dipping into new profits

Premium products driving the moist smokeless tobacco business, U.S. Smokeless Tobacco says.

An influx of deep-discount products is forcing retailers to change the way they merchandise moist smokeless tobacco (MST) products and experts are concerned that these changes are adversely affecting moist smokeless profitability.

As the deep-discount segment has grown in volume, it is compressing dollar sales and gross profit per transaction, forcing retailers to sell one-and-half cans of the deep-discount products in order to experience the same profitability from selling one can of premium moist smokeless tobacco products, the study found.

In its study, “Examining Growth Opportunities in Moist Smokeless Tobacco,” Willard Bishop found retailers that aggressively expanded into the deep-discount segment of smokeless tobacco are surrendering penny profits and experiencing declining profitability. As a result, these retailers are beginning to rationalize assortment levels down in favor of premium products, like U.S. Smokeless Tobacco’s (USSTC) Skoal and Copenhagen and Conwood’s Kodiak, which offer high profit margins and have intense drawing power.

“Retailers should have offerings within each of the price segments in MST,” said Ed Chrupcala, director of category development for USSTC. “However, when they must make itemlevel assortment decisions, we ask retailers to consider the incremental value of an item. If profitability is the objective, clearly premium brands deliver higher profit.”

Analyzing unique MST transactions based on retail POS, Willard Bishop discovered that premium customers purchase between 28% to 50% more cans per transaction than either price value or sub-price value. Premium MST transactions also generate 50% to 60% higher dollar sales versus the two other price segments.

The larger purchase quantity combined with higher retail prices generates a bigger dollar ring for premium MST. “This is between 1.9 and 2.3 times higher than the other segments,” the study said. “These transactions also generate a higher ring related to non-MST products, particularly when compared to price value.”

Transactional analysis quantifies the value of the shopping trip versus simply the product. “Retailers can defend their base business, protect a valuable profit source and achieve profitable growth by at delivering competitive value in the premium segment,” the report concluded.

Bishop also found that premium and subprice value customers spend very similar dollar amounts on non-MST products per transaction. However, the penny profit potential is greater for premium “because these customers purchase higher gross margin products such as foodservice. As a result of stronger gross margins from ancillary purchases and the higher penny profit relative to MST products, transactions involving premium MST products generate 49% to 37% more gross profits than either price-value or subprice value, respectively,” the report said.

In its retailer surveys, Bishop found that chains typically offered between 20 and 50 SKUs in the MST category. In stores where the assortment is present across all three price segments, premium, price value and subprice value, premium MST represents more than 60% of the product mix, while price value (29%) and sub-price (11%) lagged far behind.

“The premium MST customer is a profitable customer for the convenience retailer who visits stores frequently. Other industry research shows that MST customers are visiting your stores around 12 times per month,” Chrupcala said. “Is the premium MST customer important? You bet. They bring a large and very profitable market basket to your store every 2-3 days.”

The study also found that a relatively small number of products, about eight SKUs, drives more than half of the MST business. This underscores the need for marketers to keep products fresh and in stock.

Bishop and USSTC agree that growing the premium MST business requires an unrelenting focus on building sustainable growth. Retailers and their category managers strive to this objective by developing:

  • Volume-driven strategies designed to grow the core business and deliver greater value to adults.
  • Efficiency-driven strategies to improve profit per transaction and increase asset utilization.

In turn, these strategies help guide retailer emphasis on the various marketing elements based on the customer value proposition. Given that moist smokeless is becoming a more important part of the convenience business, retailers are urged to re-examine the category and assess how well their MST growth strategies align with their overall financial objectives.

“We know that the MST adult consumer is very loyal to their brand, two-thirds of which have stated they would leave a store if their brand were not in-stock rather than switch to another brand” Chrupcala said. It is critical that retailers remain in-stock on the leading items within the category to retain the customer loyalty and protect the profitable market basket associated with the MST purchase.”

USSTC has good reason to be bullish on the premium MST segment. In December, the Greenwich, Conn.-based manufacturer reported record net sales of nearly $1.9 billion. In addition to Skoal and Copenhagen — the topselling brands in the category — its products include Red Seal, Rooster and Husky. Remarkably, USSTC’s mega-brands, Copenhagen and Skoal, each account for more than $1 billion in sales at the retail level.

Despite posting strong annual numbers, USSTC says in 2006 it’s going to launch an aggressive marketing campaign to attract premium customers at premium prices.

“Our strategy of growing the category for moist smokeless tobacco, primarily by attracting adult cigarette smokers, has been working. This is important because 9 out of 10 new adult consumers enter the category by using premium brands,” said Murray Kessler, president and chief operating officer of UST.

“However, this growth is being more than offset by down trading from premium brands to price value brands, exacerbated by the negative impact that high gasoline prices are having on our adult consumers. Our plans continue to call for increased spending on category growth and to make a major financial commitment to premium brand loyalty by providing improved value on our premium brands to adult consumers in price sensitive areas of the country.”

This growth includes the rollout of Copenhagen Long Cut Straight, which began hitting shelves Feb. 27.

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