NATO Show 2014: Shifts and Starts
Nicotine sales affected by competitive pricing, imbalanced sets, Burke says
“Why do people go to tobacco outlets over c-stores?” Don Burke, senior vice president of Management Science Associates, asked attendees of his session, “The Total Nicotine Picture.”
“Friendly service,” a few audience members called out. “A well-educated staff,” said others. “Price.”
Burke concurred on all these points, saying some will remain strong differentiators, while others—such as the price gap between c-stores and outlets—are eroding.
Burke shared sales figures from tracking wholesale shipments to retail. Overall, tobacco outlets account for 3% of all retail outlets (compared to 51% for c-stores), and that 3% accounts for 8% of total retail nicotine volume including e-cigs (compared to 61% for c-stores). All retail outlets saw nicotine unit volume decline by 4% in the 26 weeks ending Feb. 22 vs. a year prior. Tobacco outlets experienced a 9% decline; c-store volumes were down 4%.
Premium cigarettes declined by about 8% in tobacco outlets, while c-stores saw a 4% drop. Discount cigarettes are down 14% for tobacco outlets and 8% for c-stores. Little cigars saw a decline of 10% in both tobacco outlets and c-stores in that same time period (due to a taxation change, said Burke), while large cigars grew 2% in outlets and a comfortable 15% in c-stores. Moist was up 2% at tobacco outlets and 6% in c-stores.
That leaves e-cigs, which saw 92% unit volume growth at tobacco outlets in that same time period. C-stores saw a 117% increase, and total outlet growth clocked in at 126%.
So why the disparity between volume trends at c-stores vs. tobacco outlets? For one, Burke points to the types of cigarette users each channel attracts. In the 52 weeks ending Feb. 22, premium cigarettes accounted for more business at c-stores than tobacco outlets (75% share of cigarette volume vs. 63%), while the opposite is true of discount cigarettes (37% for outlets vs. 25% for c-stores). And 20 points of that 37% are “deep discount” brands; of c-store’s 25% discount-cigarette share, it’s significantly less.
All of this, said Burke, points to a much more price-conscious shopper. Cigarette volume declines at tobacco outlets are double those of c-stores, thanks in part to e-cigs and a shrinking price gap. From January 2012 through December 2013, MSA saw the average price gap between c-stores and tobacco outlets narrow from 72 cents to 63 cents—a 9-cent squeeze sure to draw the attention of that thrifty outlet shopper.
Also affecting the performance of tobacco outlets is SKU counts. Tobacco outlets have twice as many discount cigarette SKUs as c-stores, and three times as many loose-tobacco SKUs—a category that has been underperforming. “The question becomes: Are my SKUs working as hard as they should be?” said Burke.
The electronic/vaping category, meanwhile, reflects differences in the role of tobacco outlets vs. c-stores. Refill cartridges make up 42% of c-store volume share, followed by disposables at 34%, liquid at 16% and kits at 8%. By comparison, liquid makes up 48% of tobacco outlet share, followed by refill cartridges at 37%, disposables at 10% and kits at 5%. Both channels have seen an increase in liquid share and a decrease in refill-cartridge share.
Burke urged tobacco-outlet attendees to focus on the strengths of the channel, such as e-liquids and high-ticket items such as refill packs.
Another factor affecting tobacco sales is Dollar General’s increased attention to the category and CVS’ planned pullout.
MSA looked at sales of tobacco outlets that have a Dollar General nearby and found a 3% decline in volume, compared to no change at outlets without a Dollar General nearby. While c-stores also lost share to nearby Dollar General stores, the channel that was hit hardest was grocery.
On the flipside, MSA also forecasted potential volume growth for tobacco outlets and c-stores when CVS pulls out of the category. It estimates that c-stores with a CVS within a mile could potentially see an increase of 43 carton sales per week, and tobacco outlets an increase of five cartons.
Burke urged outlet retailers to look at what other products tobacco buyers are purchasing at c-stores—largely packaged beverages, candy and snacks—and to consider loyalty programs to distract from the pricing game.