Who says tobacco’s on the decline?
Such notions are dismissed into the world of the absurd. A trek through the 2012 NATO Show showed an industry in positive transition, pivoting from cigarettes’ dominance to a broader spectrum featuring a robust collection of cigars and moist smokeless, relative newcomers snus and electronic cigarettes, and niche players such as hookah and roll-your-own.
This year marked the 11th annual NATO Show, hosted April 24-26 by the National Association of Tobacco Outlets, and it was the association’s most successful. Inside the Paris Hotel and Convention Center, the number of exhibitors soared 40% to 176; show-floor space skyrocketed 154%; and the number of both retailers and tobacco buyers increased over last year’s totals. Educational sessions were richer than ever.
“We are more than pleased with NATO’s 11th Anniversary & Trade Show,” said NATO president Andy Kerstein. “With more exhibitors, a sold-out show floor, relevant speakers and educational sessions, it’s no wonder the NATO Show has become the premier event for the tobacco industry.”
Inside this special event coverage, you’ll find reports from several of the presenters and highlights from the second annual exclusive NATO-CSP Tobacco Survey. (To read the 2012 CSP Tobacco Supplement, go to www.cspnet.com/tobsup12.)
Embracing Alternatives?
Are e-cigarettes and snus on similar or divergent paths?
ombustion-free electronic cigarettes are smoking hot, garnering intense attention from tobacco outlets and convenience stores alike. But is the attraction superficial or real? Are e-cigarettes the wave of a smoke-free future or the new snus, which burst onto the tobacconist scene a few years ago with great fanfare, only to simmer to an uncertain fate?
An exclusive NATO-CSP Tobacco Survey sponsored by Swedish Match shows that nearly three-quarters of tobacco outlets surveyed view e-cigarettes as a growing segment, vs. only 35% for snus. What is hard to predict is whether e-cigarettes are merely riding the hype and widespread curiosity, and whether snus’ best days lie ahead or have flamed out before igniting a loyal U.S. customer base.
These questions were among many addressed during a panel discussion. And the excitement generated around electronic cigarettes played out further on the exhibition floor, where no less than 20 e-cigarette vendors demonstrated their wares and sought to differentiate their products.
Major Moves
Indeed, as tobacco retailers and suppliers converged, Lorillard was announcing the $135-million cash acquisition of blu ecigs, fueling speculation that Altria and R.J. Reynolds may not be far behind in exploring the e-cigarette craze. At the same time, statistically, neither e-cigarettes nor snus constitute even 1% of total tobacco, a category dominated by cigarettes, followed well behind by cigars and moist smokeless.
Panelists Randy Silverman and Trey Power weighed in on the newer entries to the tobacco set. “Right now, electronic cigarettes are the hottest growth category for us,” said Silverman, fourth-generation operator of the 14-store Klafter’s Inc. tobacco shops, based outside of Pittsburgh. “Determining how many brands and knowing what brands to carry are the biggest challenges.”
Earlier this year, Circle K, the U.S. retail arm of Laval, Quebec-based Alimentation Couche-Tard, embraced e-cigarettes with the chainwide launch of Finiti Branding Group’s FIN e-cigarettes, a disposable unit equivalent to more than two packs of traditional cigarettes.
The chain has been reshaping its tobacco backbar, aiming to give stronger representation to the growing OTP sector. “Increasingly, adult tobacco consumers are demanding a much wider variety of alternatives to traditional cigarettes,” said Powell, director of national procurement/natural accounts, U.S.
That said, Powell acknowledged that both e-cigarettes and snus remain fledgling segments with much to prove: “That no one manufacturer or product line has created material separation at this stage of the life cycle is particularly unique. On the one hand, there is no dominant brand or alternative platform, only the promise of future demand.
“Conversely,” he continued, “this translates into tremendous opportunity for the snus, cessation or electronic-cigarette company that can develop some equity and begin to consolidate alternative volume ahead of the higher growth periods yet to come.”
Looking Ahead
Forecasting growth in any infant business is challenging. Trying to do so in an environment of likely FDA oversight is no likelier than winning at the roulette wheel.
“How the government handles electronic cigarettes will be the biggest long-term concern for the viability of this category,” said Silverman. “With all of the public smoking bans, it could be a huge category in the future.”
As for snus, Silverman offered: “Snus has been a category that has been rapidly growing. I’m not sure whether it is taking sales from traditional snuff consumers or cigarette consumers, but it has become a subcategory that we are seeing continued growth with. One of the challenges for carrying snus will be that some brands require refrigeration of the product, and this type of space may be limited.”
