A sold-out trade-show floor and attendees including retailers and wholesalers who operate or service more than 100,000 locations were just a few of the factors contributing to the success of the first ever National Association of Tobacco Outlets (NATO) Show. Commemorating the 10th anniversary of NATO, the show was held April 12-14 at the Rio All-Suite Hotel & Casino in Las Vegas. CSP, as the official media partner of the show, was there to document all the action. Read on for our coverage.
FDA Looks Ahead
Center for Tobacco Products director addresses retailers, outlines next steps When it comes to tobacco regulation, Dr. Lawrence Deyton, director of the FDA’s Center for Tobacco Products (CTP), acknowledges there might be occasional discord. But as he told retailers and manufacturers at the NATO Show, communication is an important focus of the CTP—even during those times. “We want to establish a relationship of good communication and trust,” he said.
“We may not always agree on everything. We can disagree on things, but we don’t need to be disagreeable. And we need to keep communicating with each other about how this is all going, so that we can all learn from each other.
“Tobacco retailers are crucial to us at FDA to help keep tobacco out of the hands of kids.”
Deyton also outlined what’s up next on the CTP agenda:
- Menthol. In March, the Tobacco Products Scientific Advisory Committee (TPSAC) reported that “removal of menthol cigarettes from the marketplace would benefit public health in the United States.” Deyton said, “The Tobacco Products Scientific Committee is just that—it’s advisory. … That committee’s advisory does not set FDA policy; FDA sets FDA policy.” CTP is considering the report and an industry perspective document, as well as conducting additional research. Deyton said the process could “take some time,” but he promised the first progress report will be available in June.
- Graphic warnings. Also in June, the FDA will issue a final rule on graphic health warnings, proposed in November 2010. Those warnings will have to be put in place by manufacturers in September 2012.
- Dissolvables. TPSAC also will be looking at dissolvable products and will issue a report by March 2012.
- Harmful constituents. In April 2012, CTP will establish a list of harmful and potentially harmful constituents, publish that list and begin educating the public about it.
- Modified risk. Also in April 2012, the center will issue guidance or regulation on the scientific evidence to be used to assess modified-risk tobacco products. Manufacturers must submit information to the FDA proving that their products are modified risk, if they want to market them that way. “If they do effectively prove it and FDA agrees, they can market it as having modified risk. But we have to establish what those standards are,” Deyton said. When asked if it’s possible to prevent youth access to tobacco products without “complete prohibition” of them, Deyton said he didn’t know the answer. “The law says that these are legal products in this country. … I do think that big-picture goal is achievable,” he said. He reiterated that retailers are important to that process: “Your understanding of tobacco use, tobacco sales and tobacco marketing in this country is huge for us to understand, so we can together achieve those kinds of public health goals that the law intends for us.” —Linda Abu-Shalback Zid
Building the Foundation
First NATO-CSP Tobacco Survey uncovers info from 11,000 stores
In the first session of the first annual NATO Show was another first: a NATO-CSP Tobacco Survey that will serve as “foundation research” for future industry use.
“The idea here is that we actually build a foundation, so we have some insights and facts for informed decision making,” said J. Michael Marks, managing partner of Melbourne, Fla.-based Indian River Consulting Group.
Sponsored by Swedish Match, the survey drilled down into the tobacco-category specifics of 160 c-stores and tobacco outlets, representing nearly 11,000 stores.
Cigars. When it comes to cigars, tobacco shops draw 23% of their tobacco revenue from this category, while c-stores are at 7%. Tobacco shops had an average of 430 cigar SKUs, while c-stores carried 59, according to results from the survey.
The research also looked at “most significant” new products in each category over the past 12 months. For cigars, there was no Secretariat winning the race—no single product garnered more than 5% of votes, according to Mitch Morrison, vice president and group editor of CSP. “Our survey actually found there was equally as much engagement and enthusiasm about some of the packaging innovation,” he said.
Pipe tobacco. In this category, the c-store is a “marginal player,” according to Morrison. It accounted for 1% of c-store tobacco revenues and four SKUs. In tobacco shops, it accounted for 7% of revenue. Tobacco shops averaged 31 SKUs of standard and 14 SKUs of hookah, with Morrison saying that there has been “an uptick in consumer preference for hookah” lately.
Cigarettes. The survey found that cigarettes accounted for 80% of tobacco revenue in c-stores and 51% in tobacco shops. Tobacco shops generally carried 238 SKUs, while c-stores hold 182 SKUs. Marlboro Special Blend “had taken off” with 28% of the votes. Morrison said he was also “pleasantly surprised” by Newport Non-Menthol’s 10%, because it was introduced only a couple of months prior to the survey. However, pricing incentives could be playing a role, he said.
