Tobacco's Best in Class

Industry professionals offer insights into current cigarette, OTP markets

Published in CSP Daily News

By  Linda Abu-Shalback Zid, Senior Editor

OAK BROOK, Ill. -- The faltering economy and changing consumer shopping habits are changing the way the "best of the best" other-tobacco-product (OTP) operators are treating the tobacco category. OTP is growing at more than twice the rate of the rest of the convenience store, Joe Teller, director of category management at Swedish Match North America (SMNA), Richmond Va., said during last week's Tobacco Update CSPNetwork CyberConference. [To view an OnDemand replay of this CyberConference, please click here (free to retailers and wholesalers; others, $49).] For moist smokeless tobacco (MST), Teller said the category has had 10 straight months of double-digit can growth at c-stores, with many cigarette smokers also using MST. On top of increasing smoking restrictions and pressures to stop smoking, cigarette prices went up 10% last year, compared with a 3% increase for MSTs. "So there's only going to be a wider gap and more of a reason for dual smokers and dippers to shift nicotine occasions," Teller said.

Cigar-category growth has been a "dramatic surprise," according to Teller. "What I think is driving that is...both cigar manufacturers and retailers are doing a great job of focusing on the less-expensive single cigars and small cigars, compared to packs and large cigars."

Small, single cigars, he said, are growing fast enough to offset declines from the rest of the category. Also contributing to growth is the foil single-cigar innovation and aggressive pricing.

Cigarettes also fared fairly well. During the cyberconference, sponsored by SMNA, Nik Modi, tobacco analyst, UBS Securities LLC, New York, said that despite cigarette volume declines of 4.8% in the first half of 2010, the industry was able to take more than 6% pricing, maintaining historical elasticity levels.

While tobacco has always been a challenging category, Modi said that tobacco has a -0.3 price-to-volume relationship, and that "not that many categories are price inelastic as the tobacco industry." He added that most people who were going to quit smoking have already left the industry. "Today, you have people who are going to smoke no matter what the price." He predicted that cigarette volume declines will hold around the 4% range.

So what are best-in-class retailers doing to manage the category? "They're trying to create in shoppers' and consumers' minds an idea about tobacco at their stores," Teller said. "So that's like a retailer identity or retailer brand image about tobacco that gets communicated everywhere, inside and outside the store."

He added, "Having this overarching image and strategy and identity for the retailer for what they do with tobacco I think is one of the keys in winning this business."

The best operators are also shifting about two feet in space from cigarettes to OTP, closing gaps in distribution voids, localizing assortments to better reflect consumer demand and having everything clearly tagged at the shelf with price callouts that OTP shoppers can't miss.

Teller also shared some numbers for the "best in class" approach.

In terms of velocity and volume, he said they sold more than 300 MST cans per store per week, more than 1,000 traditional cigar sticks per store per week, and 15% to 20% growth in MST can volume and cigar units.

For item counts and section size, there were more than 64 MST items carried on average, more than 80 traditional cigar items carried on average, and 15% to 20% growth in OTP item counts in 2010.

"The whole thing starts with retailer strategy and identity and marketing, and that sets the tone for what gets changed to end up driving numbers like this," Teller said.

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