Building an Electronic Destination

How one retailer is creating a point of difference with e-cigarette segment.

By  Melissa Vonder Haar, Tobacco Editor

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Retailers and consumers alike are buzzing about electronic cigarettes as the industry’s greatest potential game changer.

Although a nascent category with but a fraction of 1% of total tobacco share, e-cigs offer reasons for excitement: Wells Fargo’sQ4 2012 Tobacco Talks survey cites an estimated annual growth of more than 20% and as much as a 25% edge on gross-profit margins compared to regular cigarettes.

No wonder so many retailers are getting into the electronic-cigarette game. Or are they?

“If a retailer is only carrying one electronic cigarette, they are not really in the business,” says Lou Maiellano, a former tobacco buyer for Sunoco and president of Sevierville, Tenn.-based TAZ Marketing& Consulting Group. “You’re in the business when you have at least thereto five brands. You need to have variety. Consumers have different preferences of feel and taste profiles.”

Until recently, Dallas-based AlonBrands Retail was one of those retailers “not really” in the electronic-cigarette business. But then in 2012, William Slattery joined the company as tobacco category manager.

“When I started, we only had one brand of electronic cigarettes (NJOY)in the stores,” Slattery says. “Through conversations with many people, I’ve come to view electronic cigarettes as an opportunity—not just for incremental sales, but as a point of difference.”

Though e-cigs remains a niche, Slattery envisions it as a mainstream purchase:“There are a lot of conveniences that the tobacco consumer has lost over the years. Electronic cigarettes can give consumers some of those conveniences back, and more.”

Looking at the competition, Slattery saw an opportunity. Lacking were retailers, whether c-stores or other retail channels, offering the variety necessary to establish themselves as true destinations for electronic cigarettes. It has become his mission to do just that for Alon Brands.

“I’m creating a destination for electronic cigarettes within our stores,” says Slattery, echoing Wall Street analysts such as Nik Modi of UBS and Bonnie Herzogof Wells Fargo in comparing the subcategory to energy drinks when they first burst onto the scene. “It’s a new type of product that will take time to gain traction. But as traction grows, I’m going to make sure Alon Brands stores are known as a place where consumers can get them.”

In a remarkably short amount of time, Alon Brands has seen the benefits of establishing itself as such a destination, including a more than 100% increase in sales and units year over year. Alon’s journey from a dabbler in electronic cigarettes to an electronic-cigarette destination isn’t merely a profile of one retailer’s success. It’s also a road map for how other retailers could enjoy similar success in this new electric realm.

Keys to the Kingdom

When Slattery started looking at ways to distinguish Alon Brands from other sellers of e-cigs, it became clear that carrying a wider variety of brands was the first step.“Although other companies sell electronic cigarettes, most don’t offer the variety we’ve brought to Alon stores,” he says.

But choosing the right brand to partner with can be a daunting task, especially considering Maiellano estimates more than 380 e-cigarette companies are selling in the United States.

“Two things that really need to be stressed are whether or not the company has a solid marketing base and financial stability. Do they exhibit stability?” Maiellano says.

Alon’s successful history with NJOY made it easy for Slattery to trust in the Scottsdale, Ariz.-based manufacturer. To decide which other brands to bring on, he spoke with a number of companies and enlisted advice from tobacco analysts and manufacturers before settling on three others: Nicotek, Wheat Ridge, Colo.; FIN, Northbrook, Ill.; and blu eCigs, which was acquired by Greensboro, N.C.-based Lorillard Tobacco Company last April.

“While I believe each company offers an excellent product and carries a good reputation, each also has unique attributes that made them desirable to bring into Alon Brands,” says Slattery, citing Nicotek’s distinctive product mix, Fin’s ability to market not just its products but electronic cigarettes as a whole, and blu’s attractive merchandising solutions and established customer base.

But it’s not just about offering a variety in brands. To establish Alon Brands as a true e-cigarette destination, Slattery also had to offer an assortment of products. And this may be, for now, Alon’s point of distinction among c-store operators.

“Develop the different segments within that category,” Maiellano says.“You need to be in the cartridge business; cartridges are where the high margin is and where you can actually develop consumer loyalty. Disposable, express kits, starter kits: You need a cross-segment of the whole offering.”

As such, Alon’s product mix includes both disposables and starter kits, along with a wide variety of cartridges and flavors.“We offer a mix of everything,” says Slattery. “Our goal is to appeal to as many consumers as possible.”

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