Last year, Kelly Nelms of Austin, Texas-based Kwik Chek Food Stores set out to own moist smokeless tobacco in the chain’s markets.
He began with an aggressively priced two-can deal on Copenhagen and Skoal that lasted six months. He tried to catch customers’ eyes with point-of-sale promotions inside and outside. At the start of 2015, he reinforced Kwik Chek’s budding reputation for low prices by adding a two-can deal on Grizzly.
And when he ran the numbers, Nelms knew that Kwik Chek had done it.
With a 13% jump in sales of moist smokeless tobacco—an increase more than twice the national average—he found confirmation: “If I’m out-trending the nation, I’m doing something right. We’re not only seeing good growth in our promotional products, but our other brands are growing too. I said, ‘OK, we’ve become a tobacco destination.’ ”
Benefits of Consolidation
Kwik Chek, the 38-store retail division of McCraw Oil Co., covers a sprawling area that extends from southern Oklahoma into Texas. Nelms finds he can’t rely on national sales data to determine what tobacco products will work best in mostly rural stores.
“I look at nationwide data, but I don’t take it into 100% consideration,” he says. “If I get Dallas IRI data, it doesn’t help me much in my north Texas stores or my southeastern Oklahoma stores.”
He keeps a close eye on how other retailers and channels in his markets are pricing tobacco, especially if he finds a Kwik Chek store that is not performing as well as other locations. When a competitor is doing something that is keeping his tobacco sales from growing, “I try to see what they’re doing, react and take that business,” Nelms says.
After years of flat to minimal growth in cigarette sales, Kwik Chek saw an increase last year of about 4%. Nationwide, c-store cigarette sales increased less than one-third of a percentage point, according to IRI data for the 52 weeks ending Dec. 28, 2014.
“We saw growth in 2014 and continue to see growth in 2015 because we changed our strategy,” Nelms says. “We went with the Pall Mall [everyday low price] program with [Reynolds] and then adjusted our Altria contract by store to be more aggressive in stores that were underperforming.”
Lower gas prices also may have contributed to consumers upgrading their cigarette purchases to branded products and even premiums, Nelms says.
E-Cig, Vaping Challenge
Cigar sales also are increasing month to month. Nelms attributes that to a decision last year to name Swisher International as Kwik Chek’s category captain for cigars. The chain added more Swisher products and flavors, mostly two-cigar foil pouches. Nelms also pulled slow-moving cigars and replaced them with in-and-out offers.
“Other than Black & Mild, I have nothing other than the foil pouches,” Nelms says, “and that seems to have been a good move.”
The chain will expand its moist smokeless tobacco in 2015 to include more variety. If he finds a less-popular brand doing well in a particular Kwik Chek market, Nelms says he will add it to sets in other markets.
He expects moist-smokeless-tobacco sales to continue to grow, although perhaps not by double digits, as they did last year.
But he has far less enthusiasm about the prospects of e-cigarettes and vapor. Nelms chased the category in 2014, adding whatever “was supposedly the hottest newest brand.” He found mostly frustration and disappointment. Vapor sales increased but were offset by declines in sales of e-cigarettes.
Also, the rapid evolution of e-cigarette brands and technology have led to consumer confusion, he says. Unlike tobacco or vapor specialty shops, c-stores don’t have the time to educate customers about the various options.
He also believes that vapor users are different from traditional c-store tobacco customers in that they tend to favor trendy flavors over brand loyalty and the vaping experience over shopping convenience.
“The mass market has just gotten saturated,” he says. “In 2013, in our area I was one of the leaders as far as getting in e-cigs and having several to offer, so we were seeing a lot of growth. In 2014, everybody now had e-cigs. I think it … divided up the sales.”
Waiting for the FDA
Nelms sees keeping up with technology and changes in the e-cigarette and vapor category as some of the biggest challenges facing tobacco category managers in 2015.
“Technology almost changes monthly,” he says. “What’s working and being successful today six months down the road is going to be outdated. It’s very hard to keep up with.”
While some analysts tout the potential of e-cigs and vapor to eventually outpace sales of combustible cigarettes, Nelms questions that logic: “E-cigs and vapor make up less than 1% of my total sales for the category. Everybody thinks that’s the future, but yet we’re all chasing such a small percent of our business. I kind of wonder what we’re doing.”
Something that would help strengthen the e-cigarette and vapor category, he believes, would be a decision by the FDA on possible regulation of those products. While the agency gathers scientific information about e-cigarettes and health, states and cities are starting to act on their own. In Texas, for example, some cities and towns have sought to ban e-cigarettes in public places.
Another looming threat to the tobacco category is a familiar one. President Obama’s proposed federal budget includes, for the third consecutive year, a 94-cents-per-pack increase on the federal cigarette tax rate and the possibility of an increase on other tobacco tax rates.
If that proposal were to pass, the effect would be huge on all c-stores, Nelms says.
“I know there’s a happy medium to find for the government and states as far as taxation. But can we just keep raising it and raising it and raising it?”
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