Moist smokeless tobacco (MST). The category accounted for 6% of tobacco revenues in tobacco shops and 9% in c-stores. Tobacco shops carried an average of 47 SKUs, while c-stores weren’t far behind with 37 SKUs. “As tobacco sets start to shift from a cigarette heavy in convenience stores, we’re seeing greater featuring of MST, both in terms of premium and nonpremium brands,” Morrison said.
For MSTs, Copenhagen wintergreen had 30% of the votes as a significant new product. While vibrancy is good for manufacturers’ bottom lines, they are also looking at what’s happening overseas and spending many advertising dollars to raise awareness, Morrison said. Retailers, he said, should be examining how they can be “piggybacking” on those efforts.
Of the significant new products in the survey, Morrison said, “You need to have the products that people want, but you also want to be able to surprise.” —Linda Abu-Shalback Zid
NATO, Altria Examine State Tobacco Taxes
When it comes to state tobacco taxation, Thomas Briant (right), executive director of NATO, has identified two recent trends.
The first he calls “the dollar standard,” with roughly two-thirds of the 22 states considering cigarette taxes at press time looking at proposals of $1 or more per pack. “Gone are the days when we’ve seen a dime or a quarter per pack tax increase, which used to be the norm,” he told the NATO Show audience.
The other recent development was four states examining bills to actually lower tax rates. “We don’t often have the opportunity to talk about tobacco decreases being considered by state legislatures,” Briant said. New Hampshire was considering two bills: one that could drop cigarette tax rates 10 cents per pack and another to drop the taxes 98 cents. New Jersey was considering a 30-cent-per-pack reduction, and Rhode Island was considering a $1-per-pack reduction. Oregon was considering an other tobacco product (OTP) reduction, but that could be offset by a proposed increased cigarette tax.
Bruce Gates, senior vice president of external affairs for Altria Client Services, said Altria has been helping New Hampshire retailers get the message of “my business wins with more revenue” out to legislators.
While large retailers have depth and scope, Gates said, many independents are the “lifeblood” of their communities, and both should play an active role in issues such as taxation. “It doesn’t matter what size you are, how many employees you have, how many stores you have,” he said. “It is important that everyone stay involved.”
Customers are also an important part of the process, Briant said; NATO provides customer alerts to help retailers communicate with customers. “We drill it down to the customer level,” he said. “You’ve got to use this network within your own stores, because your customers are as concerned about a tax increase as you are.” —Linda Abu-Shalback Zid
Panel Ponders Change in Tobacco Sets, Consumer Tastes
Welcome to a tobacco manager’s life after hours. Here are just a few of the questions he/she is pondering:
Do I accept one cigarette manufacturer’s promotions over another? A wave of innovation is flooding moist smokeless tobacco (MST); what should I carry and where do I fit it in? Snus seems promising, but how do I train my folks to explain how it works?
Tobacco consultant Lou Maiellano pointed out that “one thing that is never discussed in these discussions is what is it that the consumer wants.”
Maiellano, president of TAZ Marketing & Consulting Group, moderated a panel that tackled the dramatic changes in the tobacco world.
Fundamental to the transformation are evolving consumer tastes and demands driven largely by ubiquitous smoking bans. Cigarettes may continue to anchor tobacco sets, but over the next decade they will lose incremental share to MST, cigars, RYO/ MYO and possibly e-cigarettes.
While some promote e-cigarettes as a safe alternative to cigarettes and even, potentially, as a cessation product, others are more skeptical. “There’s a market for that type of product,” said Steve Sandman, vice president of sales and marketing for Republic Tobacco, who admits he’s not a big fan. “They’re very expensive and completely unreliable.” Nonetheless, “If a better [e-cigarette] product comes along, I think it will take off,” he said. In other matters:
MST: Joe Teller, category management director for Swedish Match, said the category boasted double-digit growth for 10 consecutive months in the convenience channel. He attributed some success to traditional smokers who cross over due to smoking bans, communal pressure and climbing cigarette prices.
