Finding Profits with Tobacco Accessories

Food and Drug Administration (FDA) mandates, scheduled to go into effect on June 22, prohibit retailers from selling cigarettes and smokeless products in self-service displays except in age-restricted stores that ban customers younger than 18 years of age. While retailers in some states, such as New York and Idaho, have already had to comply with these laws on a state level, retailers in other states are moving merchandise formerly on floor displays behind the counter, making tough decisions about what stays and what goes in an already crowded environment.

As retailers scramble to reorganize the placement of products, the positioning of front end items, including tobacco accessories—from lighters to rolling papers—are also in a state of flux. While some retailers move to scale down their selections, others are finding new opportunities among strong lighter sales and the novelty of e-cigarettes.

Balancing the Back Bar
“We’re trying to create more space,” said Bill McCloskey, vice president of retail operations for Texor Petroleum, which operates 10 Minuteman  Convenience Centers in the Chicagoland area. “A lot of the stores have been designed with OTP on the floor, and now we’re mandated to take it off the floor and bring it behind the counter. It’s creating some issues because the front end is the busiest place in the store and real estate is precious, so you have to facilitate this transition in a way that still keeps operations running smoothly. It’s a challenge.”  

So far the chain is taking a close look at customer demand. “It’s an SKU reorganization that needs to be done, and you have to be careful because you don’t want to tick off a regular customer,” McCloskey said.  

Some decisions have been easier than others. One product that has been especially successful at getting customer attention at the back bar are the new Camel Menthol cigarettes from R.J. Reynolds, which now contain a menthol burst capsule that enhances menthol flavor when squeezed. “It is incredibly popular with the 21-35 year old smoker—it’s hitting its mark,” he said. The packaging “has good graphics and it really jumps off the back bar. I think RJR has done a good job of setting Camel Menthol apart.”

Such presence is important now that the back bar needs to hold everything from snus to cigars. “It’s tougher to get noticed,” McCloskey said.

E-Cigarettes To The Rescue
One tobacco accessory McCloskey will definitely be keeping around—as long as the FDA allows—is e-cigarettes, which the chain first debuted late last year. “They have done phenomenally well. We’re really excited about it,” McCloskey said.

The sensation devices are attracting customers looking to cut down on cigarette smoking. One of McCloskey’s stores, offering e-cigarettes at $60 each, sold 30 units in less than a month. Minuteman stores also offer resale cartridges for the e-cigarettes on the front counter, which have proved to be a steady line of business as customers return to the store specifically looking for them.

E-cigarettes are growing in interest at retail, said David Bishop, managing partner at Balvor LLC, a convenience store consulting group in Barrington, Ill.

“The category is still emerging and appears to offer a large opportunity, but there is uncertainty as to how the FDA might choose to classify them in the future,” Bishop said. “Retailers don’t see them as part of the tobacco category because they’re not taxed like tobacco, but to the FDA, they are used like tobacco.”

Bishop has seen some retailers drive impulse sales by including displays with an audio-recorded message about e-cigarettes that educates the consumer who might not be familiar with the product.

Keeping it Simple
Other chains don’t see the need to give up precious counter space to tobacco accessories.  “I think most customers looking for a wide variety of accessories are going to the tobacco stores,” said Bill Hohler, category manager for Jacksons Food Stores, which has 212 locations in Idaho, Nevada, Oregon and Washington.

Jacksons limits its tobacco accessories to rolling papers and lighters in most stores. “We use (the front end) mostly for novelty type items,” Hohler noted. “We also have candy, gum and mints on the front counter of most stores and plan to test a food warmer there as well.”

Jacksons stores don’t need to worry about rearranging their back bars, as keeping tobacco products behind the sales counter has been the law in Idaho for some time.

Lighters remain the most popular tobacco accessory offering for c-stores, with stores that don’t usually dabble in accessories still finding room among the front end for the popular product. In fact, lighters accounted for more than $411 million in 2009, according to Information Resources Inc. (now Symphony IRI) for the 52 weeks ended Dec. 27, 2009. Even though overall dollar sales dipped by .83%, the average price of a lighter in U.S. c-stores increased four cents last year to $1.31.

“Lighters continue to be a stable product selection in c-stores,” said Bishop. While the traditional $1-$2 lighters remain the core offer in c-stores, premium lighters that retail for $20-$25 and the accompanying butane fuel refills are not very large contributions to unit sales, but do offer a large profit per unit.

“Low sales in premium lighters are not indicative of opportunity. If you compare selling 36 $1 lighters to selling one $25 premium lighter, you see there are still benefits to serving the premium market,” Bishop noted. 

Plus, lighters that need to be refilled also give customers a reason to return to the store.

Prospering with Papers
With more tobacco customers choosing to roll their own cigarettes, having a selection of rolling papers can also keep former cigarette customers who have switched to roll your own (RYO) coming back to the store.

In the RYO category, “you not only have the tobacco as a sales and profit generator, but also the tubes and accessories. The profit margins on all these items are two to three times more than traditional cigarettes,” said Lou Maiellano, president of TAZ Marketing and Consulting Group in Sevierville, Tenn.

Knuckleheads Tobacco and Gifts, which has two stores in Wisconsin, has noticed more RYO customers gravitating toward raw, unbleached papers, in a time when consumers widely consider “natural” to be better, noted Steve Agee, area manager for Knuckleheads. Some rolling paper brands, such as Elements, are offering packs of rolling papers with hidden magnet closures within the pack that allows them to neatly close once opened, an addition that has been popular with consumers at Knuckleheads stores.

“Since the flavored papers went away, (due to FDA rules) we’re seeing a lot of consumers buying the flavored drops some manufacturers offer, and they place that on their rolling paper to add flavoring to it,” said Ray Calderon, of Discount Smoke Shops, which operates 50 stores in Illinois, Missouri and South Dakota.

Some chains have continued selling flavored papers by adding stickers to the packs that list them for herbal use only.

For customers who don’t want the hassle of rolling their own, offering MYO machines at a time when cigarette prices are skyrocketing, could be beneficial. “The most exciting product we have had in years is an electric cigarette making machine,” said Mark Tucci, owner of 7 Valleys Customer Blends, a
six-store brand in Pennsylvania and Virginia. “People who already make their own are now experimenting with all the different machines we offer to discover which is their favorite.”

As more retailers look to find space, cigars, rolling papers and rolling machines could end up finding their way below counter height in a place of low visibility, according to Bishop. While cigars, papers and machines fall into a gray area by not being directly mentioned by the new FDA rules, retailers are leaning toward playing it safe side when faced with unclear FDA regulations.

To keep products from getting lost among the crowded back bar, promoting them becomes ever more crucial. Bishop expects a final ruling on advertising restrictions to play a huge part in how retailers continue to promote tobacco, including accessories, which are likely to be indirectly affected.

In the meantime, the best way to drive sales of tobacco accessories—from e-cigarettes to rolling machines—is to have store clerks show customers how the product can benefit them.  “Make sure your employees know how to demonstrate the products and put them in customer’s hands,” Tucci advised.

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