Battle for the In-Between
Analyzt Herzog examines how lines between first- and second-tier brands is blurring
“Economic growth has been modest coming out of the recession. … The U.S. economy will probably muddle along over the next couple of years.”
It was not an optimistic opening to Wells Fargo Securities senior analyst Bonnie Herzog’s “U.S. Tobacco Trends and Insights” discussion.
Negative as it may be, it was a relevant opening. With the unemployment rate and gas prices high (unemployment at 8.2%, gas prices reaching an average of $3.86 as of April 22) and consumer confidence low (70.2% in March 2012), there’s bound to be an effect on retail sales.
“As you think about your tobacco category and what could be impacting it, this is worth noting,” Herzog said. “I don’t want to depress everyone early on—just keep this in mind.”
It’s certainly on the minds of those selling or manufacturing premium cigarette brands, whose percent of the total industry volume has fallen from 91% in 1984 to about 70% today.
“My assumption is this will continue to depress,” Herzog said of premium’s share of the marketplace.
But it’s not all bad news: Herzog described a growing “sweet spot” between the traditional first- and second-tier brands. In fact, she believes the line between the first and second tiers has blurred significantly. “The interesting thing about this industry is it’s much more complex,” said Herzog. “There are so many different price tiers now.”
With premium numbers in a freefall, the big three tobacco companies have engaged in what Herzog refers to as a “battle of the brands” for control of that second-tier rank.
“This is something we know started late last year,” said Herzog. “The competitive pressures have intensified and promotional spending has increased.”
This could be bad news for the current “king” of the second tier, R.J. Reynolds’ Pall Mall, whose volume was down for the first quarter of 2012.
“They’ve got the most to lose,” Herzog said of Reynolds American. “They’re trying to defend their turf with Pall Mall. You’ve seen a lot of increased hyped activity from Marlboro Special Blends, L&M, Maverick, Newport Red—a lot more money being spent fighting to take the share from Pall Mall.”
Philip Morris USA and Lorillard have employed a variety of methods in the fight for Pall Mall’s hold on the blurry territory between first and second tier. Lorillard has taken the slow and steady approach with Maverick. With a minuscule share of the market, Maverick may not seem like a threat—but Herzog warns against overlooking Lorillard’s offering.
“Although Maverick has less than 2% of the market share, it has been growing at a double-digit pace for the past several years,” Herzog said. “It’s a growth that appears to be continuing.”
For its part, Philip Morris has challenged Pall Mall’s stronghold with not one but two brands: Marlboro Special Blends and L&M.
“They might be trying to find a sweet spot, trying to raise that price between the first and second tier,” Herzog said of Special Blends, a brand whose price-point Marlboro previously has lowered to keep consumers buying the Marlboro name. “Their challenge now is to get that price point up.
“In terms of L&M, they’ve been much more aggressive,” continued Herzog, who applauded the strategy of positioning L&M to go head to head with Reynold’s Pall Mall.
Not that Philip Morris is limiting itself to L&M or Special Blends to take down Pall Mall. It’s also looking at third-tier brands.
“They’re trying to match Pall Mall wherever possible—or be lower,” Herzog explained.
Regardless of the brands at war or the methods employed, Herzog believes this battle of the brands will continue through 2012 and perhaps beyond. It’s just one example of how the category is changing in the face of the current economic and regulatory environment.
“At the end of the day, tobacco will stay,” said Herzog. “But it will have to evolve.”
Deputizing the Public?
NATO’s executive director addresses FDA’s proposed tobacco violation form
o close out this year’s NATO Show, the organization’s executive director, Thomas Briant, gave attendees of his general session an outlook on what the upcoming year might hold for tobacco retailers. Not surprisingly, a lot of the focus was on the FDA.
“Currently, the FDA has issued 101 civil warning penalties—so they are seeking fines against 101 retailers,” Briant said. “Those fines range from $250 up to $5,000 if you look at each of those complaints.”
However, if the FDA has their way, those numbers will go up significantly in 2012. “Last fall, the FDA posted a notice to the public that seeks public comments on a proposed Tobacco Product Reporting Violation Form,” Briant said. “In essence, the FDA wants the general public to be able to submit via a smartphone, email or mail potential violations of these tobacco regulations in your retail stores.”
By the FDA’s own estimate, this would result in 1,000 reports of possible violations each year for the next three years, although the agency failed to provide an explanation of how they calculated this estimate. NATO fears the numbers could be significantly higher.
“In essence, they’re deputizing every single citizen out there to stand in a retail store and watch your clerks perform those transactions to see if they discover any violations and submit a report on their smartphone,” Briant said.
