Managing Tobacco's Volatility
Retailers ponder whether and tobacco category; should be changed to &;nicotine category.
Wacky, volatile, unpredictable: These are just a few of the adjectives one could use to describe today’s state of tobacco.
With local communities threatening new sales bans, a bevy of states considering higher taxes and manufacturers giving rise to new segments, it doesn’t take much imagination to understand how retailers could look at their No. 1 category with a somewhat blurry eye.
So when more than 50 tobacco retailers, manufacturers and distributors gathered in Chicago in September to take part in CSP’s annual Tobacco Category Review Meeting, there was no shortage of conversation.
A pre-meeting survey of retail participants, one-on-one conversations and roundtable discussions revealed a multitude of concerns, such as contract limits and rising prices, and how these issues affect outside competition.
As far as pricing, the survey showed cost increases are still one of the biggest problems facing retailers, with every survey respondent listing cost increases as either “critically important” (58.3%) or “somewhat challenging” (41.7%).
And while results suggested the relationship between retailers and suppliers has improved (with 41.7% of respondents saying vendor relations are “not really a problem”), survey comments and roundtable discussions hinted at ongoing problems with contracts enforced by suppliers. When asked about the biggest challenge to the tobacco category, several survey participants referenced contracts, listing “navigating tobacco company contracts” and “major cigarette manufacturer contracts.”
At the roundtable discussion, retailers and e-cigarette manufacturers alike expressed concerns about major manufacturers imposing cigarette-like contracts on OTP and e-cigs as they get into the expanding categories.
“The influence contract agreements have on pricing and promotions,” said one retailer when asked what his company would change about tobacco category management. “It’s difficult to maintain pricing competitiveness and grow the overall category with agreements.”
Maintaining an edge against the competition for tobacco sales was another crucial worry expressed by retailers. There’s the new threat posed by dollar stores such as Family Dollar (which 50% of survey respondents listed as “somewhat challenging”), as well as the ongoing threat from Native American reservations—some of which are starting to manufacture cigars and smokeless products. And while Internet and mail-order tobacco may appear to be a thing of the past, one distributor warned that popular OTP products are “more widely available than you think” via such outlets.
However, the biggest competition facing tobacco retailers might not come from other sales outlets, but local government. While other brick-and-mortar and online retailers represent a threat to c-store sales, local ordinances determining when, where and how retailers can sell tobacco could be more detrimental if enacted.
Yes, the tobacco advertising ban in Worchester, Mass.; the tobacco display ban in Haverstraw, N.Y.; and the graphic warning ads in New York all were blocked or overturned—but with NATO fighting 15 bills through 2013, local government represents a significant threat to the tobacco retailer.
The Local Front
Welcome to Tom Briant’s world. Executive director of the National Association of Tobacco Outlets, Briant and his team spend their days trolling the news, municipal councils, health departments and other bodies capable of further restricting the sale of a legal category.
NATO’s work is recognized by the largest tobacco manufacturers, as well as scores of retailers and analysts, none of whom share NATO’s ability to seemingly spot the proverbial needle in the haystack. So when Briant shared at the tobacco meeting the story of Worcester, Mass., everyone took note.
In April 2011, Worcester passed one of the most restrictive tobacco advertising laws in the country, banning all outdoor advertising and all in-store advertising that could be viewed from the street. Objecting to what they asserted was a clear violation of the First Amendment, NATO and several tobacco manufacturers sued the city of Worcester—and were successful in their efforts to overturn the ban.
But why should retailers outside of Worcester care? “These local issues are very important for the entire retail industry across the country,” Briant said. “The Worcester, Mass., court ruling can be used as a precedent to prevent other cities from proposing and adopting a similar advertising ban law.”
It’s an important victory considering the money tobacco retailers are up against. Briant specifically referenced the 2009 American Recovery and Reinvestment Act, which earmarks about $1.5 billion through 2015 to the CDC for local government grants to be used for enacting tobacco-related restrictions. Those restrictions can include anything from advertising for promotions or cigar package sizes to banning the sale of flavored tobacco products or placing more limits on smoking in public.
“This year NATO established a special local ordinance project, and we are working with our field staff to go into these cities, engage retailers and get them to oppose these restrictive measures,” Briant said, citing a recent victory in which NATO and retailers successfully lobbied for the Haverhill, Mass., board of health to remove a provision that would have required cigars to be sold in packages of four, unless the price of an individual cigar was $2.50 or more per cigar.
Briant outlined other local battles NATO is fighting on behalf of tobacco retailers:
- Philadelphia’s graphic health warnings sign: Last year, the Philadelphia Board of Health proposed that graphic warnings signs be placed next to every register at every store selling tobacco products (and received $10 million in stimulus money to lobby for it). A nearly identical ordinance passed by the New York City Board of Health was struck down by the Sixth Circuit Court of Appeals, prompting Philadelphia to put its proposal on hold until late summer, when members of the Philadelphia Board of Health circulated a memo, suggesting it was time to move forward with local graphic warnings sign efforts. “I sent the Philadelphia Board of Health the Sixth Circuit decision on July 20, but the Philadelphia staff members proceeded to issue the memo three weeks later,” Briant said. The Philadelphia Board of Health is expected to hold a hearing later this year.
- Massachusetts’ cigar pack restrictions: Haverhill is not the only city in Massachusetts looking to pass laws requiring cigars to be sold in larger packs or as higher-priced singles. “NATO has responded to 23 of these proposed regulations to date, and so far 17 boards of health have not adopted the restrictions,” said Briant, pointing out that additional Massachusetts cities have proposals on the table to ban tobacco product coupons and promotions.
- Providence and Miami-Dade’s flavored-tobacco bans: This past January, Providence, R.I. officially banned the sale of all flavored tobacco products, and Florida’s Miami-Dade County proposed a similar measure. NATO and several manufacturers sued Providence and, at the time of print, were still waiting to learn whether or not a federal judge would uphold the flavor ban. The Miami- Dade proposal has been postponed indefinitely. “If such a restrictive ordinance is allowed to stand,” said Briant, “other cities could adopt similar restrictions banning the sale of flavored tobacco products and limiting or prohibiting coupon redemption and tobacco product promotions.”