Who's Challenging C-Stores' Share of the Tobacco Market?

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C-stores are the dominant retail channel for tobacco, with nearly 87% share of tobacco sales, according to The Nielsen Co. But in the fight for consumers’ fractured spend, dollar stores and even drug chains are increasingly challenging the convenience channel, using low prices and a greater assortment in other categories as powerful lures.

Marsha Ramsey, owner of Select Fuel & Convenience in Red Bud, Ill., has to keep a watchful eye on her two biggest tobacco-selling adversaries: Dollar General and Walgreens. She also loses tobacco share to stores over the border in St. Louis, where customers are drawn by Missouri’s lower cigarette tax. It’s the lowest in the nation at only 17 cents per pack, compared to $1.98 per pack in Illinois.

To gain an edge, Ramsey tries to entice shoppers with deals and discounts on other merchandise they may add to the basket. “It’s all about pricing,” she says. “If our prices are cheaper for things like snacks and drinks, they’ll pick up the product while they’re here.”

Another key is playing ball with big tobacco. “I’ve worked with R.J. Reynolds and Philip Morris to get better pricing. This required me to expand cigarette selections, which I was opposed to because I’m a single store in a rural area. However, I was pleasantly surprised,” Ramsey says. “My current customers tried different brands, the word spread and sales definitely increased.”

Charles Olenik, owner of Camp Custer Service in Hardin, Mont., can relate to Ramsey’s retailing challenges. A nearby Family Dollar is proving increasingly competitive in tobacco.

“Family Dollar has begun promoting their cigarette prices on street-side signs,” he says. “But currently my prices are better—at least on what they promote.”

A Prescription for Growth?

Despite outside competition, c-stores can take heart in knowing that, for now, they are decisively winning the tobacco wars. The dollar and drug channels account for only 7% and 4% of all retail stores in the United States, respectively, and only 2% and 3% of the tobacco sales, according to data from Management Science Associates Inc. (MSA). C-stores represent 49% of total U.S. stores and 70% of total tobacco sales. (See “Who’s Winning the Nicotine Wars?” below.)

According to Nielsen, drug retailers had only 3.8% share of tobacco sales in 2017, while dollar, club, military and mass merchants combined had 3.7%.

More than 50,000 pharmacies sold tobacco in 2016, according to Truth Initiative. Yet considerably fewer drugstore chains sell tobacco products today than they did in 2014, when CVS, which has nearly 9,700 locations, decided to drop tobacco sales to refocus on health and wellness. Walgreens and Rite Aid have thus far resisted pressure to follow suit. (Walgreens, which has 8,100 stores, acquired more than 2,100 Rite Aid locations in 2017.)

C-stores benefited greatly from CVS’ departure from the category. According to MSA data, each c-store located within 1 mile of a CVS store sold an estimated 37 cigarette cartons more per week. “We found, on average, that convenience got about 68% of the share of the lost tobacco volume surrendered by CVS in 2014,” says Don Burke, senior vice president of Pittsburgh-based MSA.

That said, c-stores did not necessarily steal share from their remaining drugstore competition. “Walgreens and Rite Aid have been selling a pretty consistent level of tobacco since the CVS pullout, and their tobacco sets have stayed about the same in terms of number of SKUs,” says Burke. “C-stores have not been able to take much tobacco business from them in the past couple of years.”

Walgreens, Rite Aid and CVS all declined comment for this story, and CSP was unable to uncover details on individual drug chains’ tobacco sets and sales figures. However, Burke says the count of unique cigarette items in each trade class (convenience, dollar and drug) is a strong indicator of the total tobacco category size in all three.

“The MSA database shows approximately 1,400 unique cigarette items in the convenience channel, approximately 600 unique items in the drug channel, and only just over 200 unique cigarette SKUs in the dollar channel,” says Burke.

Meanwhile, the pool of new customers may be shrinking. A study published in the American Journal of Public Health in 2017 indicated that 38% of consumers who shopped for tobacco goods exclusively at CVS were more likely to stop purchasing cigarettes because of the chain’s tobacco pullout.

With CVS forsaking tobacco, it seems reasonable that Walgreens and Rite Aid could follow. Two out of three American adults favor a ban on tobacco products in pharmacy stores, according to the U.S. Centers for Disease Control and Prevention. Meanwhile, more than 100 municipalities and three major metro areas—Boston, San Francisco and New York—have barred pharmacies from selling tobacco products, according to the American Nonsmokers’ Rights Foundation.