In response to the proposal, he said NATO had submitted a four-page comment letter outlining why such a public violation form would be “unauthorized, unnecessary, unfair and unreasonable.”
One of NATO’s major objections: The proposal violates a presidential executive order issued by President Obama in January 2011, which states federal agencies are supposed to eliminate any unnecessary or wasteful government spending.
“This is unnecessary; the FDA already has contracts with the states,” Briant said. “They take an enormous amount of time to train these state inspectors so they know what the law contains and what the violations are. Under the proposal, people who are untrained and with no knowledge of the law can now call or email in potential violations. Then the FDA has to follow up—you’ll be inspected again.”
Multiple inspections based on observations by untrained civilians would certainly appear to be unnecessary. But it could also be quite unfair, because no proof would be required of an individual submitting a report.
“Basically, there is no verification needed,” Briant said in response to a retailer who asked if pictures or other evidence would be required in the forms. “The FDA’s going to rely on these public reports, then send out inspectors to see if they can verify the violation. This could result in inspections based on reports that may have been false or inaccurate.”
Briant and NATO also fear that such a system may result in an abuse of power perhaps unforeseen by the FDA.
“It’s possible this could lead to anti-tobacco organizations targeting a particular retail store for violation reports and potential fines down the road,” said Briant. “That’s very concerning to us.”
Unfortunately, the FDA does not appear to share the concerns expressed by both NATO and the retailers who sent responses to the Tobacco Product Reporting Violation Form proposal, repeatedly responding “FDA disagrees with this comment.” While the FDA did provide brief explanations for rejecting certain comments, they failed to respond to several specific challenges to the reporting form and questions raised by NATO. After making some minor changes to the wording in the violation reporting form, the FDA has moved on to the next step to passing the form by requesting approval from the Office of Management and Budget (OMB).
“We’re hoping the OMB decides not to go through with this and not allow these public stakeholders to report potential violations,” Briant said in closing.
Now that the request has been made by the FDA, the OMB will review the additional comments submitted in response to the proposal and will make a decision within 90 days (of April 9).
Tips for Mastering Tobacco
Experts from Timewise, Open Pantry share their c-store success stories
Today, tobacco is not looked at as the driver of sales?” This was the question Open Pantry’s COO Jim Fiene asked of those in attendance of the “Tips For Mastering C-Store Tobacco” presentation he gave at the NATO Show.
It’s a transition, according to Fiene, who acknowledged that 10 years ago tobacco was considered an important sales driver; if your store didn’t have the best price on tobacco, consumers would go elsewhere. But, between regulations, competition from discount retailers and growing costs, this is not the case today. According to Nielsen numbers, it’s no longer the cost of cigarettes that drives customers to c-stores; after the cost of gas, consumers now care the most about the cost of fountain sodas.
“It’s a seismic change,” Fiene admitted.
So how do modern c-store retailers and tobacco manufacturers master this increasingly challenging category? Fiene, along with Martha Flint, category manager for Houston-based Timewise Food Stores, offered some valuable tips of the trade:
- Be in Stock. “That is my main focus: having product in stock,” said Flint. “I drill that into my managers daily.” It may seem simple, but this is a crucial point. The number of consumers who go elsewhere when a store’s out of their brand rose from 53% in 2010 to 58% in 2011. That’s a lot of missed opportunities. Still, inventory control is equally important. “There’s a fine line between making sure you have everything in stock and being overinventoried,” Flint said.
- Stock the Right Products. At Open Pantry, this meant reducing SKUs to only the top 80% of sales. “If there was a brand that sold less than 1%, I killed it,” said Fiene, although he allows stores to stock up to five consumer-requested SKUs. But the tobacco category is no longer limited to just cigarettes. Recognizing the opportunity, Fiene invested in 32 linear feet of space for OTP to go under the pack displays.
- Know Your Legislation. Everyone knows how costly a tobacco violation can be. But not fighting proposed legislation on the local, state and national levels can be equally expensive. Case in point: Fiene said Open Pantry lost 18% of sales once self-service tobacco was banned. It’s crucial to stay in the know—and this is where NATO can be an invaluable resource. “We get more information from NATO on regulations than we ever could gather on our own,” said Fiene.
- Focus on the Bottom Line. Flint defines it as gross-profit dollars. With tobacco no longer the key driver of sales for c-stores, retailers have a little more flexibility on pricing than they had 10 years ago. “You don’t always have to have the lowest price,” said Flint. “But you have to have a fair price.”
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