A Big Inhalation

Retailers take in ideas on regulations, e-cigs, importance of tobacco shopper.

By
Melissa Vonder Haar, Tobacco Editor

Article Preview: 

As valuable as those add-on purchases and cross-merchandising opportunities are, perhaps nothing highlighted tobacco’s importance to convenience stores more than the cciPanel data on the frequency that tobacco shoppers visited c-stores. Roughly 10% of the cciPanel’s average consumers visited a store on a daily basis, but 16% of tobacco consumers were daily shoppers. Thirty-seven percent of average c-store consumers visited two to three times a week, yet that number was 55% for tobacco shoppers. And 23% of average consumers visited once a week; for tobacco, that figure declined to 16%.

Taking into account the amount tobacco consumers spend, the variety of other categories they shop and the frequency of their shopping trips, Burke’s data solidly showed what many retailers already know: Tobacco consumers are invaluable to the business.

“Not only are they buying more, but they’re visiting your store more often,” Burke said. “This is a critical point in understanding how very important tobacco shoppers are in this channel.”

Keys to ‘Big Electronic’ Success

The importance of the tobacco shopper is likely to only increase as more consumers turn to the margin-friendly and yet-to-be regulated electronic-cigarette segment. As managing director of beverage, tobacco and convenience store research for New York-based Wells Fargo Securities LLC, Bonnie Herzog has been far from shy in her enthusiasm for the nascent segment, going so far as to call herself a “bull” for the category.

“E-cigs remain the biggest excitement for 2013, according to our survey respondents,” said Herzog during her “Industry Trends and Insights: An Analyst’s View” session.
And this excitement is growing now that Big Tobacco is getting into the game. Lorillard Inc. was the first, acquiring blu eCigs in April 2012; R.J. Reynolds Tobacco Co. recently announced plans to take its Vuse digital cigarette national; and Altria Group Inc. is about to start test markets of its new MarkTen offering.

Yet, with more than 200 private e-cigarette companies already on the market, the question remains: Who will be the dominant player in this profitable space, especially if—or when—the FDA issues regulations?

“With the Big Three entering, there is a good chance that they will win, along with several of the private companies that are in the market today,” said Herzog. “I do think with regulations, the barriers to entry do increase. It increases the cost of entry. It’s something to think about.”

Clearly, companies such as Lorillard, Reynolds and Altria have plenty of experience dealing with both regulatory issues and the highly competitive tobacco market. The fact that they have ample funds to support e-cigarette endeavors, as well as relationships already established with retailers, may also help solidify their slots in the space.

However, Herzog doesn’t believe this automatically means the e-cigarette segment will mirror that of traditional cigarettes, in which Altria’s Marlboro brand has long been the market leader.

“The market share will be different than what it is with traditional cigarettes today,” she said. “It’s potentially a great opportunity for Lorillard. I think Lorillard’s purchase of blu was very smart. They paid $135 million just over a year ago, and it’s already contributing to their bottom line.”

Meanwhile, she was surprised to see Altria enter the market so quickly with MarkTen. It’s possible that the move may have had more to do with strategy than the product itself.

“I’m not convinced [MarkTen] is going to be their final product, but I think it gives them a voice in this category to have conversations with the regulators,” Herzog said. “They do have a product; they couldn’t go to the table without that. I don’t think [MarkTen] is their endgame. I still wouldn’t be surprised if [Altria] bought a private company.”

Click here to download full article