Plan-o-grams: Chris Beaulier, retail operations director for 15-store Cigaret Shopper, based in Lincoln, Maine, works closely with manufacturers on sets, productivity and plan-ograms. Underlying product assortment and placement, he said, are questions: “Where’s the growth? Where’s the business going in the future?” He also talked favorably about partnering with suppliers without price contracts: “What we look for is guidance— help us be a better retailer.” —Mitch Morrison
Analyst Modi Offers Insights on Sets, Menthol Bans
UBS senior tobacco analyst Nik Modi never shies away from an opinion. At the NATO Show, Modi expressed that while cigarettes may currently dominate the scene, rapid growth in cigars and smokeless is compelling retailers to modify their sets—and quickly.
Modi predicts that cigarette sales, currently representing 80% of all tobacco transactions, will slide to less than 50% by 2025. Thus, he cautions: “If you’re not best-in-class in sets in smokeless, get there.” He predicts that snus and other oral products will continue to surge.
Modi also touched on:
- Lorillard: Long dominating the menthol market with its Newport brand, Lorillard has recently stepped into the nonmenthol segment. Modi predicted Lorillard would demonstrate strong growth, especially under the leadership of former UST head Murray Kessler. “I expect to see Newport to be more expansive where they play,” he said.
- FDA’s push for graphic cigarette packaging: Modi does not believe draconian depictions will curb cigarette sales, citing the failure of such attempts across other parts of the globe. “Reality is that warning labels will not affect consumption. The No. 1 issue that affects consumption is pricing.”
- Marlboro’s new pricing option that caps retail prices: Modi said he did not support the Marlboro Leadership Price option (MLP) from a retailer perspective, nor did he believe it would boost the overall cigarette category. But from an investment perspective, he thought this would benefit Philip Morris USA and likely increase its market share.
- Consolidation: Modi predicts the Big 3—Altria, R.J. Reynolds and Lorillard—to continue growing market share, through acquisition across the broader tobacco spectrum over the next several years. Also, look for some of the smaller cigarette and OTP players to pursue consolidation.
- Menthol ban: Modi said he doubted that the FDA would actually adopt a ban of menthol products, citing strong evidence that menthol is no more dangerous than other forms of tobacco. —Mitch Morrison
How to Light Up Sales of Pipes, Premium Cigars
Getting your foot in the door in premium cigar and pipe sales requires a firm grasp of who your customer is and what products they prefer. Experts in each of these areas offered tips and ideas during a “Growing the Cigar and Tobacco Business” session.
“Stocking about 50 [SKUs] would put you into the premium cigar business,” said Joe Maldonado, senior brand manager, premium cigar division, for Altadis USA, Fort Lauderdale, Fla. He offered tips and statistics to help tobacco retailers get into the premium-cigar segment or adjust their set to make the most of the category:
- Know your customers. In some markets, full-bodied cigars may do well; in others, mild may do better.
- Know your inventory. Learn how cigars differ between the exporting countries and how flavor profiles can vary. Make sure your employees can answer questions intelligently.
- Understand proper “maintenance” of cigars. In general, a humidor should be maintained at 70 degrees Fahrenheit and 70% humidity.
According to Andrew Kerstein, president of the NATO board of directors and owner of five Smoker’s Haven stores in New Jersey, a rule of thumb is that 40% of cigars sold in a store are mild, 40% are medium and 20% are full-bodied.
For those just breaking into the business, he suggested visiting the five closest stores and comparing their stock. “That’s going to give you an indication of the top-selling brands,” he said. “But your store will tell you … what cigars you should carry.” Kerstein also predicted a resurgence of pipe sales in the next couple of years: “Since the SCHIP [tax] was put into place, there’s been a dramatic increase in people in their 20s and 30s smoking pipes.” Future tobacco taxes and regulations will likely lead to additional increases, he said. For retailers new to the category, Arron Sissom, president of Music City Marketing, a Nashville, Tenn., company that sells pipes, pipe accessories and pipe tobacco, suggested placing a pipe catalog on the counter in a store for a couple of weeks. “If you see that you have some customer interest, then we can get some product out to your stores,” he said.
Other suggestions and information:
- Consider price points. Pipes can cost from as low as $3 to “sky is the limit,” Sissom said. “Consider what your customers are paying for cigars in your stores, then ask yourself: What price point do I think I can sell?”
- Consider display/presentation options. Pipe smokers, Sissom said, like to touch and “try out” a pipe before making a purchase. However, he suggested, having a closed display provides a more regal opportunity to “present” a pipe to the customer. Either way, have a mirror available and plastic sleeves to cover the end of the pipes.
- Be realistic on expected return. “The average tobacco retailer is probably only going to get 10% to 15% of his sales from pipes and pipe tobacco,” he said, “but pipe tobacco is a great way to supplement your business.” —Steve Holtz
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