The C-Store Pipe-Tobacco Opportunity

Are retailers missing out on one of tobacco’s greatest growth segments?

OAKBROOK TERRACE, Ill. -- The electronic-cigarette boom over the past couple of years has gotten plenty of attention. And while it may be impossible for any segment in the tobacco category to compete with that growth (given the fact that e-cigarettes are a completely new product and thus started with zero sales), pipe tobacco has been experiencing a renaissance of its own in the post-SCHIP era: Sales-data research firm IRI reports that convenience store pipe-tobacco sales have nearly tripled in the last three years, going from 116,061 pounds sold in September of 2010 to 348,011 pounds in April of 2014. Pipe tobacco

Yes, an easy explanation of the sudden interest in pipe tobacco would be its tax advantage over roll-your-own or make-your-own tobacco after the passing of tax hikes to fund SCHIP (State’s Children’s Health Insurance Program) in 2009. But as vice president of marketing and product development for Scandinavian Tobacco Leonard Wortzel noted, pipe tobacco continues to grow.

“We’re not seeing the 50-60% growth year-over-year, like in 2009, but we are still seeing double-digit growth at tremendous levels,” he said. “There was a whole subset of consumers who were desperate for getting value, and they discovered that pipe tobacco is probably the best value in the tobacco world today.”

“In markets with above-average taxation on cigarettes, retailers have an opportunity to leverage pipe tobacco as a way to deliver value to the price-sensitive consumer,” agreed David Bishop, managing partner of Barrington, Ill.-based sales and marketing firm Balvor LLC.

But are convenience stores taking advantage of that opportunity?

Despite nearly tripling its sales of pipe tobacco over the past four years, “From what we can see, (the c-store channel) has kind of missed this growth story,” Wortzel said. “They have, for the most part, not participated to the extent that other channels have.”

Spatially Challenges

Easily the biggest challenge facing c-store retailers interested in the pipe segment is space. It’s an old story: Between cigarette contracts and burgeoning OTP options, there’s simply not enough room behind the counter. This is all the more challenging when it comes to pipe tobacco.

“Large packages are a key operational issue for convenience retailers as space on the back counter is extremely valuable,” said Bishop.

To help ease some of these space concerns, manufacturers like Scandinavian and Republic Tobacco now offer smaller-format pipe pouches. They still take up more space than the average OTP SKU, but are much easier to fit than the traditional 16-oz. bags.

“Convenience retailers have generally figured out that pouches are the best-selling pipe-tobacco format and the easiest to merchandise,” said Steve Sandman, president of Republic Tobacco.

Still, larger pack sizes are definitely the best value proposition, for both consumers and retailers. As such, Wortzel encouraged operators to try and find space for larger packages.

“I think what retailers will see is that, compared to other OTP products that take up a lot of space, the margins are far more favorable for pipe tobacco,” he said.

Bishop added that some stores have also added locked display cases next to the counter, allowing product visibility similar to the back bar.

Regardless of the placement, Sandman strongly encouraged retailers to reconsider the “not enough room” excuse.

“It's like saying, ‘Energy drinks are growing, but I can't find space for them because I have beer and soft drinks in my coolers already,’ ” he said. “The segment is 40-million pounds per year, along with all the complimentary products that accompany those sales.”

Reversing the “Race”

Another concern with such a value-driven segment is the proverbial race to the bottom on price.

“There has certainly been a race to the bottom with bagged tobacco,” Sandman said. “But after a number of ‘cheap’ products have run into trouble with government entities regarding payment of taxes, it seems some of the price decreases have subsided somewhat.”

Wortzel said it’s not just tax trouble, but an organic maturating of the segment that will slow down dropping price-points. Pipe tobacco is still very much a value-driven segment, but within those value-seekers, there are consumers who want the lowest price possible, consumers who want both quality and value, and consumers who are willing to pay more for superior quality pipe tobacco.

“What’s just beginning to emerge now, and what we’re hoping to drive, is the consumer who’s value-conscious but also wants real quality,” he said, noting that Scandinavian has launched Bugler Pipe Tobacco to attract that consumer. “It’s still a tremendous value, but it’s certainly not the cheapest within that category—and it’s not trying to be.

“If a retailer’s going to participate in this category, they know they have to have the mainstream and low-end offerings because that is still where the majority of the consumers are,” Wortzel continued. “But let’s not race to the bottom completely. There’s a consumer out there who does want quality and is willing to pay just a bit more for what they really want to smoke. That allows us to drive some margins back into the category.”

Bring on the Benefits

While space and price-point are legitimate concerns, Sandman believes the biggest challenge facing c-store retailers and pipe tobacco is self-inflicted: a lack of time and focus.

“With all of the effort to capture e-cigarette business, many retailers just haven't had or made the time to take another look at pipe tobacco, which is an established and thriving category,” he said. “Not only is there an opportunity, c-stores have already thrived in the category.”

Yet, for every c-store operator Sandman sees selling 20 SKU’s of pipe tobacco—and reaping the benefits—there’s at least as many not in the pipe tobacco business at all, allowing tobacco stores and smoke shops to capture that business.

“From 2009 to 2012, there was no bigger growth story than pipe tobacco, and it’s still growing,” Wortzel said. “There’s a huge consumer base out there that’s accustomed to purchasing this product and driving wherever they need to go to get it. Right now, that’s usually in the smoke-shop world, but they are just as willing to drive across the street to their local convenience store. It’s worth capturing some of those consumers.”

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