Be Wise, Accessorize

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

By  Melissa Vonder Haar, Tobacco Editor

Article Preview: 

Majestic Margins

As if double-digit sales growth and the strong potential for add-on purchases weren’t enough, the accessories segment also boasts healthy profit margins.

“RYO/MYO accessories offer much higher profit margins than cigarettes and other OTP products,” says Malacsina. “Average retail margins are over 30%, compared to cigarette margins that are generally below 10%.”

This estimate may even be a bit conservative: Williams believes it’s closer to 35% to 40%, and Wortzel predicts retailers could be making as much as 50% margins on products such as rolling papers and tubes.

“It’s printing money on these rolling papers,” Wortzel says. “A retailer can take substantial margins, depending on how fast they want to move the product.”

As consumers become more comfortable with the RYO/MYO category, the potential for profit margins only increases for retailers as consumers move from lower-priced rolling papers to more expensive—and margin-friendly—accessories.

“More people are investing into higherpriced table-top injectors vs. inexpensive hand-held injectors as they are becoming more committed to this category,” says Malacsina.

Williams agrees: “We’ve found that consumers start with a lower-end type machine and step up. You’re seeing profits on some of those higher-end machines of $70 to $90.”

The reason behind such profitable margins—for items big and small—is that, because accessories do not actually contain tobacco, they are not subject to any of the state and federal excise taxes that drive up the prices (and thus drive down margins) on cigarettes and OTP. And because pipe tobacco is not regulated by the FDA or subject to the federal excise tax, the RYO/MYO category continues to grow.

“We believe, because of this excise gap, there are more people rolling and making their own cigarettes today since the birth of the machine-made cigarette,” says Wortzel. “Until there is excise equalization, there will continue to be growth.”

 This difference in excise taxes is a big issue for the RYO/MYO segment, which makes it difficult to track the exact number of consumers who are making their own cigarettes. Because only RYO/MYO tobacco is subject to the federal excise tax, many consumers opt to purchase lowerpriced pipe tobacco for their RYO/MYO needs. The fact that official RYO tobacco sales have been declining since the 2009 tax increase at least begs the question of whether or not RYO accessories will continue to grow were pipe tobacco to be taxed the same way.

“Anytime there’s some type of new tax—whether it’s on cigarettes or any tobacco product—it’s a challenge to maintain the previous sales levels,” Maiellano says. “History would suggest there’s the potential to be a decline (in RYO/MYO sales). If there’s a price increase and all products are equal, where do these customers go? Only time will tell.”

Still, others believe that both the accessories and RYO/MYO segments will continue to surge, even if the government begins to tax pipe tobacco, because there’s still so much room for growth.

“Absolutely—I think we’ll see continued growth,” says Williams. “There are still a tremendous amount of retailers who haven’t gotten into the (accessories) category yet. Retailers who are not in this category are not only losing out on the RYO consumer, but on the additional profits that accessory products allow them to get.”

Spatial Challenges

With so many benefits, one might question why any retailer would overlook the accessories segment. Yet with cigarette contracts and an expanding option of popular OTP products crowding the backbar, the most significant challenge in building a robust accessories set often comes down to finding room to accommodate the extra SKUs.

Toward that end, Williams recommends retailers carry a variety of tubes, papers, filters, injector machines and electronic machines. Although such products are not required to be merchandised behind the counter (as cigarettes and many OTP products are), he points out that the majority of c-store retailers choose to house accessories on the backbar because they are indeed a part of the OTP set.

“At a minimum, we believe retailers have to allow one 4-foot shelf,” says Williams. “It will cover all the items that they need.”

Wortzel believes that, because of space limitations, many operators are also challenged to provide a proper selection, saying that retailers need “adequate space, and make sure you provide adequate variety. The challenge is to prevent getting pegged down into one or two brands.”

While many retailers will carry a small selection of rolling papers, many suppliers believe this is nowhere near enough to meet the demand of the true RYO/MYO consumer.

“Retailers who carry a good mix do so much better than those who only carry limited selections of the RYO/MYO category,” says Malacsina. “Consumers will buy their tobacco, tubes and accessories at the same place, so if a retailer doesn’t carry the whole RYO/MYO category, they are missing out on high incremental sales and profits.”

As a former retailer and consultant, Maiellano agrees that retailers who are in the RYO/MYO segment will benefit from carrying a wider offering of accessories, including machines. However, he also points out that it’s not a segment that will work for every retailer or at every location.

“If I’m a retailer, I know I’m going to have locations where I’d be open to a more extensive offering when it comes to roll-your-own, which would include expanding my offering when it comes to accessories,” he says. “I’m not saying that it’s something I would put everywhere, but I do believe retailers should look at those markets where they could expand accessories to meet the needs of their consumers.”

The good news for retailers is that many accessories manufacturers recognize the spatial challenge and are doing their part to lessen the footprint required to build a true accessories set. “As a manufacturer, we—and I’m sure others—have been doing things to ensure our products can fit in a more and more compact space,” says Wortzel, pointing out that Scandinavian offers a small “fish bowl” merchandising option for its rolling papers that can be placed on the counter, as well as a rolling paper carton with adhesives that allow it to be placed on the wall. “We’re looking to find fixtures that get stuff up and out of the retailer’s way.”The even better news is that retailers who agree to try out an expanded accessories set are reaping the benefits. Though this admittedly niche player will never come close to the kind of sales generated from  OTP heavyweights such as cigars and moist smokeless, it’s certainly paying off for operators who devote a little attention to the segment.

“If a retailer will allow us a whole shelf, we’ll put in a small section of accessory products,” says Williams. “Then when they see the success and the profitability, retailers figure out right away the benefit of these products.”In other words, sometimes it pays to accessorize.


In Search of the Connoisseur

While both the RYO/MYO and accessories segments are typically associated with value-driven consumers, Leonard Wortzel, Scandinavian Tobacco Group Lane’s RYO and pipe tobacco brand manager, has observed another, perhaps surprising, tobacco consumer entering the category.

“There is another segment of true cigarette tobacco smokers that are connoisseurs,” he says. “They could care less about the price they’re paying.”

While one of Scandinavian’s premium RYO offerings, Peter Stokkebye, retails at a higher price than the company’s popular RYO Bugler Tobacco, Wortzel says that Stokkebye—and other high-end loose tobaccos—are increasing in sales volume, thanks in part to the rise in premium RYO/MYO consumers.

“There is a subset of consumers out there who may have been machinemade cigarette smokers but now are looking for a different experience,” says Wortzel. “They don’t want some generic, machine-made tobacco.”

This type of consumer is drawn to making their own cigarettes because they get to actually touch and smell the tobacco, controlling the amount and blend that goes into each cigarette they smoke.

“They’re probably not doing any tubing with this tobacco, but more and more of that segment is becoming aware of finding a better way to roll and craft their own high-quality cigarette,” Wortzel says. “It’s very comparable to the craft or micro beer drinker. There is this little subset that’s occurring where folks are taking a little bit of this tobacco and little bit of that tobacco to create their own blend. It’s a small subset, but it’s out there.

”Which means there’s an even wider base of consumers for tobacco accessories.

“While you’re not really attracting that mainstream consumer, you are consistently and continually now attracting both the extreme value consumer and the premium consumer,” says Wortzel.

Pages

Click here to download full article