Quality counts—especially with tobacco, something c-store operators had better keep in mind.
Kevin Paige, owner of three Butthead’s Tobacco Emporiums in Danbury, Conn., said he is trying to distance himself from the c-store channel when it comes to tobacco. “Although I operated my own c-stores for over 20 years, I don’t think the c-store can keep the tobacco as fresh as I do as a tobacconist.”
His current stores contain more than 6,500 square feet of humidified s
Ironically, it was his c-store chain’s decline in tobacco sales that helped draw Paige to the Butthead’s Tobacco Emporium concept. “My convenience stores had been the most profitable in the years that we were strongest in the tobacco category. The elimination of back-end merchandising payments made the real estate more valuable for other items.”
Paige recalled that one tobacco supplier in his market found out about the importance of freshness the hard way. “They flooded the c-store channel with make-your-own (MYO) items that were not kept fresh or rotated and were sold by uninformed staff. One dry bag of tobacco and you lose that customer. The average c-store owner doesn’t get tobacco the way a full-fledged tobacconist does.”
On March 31, 2009, the federal excise tax on roll-your-own (RYO) tobacco was $1.09 per pound.
On April 1, 2009, it was $24.78.
The additional $23.69 per pound tax has hit the RYO category hard but it hasn’t eliminated it—something that c-store operators need to keep in mind while formulating strategies for their beleaguered tobacco business.
Given the tobacco industry’s current state of transition, retailers and consumers are searching for alternatives. While it is still somewhat more economical for smokers to roll their own, the gap between the tax on manufactured cigarettes and RYO tobacco has been reduced substantially.
The consensus among retailers is that RYO is still a growing category. What has helped keep the category viable has been manufacturers’ shift to smaller package sizes. Instead of selling their loose tobacco exclusively in pound packages they have moved to, say, six-ounce packs so that consumers’ cash outlay is limited.
“It used to be a lot more popular before the taxes on the bulk tobacco got applied,” said Dave Williamson, general manager of Hill City Oil Co.’s 10-store Jubilee Food Stores chain based in Houma, La. “There used to be a huge tax advantage with it, but the last go round of taxes kind of eliminated that. It pretty much wiped out any price advantage in our stores.”
Beware of State Taxes
“Business is good,” reported Kevin Paige, owner of three Butthead’s Tobacco Emporiums in Danbury, Conn. “There are more people buying RYO tobacco, but we’ve got a problem in Connecticut. They are trying to tax all the loose tobacco at 15 cents per gram, or the equivalent of making RYO tobacco about $75 to $85 wholesale per pound.”
If Connecticut gets its new tax, Paige said the pain will be severe. Right now his pricing is roughly equivalent with that of his competitors in neighboring New York. “But my bag would go to $30 and theirs will still be $10.99 just eight miles away from me across the state line.”
In all, about 40% of Paige’s revenue comes from RYO, Paige reported.
“The reason Connecticut is doing it is that it doesn’t like the ‘loophole’ of using pipe tobacco under the RYO provision,” Paige explained. Thus, a tin of Captain Black, which retails for $30 in one of his stores, is going to rise in price to $75 or $100. “Who is going to buy a tin of Captain Black for $100, especially when you can drive next door into New York State a few miles away and buy it for $30?”
Indeed, NACS reported in May that Democratic senators looking for ways to fund small business job creation initiatives were proposing to “slam shut” a pair of perceived tobacco tax loopholes in the State Children’s Health Insurance Program (SCHIP), which was enacted July 1, 2009.
However, late last year, some reported that tobacco companies were getting around the new taxes by changing the weight on ‘little cigars’ and labeling roll-your-own tobacco as pipe tobacco. Currently under consideration, NACS reported, “is whether to penalize RYO tobacco for supposedly changing its labeling to pipe tobacco to avoid a tax rate of $24.78 a pound, up from $1.10 per pound. Pipe tobacco is taxed at $2.83 per pound.”
Senate Democrats, including New Jersey Sen. Frank Lautenberg, have tended to view this as instances of RYO brands trying to circumvent the law. In the House, Congressmen Steve Cohen of Tennessee and Lloyd Doggett of Texas have sponsored the Tobacco Tax Parity Act, which would raise the pipe tobacco tax to the higher RYO cigarette rate: $24.78.
Focus on Quality
Doug Kennedy, editor of RYO magazine, has long urged the tobacco industry—and by extension, retailers—to focus marketing efforts not on price, but on quality.
“The industry constantly, against our extreme recommendations, kept promoting it as cheap. As a matter of fact, if you take high quality rolling tobacco you have a better product than any cigarette that’s ever been made on the planet.”
Companies like D&R and Stokkebye are known—but not nearly enough, Kennedy insisted—for their quality tobaccos.
“By focusing on cheap, retailers are disparaging their products and the RYO industry, and will ultimately fail to convert people from packaged cigarettes to RYO,” Kennedy noted. “Also, the government saw cheap and didn’t like it.”
The message is to focus consumers’ attention on quality, not price, since the price advantage is now largely gone.
While it is the nature of taxes to rise everywhere, said Paige, he does not believe that New York State is going to raise its taxes to do what the state of Connecticut is doing. “Connecticut is the only state that has ever tried to do it. (They) are trying to force the price of loose tobacco up to equal the cost of a regular carton of cigarettes.”
Nor is loose tobacco used exclusively for cigarettes. Paige confided that his fear is that the tax increases would wipe out the pipe tobacco business. “The problem is that all these people are just trying to milk a cow that only has a limited amount of dollars that can be gotten out of it. Everybody found that out after the SCHIP,” he said.
Paige pointed out that thanks to Connecticut’s Fair Trade provisions he is guaranteed by law to make 8% on cigarettes. “But there is no Fair Trade control on RYO; you just sell that at cost, and that’s the problem.”
Another problem for the category, Paige believes, is that convenience stores are providing additional competition, but many do a less than satisfactory job of storing it properly. “So the product dries out and goes stale. That gives me a competitive advantage, but is also turning off customers that may be trying it at a c-store for the first time.” CSD