Still, Burke doesn’t think it’s likely.

“CVS had several vendors within their Caremark insurance division that required them not to sell tobacco, so they won’t be bringing back tobacco because it’s far more lucrative to maintain the Caremark clients and relationships they have,” he says. “Rite Aid and Walgreens do not have an insurance division, so it’s far unlikely that they’ll have the same incentives to discontinue tobacco.”

Nik Modi, beverage and tobacco analyst for RBC Capital Markets in New York, agrees.

“Our understanding is that tobacco is a much bigger business for Walgreens and other drugstores vs. CVS,” he says. “In a world where customer traffic is at a premium for brick-and-mortar retailers, it is less likely they will discontinue tobacco. This group may also show interest in tobacco alternatives, such as heat-not-burn and nicotine-replacement-therapy products.”

Dollar Deals

Dollar chains began carrying tobacco products in 2012. Thus far, the effect on c-stores has been minimal: There has been only about a 1% net loss in tobacco sales at convenience stores within a 1-mile radius of a Dollar General location, says Burke.

Nevertheless, the dollar channel’s tobacco sales are growing strongly off a small base, with cigarette unit sales up 11%, moist smokeless sales up 37%, cigarillos up 20% and sales of little filtered cigars up 46%, according to MSA data for the year ending July 2017.

“Once the dollar channel determines the SKUs that have the strongest appeal to their shopper base, and begins to provide their consumers with a consistent selection of these desired brands, their tobacco sales will increase considerably,” Burke said.

However, he gives drugstores a slight edge over dollar stores when it comes to the growth potential of tobacco sales because more of their locations are typically in high-traffic areas.

Dollar stores have long been a contentious competitor with c-stores, and the channels’ recent forays into immediate consumption and smaller stores—on top of tobacco—have increased the threat.

Dollar General plans to open 900, renovate 1,000 and relocate 100 stores in 2018. Dollar Tree and Family Dollar plan to open about 620 new stores in fiscal 2017 (ending Feb. 3, 2018).

Consider, too, that drugstores have made inroads in vape, particularly in sales of kits (volume is up 286% for the year ending July 1, 2017, according to MSA), vaporizers (up 143%), e-cigs (up 37%) and disposables (up 36%). Dollar chains have not fared as well in vapor, because “their selection of SKUs has been in flux, with almost a complete elimination of the e-liquid segment,” says Burke.

Looking Ahead

Despite dollar stores’ impressive site count growth and expanded product selection, their effect on c-stores will be limited, according to Burke.

“It will be difficult for dollar stores to take significant tobacco sales from the convenience channel or carry a similar amount of tobacco items without a redesign to the store,” he says. “The tobacco product line in a c-store is consistent and extensive. And the greater number of convenience outlets makes the c-store a far more desirable stop for the tobacco consumer.”

Put another way, convenience “will rule the tobacco roost for the foreseeable future,” Burke says.

Modi also points out that, per Nielsen data, “c-stores have gained the most tobacco share of any retail channel, gaining 184 basis points of tobacco share from 2013 to 2017 and consistently gaining tobacco share each year.”

While there are more than five times the number of c-stores than major dollar-chain stores, the disparity is even larger when compared to pharmacy chain stores that sell tobacco: Convenience outlets outnumber them 18 to one. And, “across the convenience channel there are over twice the number of SKUs carried as compared to the drug channel, and over four times the number of SKUs as compared to the dollar channel,” Burke says, citing MSA wholesale shipment data through Sept. 30, 2017.

“We suspect convenience will continue to consolidate tobacco sales by reinvesting in the channel vs. other brick-and-mortar retailers, including drugstores, who are focusing reinvestment on e-commerce alternatives,” Modi says.

To stay ahead, he urges c-stores to adjust their merchandising and educate consumers on next-generation tobacco products.

Who’s Winning the Nicotine Wars?

Convenience crushes the competition, but dollar and drug are rising in some categories, according to MSA data. (Numbers boxed in green indicate significant change.)

Nicotine distribution*

Source: Management Science Associates

* Wholesale shipment to retail data through July 1, 2017

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