State Tax Hike Forces Casey's to Adjust Cigarette Pricing

Convenience store chain saw 25% unit decline in Illinois

ANKENY, Iowa -- Casey's General Stores has made some changes to its cigarette pricing structure in about one-third of its stories following a challenging three months on the heels of Illinois' cigarette tax hike.

"[In June], we incurred a change in the cigarette tax in one of our largest states, resulting in cigarette carton volume dropping significantly," CFO Bill Walljasper said during the company's recent first-quarter fiscal 2013 earnings call. "About half of the downward trend in cigarettes was the result of the state of Illinois moving downward. We saw roughly about a 25% to 30% unit decline in the state of Illinois on carton movement."

The effect of this on the bottom line was dramatic. Same-store sales for the first quarter rose 2.6%; however, excluding cigarettes, same-store sales were up 6.4% during the quarter.

This drop came even as the chain saw a one-time gross-profit benefit of approximately $3.5 million due to the Illinois cigarette tax hike not being assessed on floor stock. In fact, the average margin in the quarter increased about 90 basis points to 33.4%, primarily due to that benefit. But "toward the end of the quarter, we have seen more competitive pricing on cigarette packs in parts of our marketing territory," Walljasper said.

As a result, "we've made some adjustments," Walljasper said. "In just about 550 locations, and most of those are in our three main states, which are Illinois, Missouri and Iowa, we adjusted [cigarette] pricing to be more competitive."

Walljasper couldn't offer specifics because pricing is different from state to state and market to market; however, he did underscore the importance on maintaining market share of cigarettes.

"We're looking to drive carton movement," he said. "We feel it's imperative to be competitive on this product. It's probably the No. 2 destination item in any convenience stores, and we feel it's important to maintain our competitive edge in that regard."

The pricing changes come at the cost of reduced margin, but Casey's is hopeful it will be worth it.

"It will affect the gross-profit margin, but we're hoping that we'll see unit movement [increase]," Walljasper said. "And we are seeing sequentially over the course of August some improvement in the units as we move forward. ... We are slowly getting that tobacco to move in the right direction."

The state of Illinois enacted a $1-per-pack cigarette tax increase effective June 24. It also raised the other tobacco products (OTP) tax to 36% effective July 1, changed taxation on moist smokeless tobacco to a weight-based rate of 30 cents per ounce effective Jan. 1, 2013, and included little cigars in the definition of cigarettes to tax little cigars at the $1.98-per-pack cigarette tax rate effective July 1, 2012.

Based in Ankeny, Iowa, Casey's General Stores Inc. is a leading independently owned convenience store chain in the Midwest and one of the largest in the country. As of September 11, 2012, the company owned and operated 1,698 stores in 11 states.


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