Tobacco's Optimistic Glow

Key category shows resilience despite federal,state tax hikes,economy

Angel Abcede, Senior Editor/Tobacco, CSP

NEW YORK -- Profitability numbers from the major cigarette manufacturers and other statistics point to the continued strength of the tobacco category, despite a slumping economy and a major spike in the federal excise tax (FET) last spring, according to an industry analyst. [To view an OnDemand replay of this CyberConference, pleaseclick here (free to retailers and wholesalers; $49 for others).]

The strength of premium brands, especially in high-tax states, is also proving out, as is the [image-nocss] general category of other tobacco products (OTP), "portion pouches" in particular, said speakers at last week's CSPNetwork Tobacco Update CyberConference.

Despite falling volume numbers post FET hike, cigarette profitability is strong, according to Nik Modi, sector analyst, UBS Securities LLC, New York. "It's remarkable to think that with unemployment, FET and [increasing] state excise taxes that price elasticity has remained constant."

Reasons for the relational consistency between volume and retail price lead back to consumer demographics, he said. Tobacco users tend to have lower incomes on average, with 60% earning less than $40,000 per year. Relatively speaking, food inflation and gas pricestwo indicators viewed as critical to lower-income citizenshave been moderate. In addition, minimum wage went up.

"Low-income consumers are in a healthy situation relative to middle-income and higher-income consumers, many of whom were impacted by housing and, earlier in year, with the [falling] stock market," Modi said.

Premium brands have also benefitted from the tax-heavy climate, Modi said. Documenting the strength of premium in relation to state taxes, he said that in states where taxes were the highest ($1.50 or more per pack), premiums held 94% of the market. He reasoned that after already paying $5- or $6-per-pack prices, a smoker is less sensitive and will often opt to trade up.

OTP in general is faring well, according to speaker Joe Teller, director of category management for Richmond, Va.-based Swedish Match North America, which sponsored the CyberConference. A trend his company is seeing is a tie to new moist-snuff tobacco (MST) users and cigarette smokers. He said company research shows that many of the newer users are also cigarette smokers, but ones that have used MST at some time in the past. These new users are pressured by bans and other social influences to smoke less and are returning to the MST category.

Of all the subcategories within OTP, he said the "portion pouch" business is the most robust, growing 20% in the past year despite the economy.

Although cigarettes typically make up the bulk of a retailer's tobacco portfolio, Teller said OTP shoppers visit convenience stores twice as many times as the average consumer and buy higher-ticket items.

"If these guys get more important over time, you're going to have to focus more on the fundamentals in order for them to stay loyal to your stores," Teller said.

Angel Abcede, CSP/Winsight By Angel Abcede, Senior Editor/Tobacco, CSP
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