The Future of Cigarette Retailing

With graphic new warning labels destined for individual packages and higher tobacco prices, retailers are facing a harsh new reality.

On November 10, 2010, the U.S. Food and Drug Administration (FDA) unveiled 36 graphic warning label images, one of which will be selected to go on every cigarette package no later than Sept. 22, 2012.

Cigarette makers have called them an infringement on their property and right to free speech. The FDA is seeking public comment on the proposed labels through Jan. 11, 2011.

Among those images: a man puffing smoke through a hole in his throat, a woman with cancer, a cemetery, a corpse, a dying man, a crying woman, a child wearing an oxygen mask, smoke being blown in a baby’s face, and someone trying to inject a cigarette into his arm. The question is how will these images affect  the future of c-store cigarette retailing?

“I think only time will tell,” said Frank Davoli, director of sales and marketing for South Bend, Ind.-based Richmond-Master Distributors Inc., a supplier and retailer that owns and operates 10 Bonkers c-stores and 37 Low Bob’s Discount Tobacco stores. “With the FDA involvement, the uncertainty over certain advertising restrictions—like the tombstone advertising, graphic warnings, etc.—it could be a telling year.”

The impact in 2011 should be minimal, Davoli reasoned, “since the wheels are slow to turn. Long term, however, when it comes to cigarette retailing in convenience stores, without a doubt it is going to become more and more of a challenge for the retailers.”

Stay Aggressive
The future of cigarette retailing depends largely on the retailers themselves, suggested Andrea Myers, executive vice president of marketing for Kocolene Marketing LLC, the Seymour, Ind.-based operator of 12 Fast Max c-stores and 19 Smokers Host tobacco stores. For example, stocking lower-priced, so-called fourth-tier products, can help attract price-conscious smokers.

“We play heavily in the fourth-tier game in our tobacco stores,” said Myers. “We carry probably 6-8 brands that are very aggressively priced, and our volume in the tobacco stores is only down 2-3% compared to the year prior.”

Kocolene’s c-stores, on the other hand, only carry a brand or two of lower-priced product due to space concerns. There, sales are down in the higher single digits.

The lesson?
“You have to think outside the box,” Myers said. “For many of those retailers who never wanted to get into that game before, I think it’s worth it now. Customers are looking for it; they’re very price driven now due to the economy.”

Those c-store operators who are willing to take on new items will find customers reacting positively. “If you’re willing to try that I think it will help your pack sales,” Myers said.

Price is a more important consideration when it comes to cigarettes than ever before, and it has little to do with legislation.

“It’s such a competitive environment now that you have to pay closer and closer attention to your competitors to make sure you’re in the game price wise,” Myers said. “Years ago, a retailer could be 10-20 cents higher than a competitor and it didn’t really matter. Now when you’re paying $5 or $6 for a pack of cigarettes customers care if it’s 20 cents more.”

Smarter Retailing
C-store operators have been living with state laws for quite some time. While some states may be a little more restrictive than others, the major impact is going to be at the federal level, where the FDA now oversees retailing. Case in point: age verification.

“For many years we’ve had the We Card program at retail,” Davoli said. “Very easy to explain to the clerks, very easy to understand, the literature has been out there for many years, and it works.”

But once the FDA is added to the equation, bureaucracy kicks into gear.

“They don’t recognize We Card as an age-verification program,” Davoli explained. “We have to use their version, which involves a whole different training schedule for the employees, testing the employees, retesting the employees a year down the road and retention of records that we have to keep even longer than we have to keep payroll records.”

What’s irksome is that We Card works. “It’s something that’s very simple and that works, and the industry—both the manufactures and retailers—pleaded with the FDA to adopt We Card,” Davoli said. “We all understand that it works. But the FDA chose not to.”

As time passes, Davoli said, the pressure on retailers will grow. “The cost of handling cigarettes in the c-store environment is increasing with all these rules and regulations, the space restrictions and so forth,” he said. “Even though cigarettes as a whole are a great contributor to overall sales and gross margin, the gross margin needs to be increased to compensate retailers for the added costs they are going to incur due to all this enforcement.”

End of the World?
Convenience store operators must first be certain they have the right SKU mix in their stores, Davoli insisted.  “Store real estate, especially the area behind the counter, is becoming more valuable. There are some manufacturers who, in order to be part of their program, require that cigars be completely self service. It’s not a state or federal requirement yet but, again, you’re tying up more of that retail estate in the back.”

It is also possible that the federal government could eventually mandate that all tobacco products be kept behind the counter. “Well, where are you going to put it all?” Davoli asked rhetorically. “You’ve got to start thinking about your existing locations, and then you’ve got to start looking at your new locations. Look towards the future on what you want to do as far as being part of the cigarette and tobacco retailing business full bore or in a limited amount.”

The industry has already seen some operators opt out of the cigarettes business, along with some supermarkets, over these issues. Others are sticking to only major brands, packs and styles as cost and tax increases make it difficult to manage an inventory.

Myers urged c-store operators to stay on top of the emerging legislation. “Know your representatives, have a relationship with them, and fight back every time something comes at us,” she said. “That way we can keep cigarettes visible, keep advertising and keep signage up as long as we can. Just keep pushing back.”

Is it a war that c-stores can win? “Yes,” Myers concluded, “absolutely. The worst thing retailers can do is nothing, just sit there and let it happen. Just think it’s the end of the world. It’s not.”

  • RB

    Actually, if the FDA forced tombstone advertising, they would all be doing us a favor. If tobacco companies force the price we pay by mandating space and advertising, tombstones would put everyone on a level playing and remove the leverage placed on us by the tobacco companies. We must all realize that this is shrinking market with lousy margins that is slowing down every year. We would be better focusing on better opportunities in food, beverage, and automated types of services.

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