Battle for the Backbar
Seize great tobacco opportunities by capitalizing on OTP.
Higher taxes on cigarettes and smoking restrictions are redefining tobacco sets. As cigarette sales continue their incremental slide, sales of other tobacco product (OTP) are climbing. You probably know that already. But what are you doing about it?
Many retailers today are reassessing their backbars, figuring out how to capitalize on OTP opportunities without forsaking cigarettes, still the mother’s milk of the tobacco category. Is it time to merchandise tobacco sets as a whole and not just as cigarettes and “other”?
Based on one analyst’s research, the answer clearly is yes. Nik Modi, senior research analyst for New York-based UBS Investment Research, projects cigarette sales will continue to shrink, from 79% of the tobacco category in 2010 to an estimated 69% in 2015. Picking up the slack, OTP will grab more category sales, growing from 22% in 2010 to an estimated 31% in 2015, Modi predicts.
“There is a lot of cigarette space in stores but cigarettes are a declining category, as we all know,” he says. “One thing that the convenience-store industry needs to do is figure out how to determine cigarette turn rates—which SKUs are moving and which aren’t— and then reallocate some of the larger space to smokeless tobacco and cigars.”
OTP ON THE FRONT LINE
When Verc Enterprises decided to remodel its tobacco sets, cigarettes were not the focus. “It’s no secret that the trend is for cigarettes to decline. OTP is exploding, so it didn’t make sense to give stores tight on space 6 to 8 feet of cigarettes,” says Ed Oliveira, category manager for Duxbury, Mass.-based Verc. “We’ve done a lot of work over the past six to eight months in the category. Some stores with 6 to 8 feet for cigarettes now have 4 feet; we gave the extra space to OTP.” Verc’s typical 4- foot cigarette set “is a little smaller” than those in other parts of the country, he says. OTP typically occupies 3 feet.
Verc recently invested in new OTP racks for half of its stores. “We couldn’t merchandise product effectively in the old racks,” Oliveira says. “The new racks have more room for product without taking up additional linear feet.” Verc bases space decisions on scan data, which guided its latest round of store resets. New tobacco items receive slots based on historical data from SymphonyIRI Group or Nielsen. “Flex” slots are included in Verc tobacco schematics for new item tryouts.
“As a company, we recently looked at the fiscal year and categories we thought would grow,” Oliveira says. “OTP was the only one we felt could grow by double digits.” Through the first seven months of this year, Verc’s OTP dollar sales are up well over 20%; and for the company’s fiscal year, which ended Oct. 31, 2009, cigars led the surge for the first six months, while moist snuff buoyed second-half performance.
Skoal, as a whole, is Verc’s top-selling OTP brand, Oliveira says: “There are six or seven Skoal items in our top 10 for the category. Sales have been strong since the price reduction last year.” Grizzly is the chain’s second-most-popular snuff brand.
Sales of snus, one of the newer OTP items, started slowly in the Massachusetts and New Hampshire areas where Verc’s 20 stores are located. However, Camel Snus Frost has cracked the retailer’s top 20 sellers. “I think the market for snus is beginning to mature,” Oliveira says.
To optimize OTP sales, Verc takes advantage of manufacturer promotions. For example, a recent Altria cardboard display placed adjacent to regular OTP on the backbar attracted attention with a price point of $3.99.
RACK ’EM UP
For Verc in the North to retailers down South, OTP is gaining greater space and new racks to enhance marketing. At Marsh Petroleum’s Kwik Shop Markets in east Tennessee, OTP has 2 to 3 linear feet of tobacco set space while cigarettes occupy 4 linear feet, according to Danny Blackburn, vice president of the Greeneville, Tenn.- based company. Since moving all tobacco to the backbar, in compliance with FDA’s June mandates, the 19- store chain has added new racks. The aggregation of cigarettes and OTP is fine with Blackburn, who prefers featuring all tobacco products in one place. He is curious to see how the resets, completed just prior to the FDA cutoff date, affect sales.
OTP’s surge, indeed, should be recognized as a trend and not a fad. Much of the decade has shown steady single- digit and low double-digit growth for the category across the entire cstore channel. In fact, OTP’s nearly 15% leap in sales dollars represented the greatest growth rate among top industry categories in 2009, and, according to preliminary numbers from the NACS State of the Industry Report of 2009 Data, OTP now serves as the channel’s sixth largest in-store dollar-sales contributor.
