Seizing Smokeless Opportunities

Just when you think you know everything about the mercurial business of tobacco, a bit of trivia comes along that gets your attention.

Distributors and retailers have had reams of information to study in the past two years as major changes in legislation, taxation and consumer habits have forced domino-effect adjustments. Manufacturers, chain executives, category managers and store employees all know the same thing:

“The writing’s on the wall for cigarettes,” said Wendell Funk.

Funk, the directory of category management for Corpus Christi, Texas-based Stripes, has navigated through the landmine of acronyms: SCHIP, PACT, FDA, FET. He’s even had to get a handle on new tobacco concepts like snus. His statement would have been shocking 10 years ago, most likely discarded as a wild bit of speculation. But these days it’s accepted as fact.

The numbers don’t lie. According to Euromonitor International, the cumulative change in U.S. cigarette unit sales dropped nearly 15% in 2008 while smokeless tobacco was up nearly 10%. Those trends are expected to continue, and not just by analysts; as for the leading tobacco companies, Altria Group and Reynolds American, actions speak louder than words.

Each bought major players in the moist smokeless tobacco segment during the past five years. Reynolds bought Conwood, makers of chew superstar Grizzly, while Altria acquired market-share leader USST, maker of Skoal and Copenhagen. Both sell snus—pouches of tobacco that don’t require spitting. Reynolds also is testing products like orbs and strips, that offer users a subtle way to get a nicotine fix, and is making a move into smoking-cessation products and programs.

Proper Planograms
To those whose livelihoods depend on absorbing such moves, this may not be breaking news; however, there are convenience stores that don’t even carry smokeless products, and they are missing key sales opportunities.

For example, when Susser Holdings, Stripes’ parent company, bought 163 Town & Country locations in 2007, it inherited smokeless sales that were not only well above Stripes’ average, but far exceeded national averages. There is a lot of oil in West Texas, and apparently oil workers like to chew.

Stripes, which operates a total of 517 stores in Texas, Oklahoma and New Mexico, has store density along the Mexican border, and that’s where it doesn’t waste space on smokeless.  “Basically, Hispanics don’t spit,” said Funk.

Stripes has its stores planogrammed by American Snuff Co., formerly known as Conwood, the aforementioned suppliers of Grizzly, now owned by Reynolds American. And according to Funk, heavily discounted Grizzly “is huge.” Its main ally has been Texas’ weight-based tax on smokeless products, which piggy-backed the federal SCHIP tax.

“We have had taxes on top of taxes in the smokeless category this year,” Funk said.

Because of the taxes, Grizzly, which is considered a mid-tier option, is now not much more expensive than the lowest tier, and consumers are now more willing to pay for the higher-quality product. “Low-end is gone,” Funk added.

In Pennsylvania, the only state with no OTP tax (for now), Grizzly hasn’t needed the taxation boost. In the second quarter of 2009, Grizzly sales topped that of Copenhagen fine cut at all 55 Rutter’s Farm Stores—quite a landmark.

Robert Perkins, director of marketing for York, Pa.-based Rutter’s, said smokeless growth in his stores is strong and “it will only get better now that pricing has finally settled down.”

There was instability during the transitions from the two (aforementioned) tobacco acquisitions, Perkins said. As a result margins suffered. The primary upcoming adjustment for his tobacco business will be federal rules on product presentation. Rutter’s stores have gotten comfortable with self-service displays, however all tobacco products, with the exception of cigars, will soon be merchandised as either associate-assisted or in a locked case.

“We’ve had good success with self-serve,” Perkins says. “It’s definitely going to be a change for us.”

Managing Merchandising
Part of that presentation the past two years has been snus, a new-kid-on-the-block product that its proponents claim can help people stop smoking. First Reynolds America tested and marketed Camel Snus, followed by Altria’s Marlboro Snus, which went national in early 2010.

There were 18 million cans of snus sold in the U.S. in 2009, about 2% of the moist snuff volume. In 2007, according to Larry Waters, founder and editor of SnusCentral.org, there were 4,000 snus users in the U.S., so snus use has grown exponentially, and that’s good for the c-store industry.

Waters is as close to a snus expert as you’ll find outside of Sweden, where one in nine people use the product and it has been regulated as a food item since the 1970s. He’s happy that more people know the word “snus,” but has fought what he feels is an attempt by some to get smokers to buy snus for when they are unable to smoke.

Because of the way snus nicotine is delivered—slowly, compared to a cigarette’s spike—the user does not have cravings. As a result, Waters and other snus advocates—including Reynolds and Altria—want snus marketed for its health benefits, as a safer alternative to cigarettes.

But it’s not that easy. According to the Prevent All Cigarette Trafficking Act of 2009 (PACT), a company wishing for such modified-risk status has to furnish the FDA scientific evidence that a product would reduce tobacco-related harm and provide a net benefit for the U.S. population’s health. Waters estimated it will take at least two years and as many as seven before the FDA would grant snus modified-risk status.

“For a cigarette smoker snus is a lifesaver,” Waters said.

For example, Swedish snus brands are steam-pasteurized and have the same level of nitrosamines—the cancer-causing agents—as a cup of French Roa

st coffee. Waters believes the target for snus should be smokers who want to quit smoking, but not give up their nicotine habit.

“Dippers are not the market,” he says. “Dippers already spit—they’re used to it.”

Stripes’ Funk and Perkins of Rutter’s both agreed that snus products are a replacement for cigarettes, not for MST.

Currently Perkins’ stores average 15 cans of snus per week, while Funk’s best snus store is near a military base that trains international servicemen. Still, his chain averages half of Perkins’ volume. Both executives admitted they didn’t have a great feel for the product yet.

Space for Snus
Perkins said spacing isn’t a problem when it comes to marketing snus. The refrigeration display for Camel Snus takes up the same space as 14 facings of cigarette packs. In a 600-facing display, with multiple facings of one brand, that’s no big deal.

“I don’t think it’s cannibalizing anything,” Perkins says. “It’s earned its place.”

It comes down to educating consumers, Waters said. Teaching people about snus takes time, and that’s more likely to happen in a lower-traffic venue like a tobacco outlet.

“I offer training on what snus items are (to distributors and tobacco retailers), but the problem we foresee, especially in convenience stores, is speed,” says Rick Davis, director of U.S. sales for Northerner Scandinavia Inc., an online tobacco retailer specializing in Swedish snus brands. “They don’t have time to educate the consumer.”

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