New insights on the cigar category reveal that retailers who manage the cigar category more strategically benefit from accelerated growth and a larger share of the market. The data was shared in a Convenience Store Decisions Webcast, sponsored by John Middleton Inc., titled “Cigars: Accelerating Category Profits by Increasing Strategic Focus,” and offered new evidence highlighting how convenience retailers can drive even stronger results with cigars.
“Retailers focused on offering a competitive assortment and lower prices on cigar packs are growing faster than the market,” said David Bishop, a partner with Willard Bishop and a Webcast presenter as part of CSD’s Online Roundtable Series. The event also featured Rich Fasanelli, vice president of marketing and sales for John Middleton Inc.
While new cigar products are an important aspect of managing assortment, a larger driver relates to product availability. Bishop pointed out that a decision related to assortment or space cannot be easily separated and should be made in tandem.
This insight, along with the observation that the sales space for the cigar category is expanding slower than the assortment offered by retailers, forms the rationale for maintaining a comparable pack assortment. In fact, the new research reveals that retailers using a comparable assortment pack strategy are reporting year-over-year growth that is 15 percentage points higher than the study average. A large component of this growth can be attributed to simply keeping top-selling SKUs in-stock and on the shelf so that the consumer can buy the product.
To this point, a retail mantra repeated during the Webcast is that “to build the base business, you must protect the core top-selling SKUs,” Bishop said. Retailers that follow this strategy have the potential to grow the category another 2% approximately.
Previous consumer research indicates that pack cigars tend to be a more planned purchase, indicating that the decision to buy occurs before entering store.
“This insight suggests that more aggressive pricing on packs can drive greater foot traffic since consumers may be more likely to be sensitive to pricing tactics,” Bishop said. “We found that retailers pricing below their primary competitor’s non-promoted price by 5% or more enjoyed sales gains that are greater than 20 points over the average [where permitted by law.]”
However, Bishop went on to highlight that this low-price strategy on packs doesn’t mean all packs need to be priced aggressively. He pointed out that, “It’s important to emphasize lower prices on the top-selling SKUs because these products play a larger role in creating the retailer’s price image,” implying that retailers can maintain higher prices on other, lower-selling pack SKUs and generate stronger profits per unit sold.
The main takeaway for retailers was “price for volume” as greater profit dollars can be made even with lower retail margins. The key is remembering that this strategy applies mainly to the top pack products.
Overall, the other tobacco category continues to be among the strongest in-store categories. According to NACS’ 2007 State of the Industry Report, OTP ranks fifth, behind only cigarettes, packaged beverages, beer and foodservice, accounting for nearly 4% of store sales industrywide. The category ranks seventh for gross margin contributions at 3.7%.
These insights and more are part of a new merchandising guide that will be available from Willard Bishop in early 2008.