Be Wise, Accessorize

A look at the OTP segment with the greatest opportunity for add-on sales.

By  Melissa Vonder Haar, Tobacco Editor

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The rising cost of cigarettes and the weakened economy continues to drive many consumers to roll-your-own/make-your-own (RYO/MYO) cigarettes. Even with official RYO tobacco sales slowing down since the federal excise tax was raised in 2009, Nielsen reports that c-store RYO tobacco sales still accounted for $68.9 million in c-store sales in 2012 (down 12% from 2011). Pipe tobacco (often used for RYO/MYO cigarettes) sales rose a whopping 65.6%, netting c-store operators $67.3 million last year.

But what makes the RYO/MYO segment unique is that it’s the only segment in OTP that requires a supplementary purchase almost every time, offering retailers a bevy of additional profit opportunities in the often-underserved tobacco accessories segment.

“From a retailer standpoint, it’s probably the one category that consistently gets you an add-on purchase almost every time,” says Leonard Wortzel, RYO and pipe tobacco brand manager for Tucker, Ga.-based Scandinavian Tobacco Group Lane. “Out of anything in the OTP category, there are more consistent opportunities to do an add-on purchase with RYO and accessories.”

To make their own cigarettes, most consumers use papers or tubes, with more experienced consumers also using filters, injectors and/or RYO machines. Aside from requiring a small footprint, the accessories category also offers retailers the ability to make generous margins while keeping prices low because accessories are not subject to the same state and federal excise taxes as other OTP products.

And according to Dennis Williams, national accounts manager of OTP for wholesaler Harold Levinson Associates, Farmingdale, N.Y., the accessories segment is one that appeals to a wide base of consumers, thus benefiting retailers big and small.

“We are seeing accessories consumers across every market, across every customer base,” he says. “When the retailer takes it in, it’s selling. Retailers who provide this for their customers are seeing tremendous growth.”

Despite all these benefits, many retailers’ accessory offering is limited to just one or two SKUs of rolling papers. Fortunately, Wortzel and Williams have joined others in the accessories game to decipher the many perks—and limited challenges—of the segment in a lesson on how retailers can benefit by accessorizing their tobacco set.

Enjoying the RYO/MYO Boom

By their very nature, tobacco accessory sales are explicitly linked to RYO/MYO tobacco sales, which have seen dramatic increases over the past several years thanks to steep state and federal excise taxes on machine-made cigarettes. Because of these excise taxes, the average price of a pack of cigarettes has more than doubled since 1998, going from $2.09 to $5.55 per pack, R.J. Reynolds Tobacco Co. estimates.

“As cigarette pricing has continued to rise to a point where that consumer has looked for alternatives, it’s driven them into the make-your-own category,” says Williams. “Consumers need accessory products in order to make their own cigarettes.”

Further driving consumers toward RYO alternatives has been the recession, which not only put many tobacco consumers out of work, but also forced even employed individuals to think twice about expenses such as cigarettes.

“Since the economy has been low for the last few years and more people are unemployed, they have time and need to save money,” says Ross Haynes, vice president of sales and marketing for Russell Springs, Ky.-based Tantus Tobacco. “Some of these consumers may not have been in the demographic before but have found themselves in this situation.”

This has resulted in a perfect atmosphere for the RYO/MYO tobacco market—and thus accessories products—to thrive.

“Traditionally, our consumers were the ones who could not afford to buy a pack of cigarettes,” says Tamas Malacsina, marketing director for Glenview, Ill.-based Republic Tobacco. “But as cigarette prices continue to increase, we see more and more smokers switching to this category, not because they can’t afford to buy a pack of cigarettes, but because they don’t want to pay $6 to $10 for a pack.”

Still, even with a significantly lower price point, rolling or making cigarettes is a more complicated, time-consuming process—and there are certainly other options within the OTP section that price below cigarettes without the time and skill RYO/MYO products require. Yet for a growing sector of consumers, this process is part of the appeal.

“There are consumers out there that prefer rolling or making their own cigarettes,” says Lou Maiellano, a former tobacco buyer for Sunoco and president of Sevierville, Tenn.-based TAZ Marketing & Consulting Group. “It’s an experience there that they enjoy, and there’s a culture there.

”Whether it’s because of economic circumstances, the RYO experience or an increased awareness of the category, more consumers are opting for the make-theirown option, leading to a surge in accessories sales. “From everything we can tell from our own numbers, there have been incredible (sales) gains,” says Wortzel. “Starting in 2009, the numbers started climbing incrementally year after year; they have only recently begun to slightlytaper. But when I talk about tapering, it’s still double-digit growth.”

And these accessory products experiencing such growth are not limited to low-ticket papers and tubes. Also included are filters, injectors and RYO machines that wholesaler Williams estimates can retail anywhere from $2.99 for a hand-held model to $89.99 for an electronic machine.

“These products allow consumers an alternative to traditional cigarettes,” he says. “It’s made it much easier today for the consumer to get into the category seamlessly because of the different types of machines and products. There are starter kits available that allow consumers to use a simple injector or roll-yourown machine, and then they can trade up to bigger, faster machines as they get comfortable.”

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