Not surprisingly, wholesalers, like retailers, have been watching OTP’s growth and advising accounts not to overlook these products. “For several years, our company has been suggesting to the retailers we service that they take a closer look at OTP and the amount of space being given to the category,” says John Mayer, product director for Temple, Texas-based McLane Co. “It becomes part of every discussion we have with visiting retailers in our headquarters’ lab store, as they review item selection and location of OTP items authorized to be carried in their stores.”
Mayer thinks OTP’s growth will continue. “The continued increase in taxes and cost coupled with the restrictions being placed on the use of cigarettes will continue to add fuel to the growth of moist snuff and other segments within the category,” he says.
Another wholesaler, who spoke on condition of anonymity, disagrees: “The whole tobacco category is a dying category. Over the past two or three years, there has been a continual drop in sales. More people are stopping the use of tobacco products as government regulations become more stringent. No self-serve access to tobacco products also hurts sales.”
In the world of OTP, moist smokeless and cigars rule, collectively representing nearly 94% of all category sales, according to NACS data. If one adds cigarettes, then moist smokeless makes up a solid 11% in 2010 total tobacco sales. Analyst Modi projects this percentage to increase to an estimated 17% by 2015. “In the last eight months, moist snuff can growth has just taken off,” says Joe Teller, director of category management for Richmond, Va.-based Swedish Match, maker of Timber Wolf. “For example, the most recent Nielsen period showed can growth at 12%.” (Can volume is a better way to measure sales, he says, because tax increases inflate dollar sales.) “I can’t think of a retailer we’ve been working with lately that isn’t already taking space from cigarettes and giving it to OTP, or isn’t in the planning stages of cutting cigarette space to expand OTP,” he says.
The growth of moist snuff in a down economy is especially surprising, given the product’s typical customer profile, which, Teller says, “is usually lowerincome and has been hit by the recession. Yet we still have can growth rates of well over 10%; that is remarkable.”
Who is the moist-smokeless-tobacco customer of today? Because of smoking restrictions, many smokers are new consumers in the smokeless category, Teller says. “Do you want to go outside and stand next to the Dumpster when it is 5 degrees, or do you want to try something else like moist snuff or snus?” he asks. Other smokers who were already using moist snuff have been gradually shifting nicotine occasions to snuff as smoking restrictions have increased, he says.
Swedish Match is advising retailers to consider space allocated for cigarettes and OTP, and then try to balance inventory costs with profit and growth opportunities. “At the end of the day, the retailer might have the same total space for tobacco but maybe less for cigarettes and more for OTP. The best OTP operators are the best tobacco operators,” Teller says.
WAYS AND MEANS
This refrain of OTP opportunities is no longer sung only from the choir of moist smokeless and cigar makers. The major cigarette companies have cut into the entire tobacco pie through acquisitions across all segments, as well as product innovation.
“We’ve been talking with retailers since the beginning of this year about the opportunities they have in smokeless tobacco and cigars,” says Greg Mathe, spokesperson for Richmond, Va.-based Altria, parent company of Philip Morris USA and U.S. Smokeless Tobacco Co. “But cigarettes remain very profitable for c-stores. Cigarettes account for the largest sales percentage in the store, so retailers continue to give the product the most space.” Based on NACS data, cigarettes generated nearly 36% of all inside sales last year and delivered average monthly sales in excess of $48,000 per store. And opportunities to grow cigarettes, as well as OTP, are being spurred by more sophisticated software, Mathe says, including Altria’s Catman category management tool, which shows storeby- store trends at the SKU level.
Retailers can capitalize on OTP, Mathe says, by ensuring product is organized, visible and easy to shop. Also, he says, “Retailers should make sure prices are competitive, visible and clearly communicated to make the shopping experience convenient and more efficient.”
Reynolds American Inc. (RAI)— parent company of the R.J. Reynolds cigarette line and American Snuff smokeless products such as Grizzly and Kodiak—debuted a total tobacco strat- egy more than three years ago, says David Howard, spokesperson for Winston- Salem, N.C.-based R.J. Reynolds. “We’re trying to look ahead and offer a range of products for consumers to choose from.”
