Other Tobacco products: OTP On The Rise

A surefire marketing strategy: Develop a need where consumers don’t even know they have one.

The flipside: Wait until a need becomes so apparent, so prevalent and so overwhelming that it can no longer be justifiably ignored as a legitimate need.

A pocketful of lawsuits and a barrage of tax increases in its portfolio, and the tobacco industry is coming to recognize that OTP may be the surest way to fill in gaps that are sure to pop up in the cigarette category, a segment perpetually threatened by legislation and public opinion.

To be sure, cigarettes are still a solid margin maker for c-stores, where the category ranked No. 2 in terms of contributions to in-store gross profit dollars and No. 1 in sales, according to NACS 2008 State of the Industry (SOI) report data. But that number is increasingly dwindling year over year, with the cigarette category on a perch that it’s sure to fall from in the coming years as it confronts more challenges from health-focused consumers, tax increases and such.

OTP, on the other hand, was among the category leaders this past year when it came to in-store sales and margins. While OTP ranked just eighth among the top 10 contributors for actual gross profit dollars, the category still led the way for increases in per-store sales and per-store gross profit dollars, posting 19% jumps on both fronts.

In the subcategories, smokeless tobacco and cigars are dominating, touted as viable alternatives to cigarettes. Product innovations, better marketing and better in-store placement of these subcategories are fueling growth as well. Smokeless tobacco, for instance, accounted for more than 62% of sales in OTP, almost a 9% increase over the year prior, while cigars accounted for about 32% of OTP sales and saw roughly a 16% increase.

USB Investment Research analyst Nik Modi said moist smokeless tobacco’s popularity is only in its early phase, and it can expect annual 6 to 8% growth up until 2010 as retailers position the category as a means to recover margins that are shrinking in the cigarette category.

 

Manufacturers Bullish

Domestic tobacco giants haven’t failed to take notice. They’ve all invested heavily in a product analysts suspect could become a critical segment in the smokeless subcategory: Snus. A spitless powdered tobacco that comes in a pouch placed between the gum and upper lip, snus originated in Sweden and is considered by some a safer alternative to cigarettes.

Both Philip Morris and RJ Reynolds have taken notice, test marketing in select states their respective snus brands, Marlboro Snus and Camel Snus. Similar products are trickling into the market as well, such as the Swedish-made Tourney snus that c-store chain Speedway SuperAmerica introduced in its stores.

At a shareholder meeting in May, Philip Morris parent company Altria Group Inc. reemphasized plans to bolster its non-cigarette tobacco products in light of smoking bans, health concerns, tax increases and other factors. Altria CEO Michael Szymanczyk said he’ll use the Marlboro brand to sell more smokeless products that it plans to introduce to the market in the coming years, since its predicting Marlboro cigarette sales will fall between 2.5% and 3% in that time.

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