Maintaining Strong Smokeless Sales

The slew of new regulations governing the sale of tobacco products has convenience store operators scratching their heads and wondering where the next assault will come from and what to do about it.

For example:
• The federal Prevent All Cigarette Trafficking Act (PACT Act) went into effect on June 29, 2010. Its goal is to regulate the sale of cigarettes, roll-your-own tobacco and smokeless tobacco sold over the Internet or by mail order to consumers. As CSD previously reported, a provision of the PACT Act that has raised eyebrows is the one that states “any person who sells or transfers or ships cigarettes, roll-your-own tobacco (RYO) or smokeless tobacco in interstate commerce” must register with the U.S. Attorney General.

While the Act defines “person” as an individual, corporation, company, firm or partnership, the same provision also refers to the term “delivery seller,” which the PACT Act defines as a person who sells cigarettes, RYO tobacco or smokeless tobacco to a consumer.

• Under the federal Family Smoking Prevention and Tobacco Control Act, the Food and Drug Administration (FDA) has placed a variety of restrictions on how tobacco products are labeled and sold. Among the restrictions: labeling or marketing cigarettes and smokeless tobacco products as “light,” “mild” or “low” for all existing cigarettes; stronger warning labels for smokeless tobacco packaging and advertising; banning displays of cigarettes or smokeless tobacco in vending machines and self-service venues (adult-only facilities are an exception); and outlawing sponsorship of athletic or cultural events by cigarette or smokeless tobacco product manufacturers.

Understanding the Market
The question that operators are asking each other is: what happens now?

“That’s a tough question,” said Rachel Montgomery, category manager for Wilson Farms Inc., in Williamsville, N.Y., whose nearly 200 stores have been forced to compete against Native American tobacco retailers for decades.

“The state tax on OTP for New York State was increased in July, which actually makes it a little crazier. Right now we’re in the midst of another tax change, and we have no idea what the market is going to do. It’s going from a 46% tax to a 75% tax on OTP,” Montgomery said. “Moist smokeless tobacco is going from 96 cents an ounce to $2 an ounce. Little cigars are going to be taxed like cigarettes. They were at 46%, and they are going to $4.35 per pack.”

Wilson Farms’ response? “Right now I don’t even know,” admitted Montgomery. “Going forward we’ve got to see where the market is going to lay, because I don’t even have any idea what is going to happen.”

What the chain’s management is certain of is that it has to continue providing great service. “We’ve got to make sure we get the proper communication out to our customers, because there will be a huge cost increase for them,” Montgomery said. Indeed, a large part of success going forward will consist of affixing the blame to over-zealous government legislators, not the retailers themselves.

“Even though this latest round of taxation is still relatively new, we made sure our associates were educated on the increase that was coming; on the fact that it was due to legislation, and not us looking to grab some extra margins from our consumers,” Montgomery said. “We need to continue letting the customers know that the increase is not entirely our fault and that we’re here to do anything we can to be priced competitively. But at the end of the day, there are just some things that are outside of our control.”

Keep Fighting

“We have to continue fighting them, but it doesn’t seem to do any good,” insisted Butch Fulton, merchandising manager for Plaid Pantries Inc. in Beaverton, Ore. “The government regulations are severely limiting the merchandising (of smokeless), and it appears that is going to get worse and worse.”

The answer, he added, will continue to be more promotions. “Copenhagen seems to be going back to being a price value more and more, and that’s really helping it. It’s giving Grizzly a run for its money now. Make no mistake about it, Grizzly is still number one by quite a ways. But if Copenhagen follows this pattern I think it is following, it’s going to cut that by a long ways.”

Fulton believes c-store operators may just be out of options, with only promotions to buoy ongoing sales. “I don’t think we can cut our margins any closer, so it’s up to the manufacturers to bring us better deals.”

Plaid Pantries has had “really good” growth in both smokeless and cigars this year, and that trend is going to continue, Fulton said. “It’s going to be interesting to see what they do with the flavored cigars. If they try to eliminate those it will take a nice piece of the pie away. For the last five years our flavored cigar sales have been off the charts as far as growth goes. Now, if the FDA steps in and takes them away next year, it’s going to hurt overall OTP sales.”

At some point, Fulton suggested, “the consumer has got to stand up and say, ‘This has gone too far. You can’t take this many choices away from us and totally tax us out of the market.’ All it’s going to do is lead to more black market products being illegally brought into the country,” he said. “Indian reservations are going to take big-time advantage of it when they weren’t really involved in it. I can see the day when one group is talking to another group about how much money they make and deciding to get into it, which is just a bad sign for retailers.”

In September, Plaid Pantries will begin a test of roll-your-own products in about 30 of its 102 stores.

Because of the tax situation, Fulton said, the large-format stores are getting away from tobacco. “They can make a lot more money with far less investment selling produce or something else than they can with tobacco, so they’re just bailing out of it,” he said. “That’s helping c-stores’ marketing efforts.”

In-Store Changes

While the FDA is requiring in-store descriptive changes, retailers remain optimistic that customers understand the marketing changes that are being required.

“From what I see standing in the stores, customers know what they’re looking for no matter the signage,” said Mike Scarpelli, marketing manager for Southwest Convenience Stores in Odessa, Texas, a wholly-owned subsidiary of Alon USA, the largest 7-Eleven licensee in the U.S. with 306 stores in Texas and New Mexico. “I don’t have a crystal ball, but over time what will happen is that the styles will change, but not the brands.”

Having to change signage to black and white has caused many operators sleepless nights, Scarpelli pointed out, but it may actually turn out to be a positive for smokeless sales. “In some stores the black and white signs for cigars in windows stood out better than other ones.”

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