“Competitors help us learn and grow,” said John Mackey, co-CEO and co-founder of Whole Foods Market, during his session at this year’s NACS Show. “Otherwise we just get complacent.”
Of course, Whole Foods doesn’t compete in the battleground that is today’s tobacco market. Between skyrocketing taxes, increasing black-market activity and a consumer base that still hasn’t fully recovered from the recession, it’s doubtful any c-store operators would call themselves “complacent” about tobacco sales.
Yet while the convenience channel continues to dominate in both tobacco and e-vapor sales—accounting for 70% of total nicotine volume this year, according to Pittsburgh-based Management Science Associates (MSA)—Mackey has a point when it comes to tracking the competition.
In this ever-evolving market, where a 0.1% increase in cigarette sales is celebrated, today’s minor competitive annoyance could easily blow up into tomorrow’s major business threat. What follows is a look at how four competitive segments are attempting to grab some of those tobacco dollars—and how c-stores can best fight back.
Table of Contents
Dollar Stores: The Threat of Tomorrow
Drug Stores: Thank You, CVS
Vape Shops: A Niche Threat
Tribal Sales: The Regulatory Gray Zone
Dollar Stores: The Threat of Tomorrow
When asked which channel poses the greatest competitive threat, MSA senior vice president Don Burke doesn’t blink an eye. Though retailers such as Dollar General and Dollar Tree account for only 1% of total nicotine volumes, Burke warns not to underestimate these tobacco newbies.
“Dollar stores have a very close profile [to c-stores] in terms of product mix,” with 65% of dollar-store nicotine sales coming from premium cigarettes, compared to 67% in c-stores, he says. “That’s major competition.”
“It’s early,” says Andrea Myers, president of tobacco consulting firm Oxer LLC, Lake Bluff, Ill., and former president of Kocolene Marketing LLC, Seymour, Ind. “If they continue to invest in the category, they’re only going to get bigger.”
Competitive Edge: Customer Base
Dollar stores have a built-in consumer base of value-driven shoppers—a base that overlaps with c-store tobacco shoppers. “They have an audience for the tobacco category that’s already shopping their stores,” Burke says.
Neutralize the Threat: Selection and Convenience
While dollar stores are competing heavily for the cigarette shopper, they are not currently offering much else. MSA reports dollar stores average four SKUs or fewer of e-vapor, MST, loose tobacco and little/filtered cigars.
“We’re seeing them begin to rely on the top-selling SKUs,” says Burke. “The selection of total tobacco items in convenience is an excellent way for c-stores to compete.”
But what happens if—or when—that selection expands? “You want to train consumers to think that if they run into a c-store, it’s more convenient,” Myers says.
Drug Stores: Thank You, CVS
Accounting for approximately 5% of tobacco sales, the drug channel has never been a huge player in the tobacco category. And that threat has only decreased.
In Massachusetts, the threat is nearly null. “We have more and more towns that have banned tobacco sales in pharmacies altogether,” says Anna Bettencourt, category specialist for VERC Enterprises, Duxbury, Mass.
You can thank CVS for the segment souring on tobacco. In 2014, the drug chain stopped selling tobacco at all of its 7,700 locations.
“CVS certainly helped by getting out of the business,” says Myers. “CVS’ front store sales are down (excluding pharmacy), which means there are customers out there looking for satisfaction.”
Competitive Edge: Female Drug Shoppers
Given how much other drug stores benefited from the CVS fallout, the majority of the channel isn’t cutting ties with tobacco anytime soon.
“Convenience picked up a lot of that business,” says Burke. “But a lot more of it went to Walgreens, possibly because they had a more similar product set.”
So don’t relax just yet, especially considering the coveted drugstore shopper: women. “The demographics does skew more female than convenience,” says Burke. “Drugstores could try to capitalize on meeting the desire of their female consumers for tobacco items.”
Neutralize the Threat: The Right Product Mix
In terms of fighting back, Burke suggests retailers keep an eye on the products drugstores are offering.
“When we analyzed CVS, their product mix was a different product set than what was available at convenience stores,” he says. “If retailers want to compete better with drug, they should determine what tobacco items are selling at nearby drugstores and match that product set.”
Vape Shops: A Niche Threat
Perhaps no segment has divided c-stores more than the burgeoning vape channel.
“I do not see vape shops as a significant threat to the convenience total nicotine experience,” Burke says, citing the channel’s niche focus on vape and only vape.
Myers of Oxer counters that: “When it comes to e-vapor sales, vape shops are the biggest competition.” However, even she admits, “This is now. Because of regulations, [this threat] is a little bit to be determined.”
Competitive Edge: Time and Selection
MSA’s survey of vape-shop owners showed the channel’s top three lines of business are liquids, replacement parts and the actual vaporizers. “Convenience competes in liquids but can never compete directly with vape shops in terms of replacement parts or the mods,” says Burke. “It would require too much space.”
It also requires an educated staff with time to explain these high-end purchases—another competitive edge of the vape channel.
“They provide a knowledgeable, dedicated, skilled person to mix the juice and engage in flavor sampling,” says Sam Odeh, president and CEO of Power Mart Corp., Elmhurst, Ill. “Vape is an upscale experience in vape shops.”
Neutralize the Threat: Keep to the Core
When it comes to competing with vape shops, the advice is simple: Don’t. Even if c-stores can offer a similar selection, it’s unlikely they can replicate the experience for the more extreme enthusiasts frequenting vape shops.
“If a customer really wants to go all in, they go to a vape store,” says Bettencourt of VERC.
Instead, focus on what c-stores do best: convenience. Vape shops typically have more limited hours and operate in less convenient locations. “Let vape shops do what vape shops do best: their time-consuming involvement … with this product,” says Burke. “Offer the fill-in approach for those who are looking for convenience.”
Tribal Sales: The Regulatory Gray Zone
Native American reservations aren’t exactly a retail channel. Yet for retailers in reservation-heavy areas, they can present one of the biggest competitive threats.
Take New York, where the $4.35-per-pack excise tax is the highest in the nation, while Indian tribes in the state operate smoke shops that charge no taxes. That’s a huge disparity in price point, and a threat that “is not diminishing,” says Jim Calvin, president of the New York Association of Convenience Stores, Albany, N.Y.
Competitive Edge: Price
When one retail channel is required to follow the law and another operates by its own rules, neglecting to collect excise taxes from customers regardless of their race, the edge is clear.
“The tribes’ competitive advantage is greatest on those products with the highest excise taxes,” says Calvin, who cites cigarettes and OTP. “The advantage is negligible on vaping products because there is no state excise tax on them—yet.”
Neutralize the Threat: Keep Showing Up
Alas, there’s not much traditional retailers can do to compete with tribal stores on price.
“In New York, there’s a minimum-markup law,” Calvin says. “The only thing [retailers] can do is be open when the customer needs a pack to tide them over until they get to the reservation.”
The most effective way for retailers to compete against reservations would be if reservations were required to collect taxes. This requirement is already a matter of law, due to the U.S. Supreme Court’s 1994 Attea ruling that requires collection of state taxes of tribal store cigarette sales to non-Indian purchasers. The problem is most tribal stores do not follow this order, especially when law-enforcement agencies aren’t forcing the issue.
“Everything that needs to be done legislatively has been done,” Calvin says. “What’s lacking is the political will to enforce that law.”
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