Tobacco Turbulence

Retailers assess effects of regulation, economy on the category.

By  Angel Abcede, Senior Editor/Content Development Coordinator

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The new, federally imposed restrictions on cigarette package labeling continue to confuse both customers and staff at the store level, causing retailers such as Colonial Pantry’s John Miller to wonder how much more government regulation will affect his 11-store business.

In addition to this problem, Miller and the 35 other attendees of the 2010 CSP Tobacco Category Review Meeting, held in August in Chicago, explored legislative trends, federal regulations and manufacturer strategies that have rocked the category. “We just want to sell product,” said Miller, expressing frustration with trends attacking tobacco sales. Regarding the labeling restrictions, a Food & Drug Administration (FDA) ban on the terms “light,” “mild” and “low tar” that went into effect this past summer has meant the clerk or the customer describing products in terms of package design or, in most cases, color. From a customer-service perspective, the challenge has become educating both sides of the counter about which product is now what color. The problem has become easier to manage as cashiers have started remembering colors for particular products; however, according to attendees, lower-volume names are still a problem.

And yet despite the challenges, including a struggling economy and rising excise taxes, tobacco has held its own, said Nik Modi, an analyst with New York-based UBS Investment Research. Describing himself as “cautiously optimistic,” he said federal efforts to revive the economy have had a positive effect on low-income consumers, who are also big tobacco users.

Modi and other speakers, suppliers and retailers attending the forum brought up additional concerns:

  • FDA scrutiny. Retailers wonder how FDA oversight will evolve and, more specifically, how the agency will enforce its new edicts.
  • Legislative developments. Bans and regulations from state and local entities continue to emerge.
  • Consumer education and new products. With restrictions on marketing and advertising growing tighter, the retail sector may become a prime resource for new-product education.
  • Concern over evolving OTP contracts. As the major manufacturers acquire smaller OTP makers, cigarettestyle contracts may creep into OTP— a game-changing development, according to retailers at the meeting. The pressure is indeed mounting. Citing how manufacturer incentives, taxation and regulation today trump customer demand, Miller said, “The government and retailers are more addicted to tobacco than consumers.”

TREADING WATER

Yet despite the challenges, near-term news for the category is positive, Modi of UBS said. With cigarette use skewing toward lower-income demographics, stimulus efforts by the federal government and growing consumer optimism indicate a positive trend. Sixty percent of tobacco’s core consumer makes less than $40,000 a year, he said. And while unemployment and taxation have been rising at the same time miles driven and construction jobs are falling, that demographic has benefited from tax credits, the unemployment-benefits extension and health-care reform. “All these elements mean improved consumption at the low end,” he said.

Consumer confidence is also rising faster among the lower-income demographic than the higher. Citing government statistics, Modi said 16% of consumers making $25,000 or less reported a higher confidence level than the recorded 14% of those making more.

Within the category, premium brands may also benefit from today’s tobacco climate. With tax increases from the State Children’s Health Insurance Program (SCHIP), which went into effect last year, as well as increases from numerous states and municipal entities (see p. 102), the disparity between premium and discount brands decreases, Modi explained. As the disparity closes, people have a tendency to “trade up.”

Still, pressure from taxation and regulatory agencies will undoubtedly reshape the current tobacco landscape. For instance, Modi projected that cigarettes will steadily lose category share, going from 80% today to 70% in 2015 and then to 45% in 2025.

RETAIL TEACHERS

What seems apparent is the changing role of retailers. In a business environment of suffocating regulation, the job of communicating descriptions of new tobacco products will start falling to the retailer, said Denise Indovina, vice president of sales for ICOM, Epsilon Targeting of Dallas.

She revealed results of the company’s recent internal-marketing survey of 1,974 U.S. smokers. In one finding, 80% of smokers in a “dark” scenario (where no signage or visible product existed at the store) said they would ask for their usual brand. So as a result, “trial and switching will be driven by couponing and communication with clerks,” she said.

Other evidence points in this direction, according to Modi. International examples of successful retailer-based training exist, such as what Winston- Salem, N.C.-based Reynolds American Inc. (RAI) learned from marketing Colgate-branded toothpaste in other countries.

 “With tobacco, [the responsibility] will move to the retailer to build brand equity,” he said. RAI may be one of the first companies to initiate consumer education through the retail channel, he said.

While agreeing for the most part on this trend, a couple of attendees raised contradictory thoughts. According to Steve Sandman, vice president of sales and marketing for Republic Tobacco, Glenview, Ill., the Colgate example was partly one of educating the population on the values of brushing teeth as well as how to do it, so its relevance may be a consideration.

Retailer Anne Flint, senior manager of tobacco for Cumberland Farms Inc., Framingham, Mass., cited the difficulty of communicating messages to consumers in a fast-paced c-store environment. Cashiers are trying to move lines and, at the same time, promote any number of in-store food and drink specials, she pointed out.

One emerging solution is the Internet and the tool of social marketing. Not many regulations exist for that route, and advertising—which is heavily restricted in print, TV and other traditional media—currently does not exist in cyberspace. But be warned, said Bill Greiwe, CEO of Cheyenne International LLC, Grover, N.C. Even though the government may not have locked down the Internet as a marketing tool, “We have to self-police ourselves. If you’re going on Twitter and it’s used heavily by young people, you may have a problem. You should be very thoughtful about that.”

TRACKING THE CONSUMER

Here’s a dichotomy: No retailer seeks out-of-stocks, yet one way to woo customers to try new products is to not have their favorite brands on the shelf. When asked what influences a brand switch, Indovina of ICOM said the most chosen reason (55%) was “When my usual brand is not available.”

For retailers, having products out-ofstock is a relentless challenge, especially when many other tobacco products (OTP) have expiration dates. “The growth of OTP has been great,” says Jaime Pukylo, sales manager for Country Fair Inc., Erie, Pa. “But our biggest problem is out-of-stocks.”

The propensity to switch brands ties to other customer characteristics, Indovina said. Older customers, those 65 and up, are less likely to be influenced by a promotion to try a second brand—and to even have a favorite second brand in the first place. On the other hand, consumers 21 to 34 are more likely to have a second brand, will try a different brand on a promotion and are also more likely to try a new brand that’s on display. But the older set does present an attractive market, smoking 18.5 cigarettes per day vs. 12.3 for the younger demographic.

“Consumption differs among ages and genders,” she said. “So you have to evaluate what the value is of all the segments.”

UPHILL BATTLES

Selling tobacco today is a battle on multiple fronts, according to speakers at the meeting. Tom Briant, executive director of the National Association of Tobacco Outlets (NATO), Minneapolis, said retailers will have a tough road ahead as the FDA steps into its new role of regulating tobacco.

“The good news is that the number of states where legislation [against tobacco] passed is down,” Briant said. “The bad news is that the FDA has an activist agenda that will come close to prohibiting [tobacco use].”

The number of states pushing cigarette- tax increases in 2010 is 13; last year it was 32. Fourteen have passed since the beginning of 2009, and six have been enacted, he said. For OTP, 29 states pushed initiatives last year, with 14 passing; in 2010, 13 states have made moves, with seven passing.

Briant said numerous issues remain brewing at local, state and federal levels, including scrutiny of menthol with the threat of an eventual ban, warning-label changes and the requirement of graphic posters showing damage to lungs and the brain. “The mindset is prohibition,” he said. 

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