Where Have All the Cigarette Promos Gone?
How Big Tobacco’s promotional spending—or lack thereof—is affecting retailers’ bottom lines
Published in CSP Daily News
Declining cigarette consumption is a story that has been covered by everyone from NACS to the Centers for Disease Control and Prevention. But there’s a lesser-publicized phenomenon that’s having as much—if not more—of an effect on a c-store retailer’s tobacco business.
In happier days, Big Tobacco aided retailers’ efforts by flushing the markets with buybacks, marketing allowances and other promotional spending.
“Promotional allowances help a retailer’s bottom line because they are designed to offer discounts on cigarette prices, thus boosting cigarette volume, since consumers should, in theory, see the benefit of lower prices,” says Judy Hong, a tobacco analyst for New York-based Goldman Sachs. “The programs have also allowed for payment to retailers as incentives to promote higher sales or preferred product placements.”
How times have changed: Today those once-plentiful marketing dollars have eroded—and, with them, retailers’ bottom lines.
“From a cash-flow perspective, [heavy promotional spending] was much more beneficial for retailers,” says Bonnie Herzog, a senior analyst covering tobacco and the c-store channel for Wells Fargo, New York. “The lower amounts that are now coming in have been challenging, to say the least— and have continued to squeeze margins.”
All of which has left operators in a bind: Cigarettes are as important as ever to the c-store operator—Herzog describes them as “absolutely critical to the channel”—yet the segment’s profits continue to plummet.
“Cigarettes represent the largest portion of [convenience] in-store sales, at over 38% in 2012, but declined 140 base points as a percentage of total sales vs. the year before,” says Hong. “Cigarettes also carry the lowest gross margin of all in-store merchandise at around 15% in c-stores.
“Despite a decline in gross margins, [they] account for over 18% of in-store gross profit.”
Which leaves the c-store channel to ponder: Where have all the promos gone, and are they ever coming back?
Promos for Profits
As tough as it is to be a tobacco retailer, manufacturers haven’t exactly had it easy in the modern era. Their operating costs have steadily risen thanks to a variety of challenges.
“I think a good frame of reference is pre- and post-MSA, using 1998 as your inflexion point,” says David Bishop, managing partner of Barrington, Ill.-based sales and marketing firm Balvor LLC.
Before 1998, tobacco companies did not have the burden of hefty Master Settlement Agreement (MSA) payments and added expenses. With the 1998 MSA signing, costs went up seemingly overnight. Settlement payments escalated to almost $9 billion a year at their peak, and they now average more than $7 billion a year. The MSA payments alone cost tobacco manufacturers roughly 50 cents per pack, according to Bishop.