandising is still key. Some products come in vacuum-sealed pouches to preserve freshness even while hanging on a traditional rack or in a display case.

Now that retailers know the benefits of upgrading an OTP program, Noah points to a couple key steps c-stores can take to make it worth their while.

Leveraging planograms and visual merchandising tools

While planogramming—the use of visual merchandising to get customers to leave with additional items they had not originally intended to buy—has long been used in the c-store arena, it’s time to revisit the science, especially when trying to step up tobacco and OTP sales. That’s because planogramming can move cigar and craft tobacco products to the front or other strategic location of a store.

When planogramming a store in order to upgrade a tobacco set, retailers need to look heavily at customer demographics. Is the customer base made up of locals or commuters? Are the shoppers mostly younger or older? Are they morning or afternoon frequenters? Do sales of tobacco or OTP go up on certain days and down on others? Do certain OTP items sell better than others?

This crucial information helps retailers make the best decisions regarding how to upgrade their offerings in the tobacco category.

Find a trusted resource for data

To set up a proper planogram, it’s important to find a trusted category leader or advisor in the industry.

“You want an unbiased, data-driven source to tell you what the best set will be for your particular store to maximize your return on investment,” Noah says.

Some companies not only gather demographical information for the store location, but they also source POS and other information from the retailer. They can also bring in data from outside the store. Each region—each block, really—is not the same. There is not a one-size-fits-all approach to set optimization, so trusted, unbiased data is super important.

“We once worked with a large chain in Florida that, in the past, used to simply put the top 30 cigars in every one of their stores throughout the entire state,” says Noah. “But, if you look at the data, only two of the top 30 cigars sold in one area, and only eight in another. And then there were some cigars that weren’t even in the store that could have sold well and caused the store to miss out on an entire group of consumers.”

Using quality data strategically to put the right products in the right stores and in the right places within the stores remains key to upgrading OTP—yet another potential profit maker and revenue driver alongside those “other,” premium or craft beer and food products.

When developing an OTP selection, strategies such as using demographic data, catering to millennials and Gen Zers and offering a variety of products are key. The opportunity to profit is huge, but it does take some time and research.