From the strong-performing Camel Snus to three styles of dip and stillbeing- tested Camel wintergreen pouches, Reynolds is providing “not just the traditional moist snuff but innovative products,” he says. The company is also test-marketing Camel dissolvable sticks, strips and orbs.
Despite the R&D in smokeless products, Howard, like Altria’s Mathe, cautions retailers not to dismiss the industry’s top-selling product. “Although OTP is growing, our advice to retailers is: Don’t forget about the combustible business. Cigarettes are still the key sales driver of in-store tobacco sales,” Howard says.
Star Tobacco aims to give Reynolds some competition in the dissolvable category with its line of Ariva and Stonewall dissolvable tobacco lozenges. Star’s products come in five blends and recently launched in several c-store chains. David Dean, president of Glen Allen, Va.-based Star, says the new item is a value-priced tobacco product with a great retailer margin. “It must be placed where it can be seen by the tobacco user because awareness and product trial are critical,” Dean says. “Ariva is an incremental sale to the cigarette user.”
STICK WITH STICKS
Behind MST, cigars are the other key driver of OTP’s growth. Modi projects cigars to grow from a current 10% of total tobacco to an estimated 14% by 2015. A substantial federal excise tax increase affected cigar sales last year. “The category took a hit but has been growing since,” says Teller of Swedish Match. Tax increases have actually affected sales of the most popular package types. Fivepacks of cigars have dropped in sales but singles have soared, prompting retailer sets to reflect the consumer change. The other big adjustment, Teller says, is cigar packaging: “The whole category is moving from cellophane to foil because foil keeps the product fresher longer.”
Verc Enterprises is benefiting from both packaging enhancements and strategic promotions. “Our No. 1 cigar by far is Game Palmas from Swedish Match,” Verc’s Oliveira says.
For more than a year, he has promoted the cigars with a “two-for” pricing strategy. “It used to be two for $2.22,” he says. “Now we’re promoting them as two for $2.50 to grab a little extra margin.” Just behind is Dutch Masters Cigarillos, “previously not a big seller in this market, but a three-for-$2 promotion has helped the sticks take off over the last few months.” Older brands such as White Owl, which used to be quite popular, do not sell as well as natural leaf cigars such as Game Palmas and Dutch Masters, Oliveira says, and Swisher Sweet sales vary by area.
Perhaps the biggest shift sweeping cigars is the transition from packs to singles. “We have seen shifts in purchasing patterns to buying fewer cigars at a time, with more frequent store visits,” says Jane Green, vice president of marketing for Jacksonville, Fla.-based Swisher International, the channel’s largest cigar manufacturer.
Changes in purchase patterns coincided with the tax levy to help finance an expanded federal Children’s Health Insurance Program (SCHIP). “The steep tax increases have sharply affected pack prices, and many smokers are buying singles now,” Green says. Swisher has had success with its 60-count box.
ALL FOR ONE?
Retailers who plan tobacco sets solely around cigarettes, then fill in with snuff and cigars, are not only missing the latest trends. They’re also missing sales and greater profit.
“Tobacco categories used to be separate, but I look at it now as the total tobacco consumer because there are more and more people using more than one type of tobacco. That is a big change,” says Teller of Swedish Match. “If you’re a c-store chain, your cigarette consumer has to be taken care of. However, the last thing you want to do is drive smokers to shop elsewhere for smokeless tobacco products that they use occasionally.” Viewing cigarette smokers and OTP consumers separately is a mistake, he says.
“When chains officially step up their game in assortment of OTP, retailers achieve success by having the best racks, which are organized and clean and with price tags on product,” Teller says. Chains are spending more time on category analysis in the store and at the corporate office to make sure they have all the right items. “Chains that are doing this are performing at a very high level.”
Modi recommends retailers be proactive: “Anticipate the trend rather than being behind it. I’d say a lot of retailers are behind the trend.
“My biggest piece of advice is to seek out services and technologies that can help you analyze productivity of your SKU counts,” he continues. “Find out what is really selling, turning—what is really driving traffic. That’s my key message: Let the analytics drive your space allocation in your tobacco set.”