How Murphy USA Is Keeping Tobacco Profitable

EL DORADO, Ark. -- As retailer Murphy USA continues on a path of store upgrades and raze-and-rebuilds, the role of tobacco is becoming increasingly more obvious, according to the chain’s president and CEO.

During a quarterly investor call May 3, Andrew Clyde provided insight on fuel margins, traffic counts and tobacco, but with each mention of cigarettes and other tobacco products (OTP), he touched upon how critical the category is to the viability of the convenience-store format.

Here’s how tobacco helped grow Murphy USA's business …

Despite volume sales declines in the category, tobacco margins have been strong. “We continue to see price increases from the manufacturers,” Clyde said. “When we pass those along, net-net, we end up improving our margins overall.”

So while Clyde acknowledged the decline in cigarette units and associated traffic, the category continues to grow margin dollars and contribute to profitability. “I think we will continue to see more of that same trend in the future as well,” he said.

Smokeless and innovation in other tobacco products (OTP) helped offset continued declines in cigarette volumes, Clyde said.

With the multiple raze-and-rebuilds completed over the past three years, Clyde said the company has seen continued improvement in year-over-year performance. However, in states with high tobacco excise taxes, regaining those customers lost during the construction is more difficult.

“I think [with] the tobacco ramp-up, you see differences if it’s in a minimum-tax state vs. not because those customers go somewhere else for those few months," he said, "and it’s a lot easier to get them back if you don’t have price restrictions in the market.”

Murphy USA Inc. is a marketer of retail motor fuel products and convenience merchandise. It operates more than 1,400 retail stations in 26 U.S. states under the Murphy USA and Murphy Express brands. The majority of its units are positioned near Walmart locations and serve about 1.6 million customers a day. The chain ranked No. 5 in a year-end update of CSP’s2017 Top 202 list of the largest c-store chains in the United States.