Cigars: Premium Choice
Attracting buyers of higher-end cigars can lead to bigger baskets
The introduction of foil pouches made it possible for convenience stores to offer cigars that don’t require humidors to maintain their freshness. Pre-priced foil pouches and three-for-two options have helped drive cigar volumes. At the same time, retailers have seen dollar sales decline.
“Slowly but surely, industry unit sales have been responding positively, but gross profit percentage per SKU has been whittled down,” says Paul Marquardt, vice president of marketing and operations for Prime Time International, Phoenix. “You just can’t make as much penny profit when you’re selling pre-priced cigarillos for 69 or 79 cents that you could possibly sell for 99 cents or $1.09 or $1.19.”
The “perfect storm” of a sluggish economy, value-driven consumers and the rise of pre-priced foil packs has left some retailers reluctantly accepting these lower-margin cigars, Marquardt says.
However, RBC Capital Markets tobacco analyst Nik Modi believes the premium-cigar market is poised to grow this year and beyond. He cites several reasons.
First, consumers are increasingly driven by “aspiration,” the pursuit of finer things that has led to increased demand for craft beer, premium spirits and even prestige beauty products. “We likely also see this trend falling over into the cigar category,” Modi says, “particularly as millenials, a very aspirational generation, age and become more interested in the category.”
Second, a growing number of small premium-cigar makers are entering the market and making waves. Even celebrities are getting in on cigar innovation, he says, pointing to rapper Jay-Z’s recent launch of his own high-end cigar.
Third, Modi says, there’s the FDA’s pending proposal on OTP regulation and the expectation it will be “less onerous on premium cigars than affordable cigars, given affordable cigars’ popularity among youth.” Indeed, in speaking about premium cigars, Zeller cited their higher prices.
Expansion of premium-cigar offerings “would be accretive to c-store margins,” Modi says, “though we note premium-cigar consumers prefer to go to smoke shops where they can often smoke cigars and speak with knowledgeable store associates.”
Kerstein, who operated 250 convenience stores at one point before deciding to focus solely on tobacco with his Smoker’s Haven stores, sees a role for both tobacco shops and c-stores in the lives of premium-cigar smokers.
The convenience store, he says, won’t be the retailer that introduces smokers to new cigars or where they’ll go to talk about cigars. “The role I think for the convenience store to play in the marketplace is just that: It’s going to be a convenient location for the customer to pick up their one or two cigars on the run because c-store hours are typically much longer than tobacco stores are open,” he says.
Retailers may see more affordable cigars as a greater hook for c-store customers, but premium cigars offer higher margins and potentially a broader market basket, Kerstein says: “If somebody is a premium-cigar smoker and they do go into a convenience store to purchase that cigar, odds are they are not just going to walk out with that cigar. They’re going to make other purchases, whether it’s a beverage, candy or mint purchase or some other snack product.”
At a store level, a core group of repeat customers is all it takes to profit from higher-margin cigars, says Prime Time’s Marquardt. Because c-store customers are creatures of habit, “you really only need to get a certain number of those people to purchase that product to really drive success.”
To have any hope of success selling premium cigars, merchandising is critical, Kerstein says. At a bare minimum, retailers need to offer 25 to 30 premium-cigar SKUs. Upwards of 100 is even better, though space at the backbar can be an issue. “If you’re going to sell candy, you’re not going to offer just five kinds of candy bars,” he points out.
Jane Green, vice president of marketing for Jacksonville, Fla.-based Swisher International, says new packaging, like that of Swisher’s Gold Strike, solves a lot of the problems c-stores once faced in merchandising handmade premium cigars. The resealable pouch keeps three premium cigars in perfect condition, she says, “and retailers will enjoy the strong margins.”