OTP Makes Strong Push for More Shelf Space

With flavored cigarettes no longer available in the U.S., flavored cigars are in line for sharp sales gains.

By Joe Bush, Contributing Editor.

There is no secret that cigars, specifically little cigars and flavored little cigars, have grabbed the interest of smokers who can no longer buy flavored cigarettes because of federal regulations.

But there are other advantages to cigars versus cigarettes these days, none more important than lower price. The other tobacco products (OTP) category is seen by convenience store operators as a category that can compensate for the long, slow and irreversible decline of cigarettes.
NACS State of the Industry numbers from 2010 show OTP increasing about 40 index points in both sales and gross profit dollars from 2008 to October 2010. Cigar sales jumped 12.4% from 2009 to 2010, according to NACS, while unit sales grew 8.4%. Monthly gross profit dollars rose 11.7%.

Strong Numbers
The excitement didn’t end when 2010 did. In the 52 weeks ended June 12, 2011, cigar dollar sales in convenience stores rose 1.23%, to almost $2.5 billion. Unit sales increased 10.56% to 1.4 billion, according to SymphonyIRI Group, a Chicago-based market research firm.

“We have so many different shapes and sizes, anywhere from machine-made cigars to Dutch Masters,” said Craig Williamson, president of the Cigar Association of America. “We need a strong c-store business to sell our product.”

Are sales up because operators are giving cigars more priority, or are operators giving cigars more priority because sales are up? One chain that brings up that chicken-or-the-egg question is Tedeschi Food Shops of Rockland, Mass. Its 190 locations feature twice as much OTP space behind the counter as they did six years ago.

Steve Monaco, the chain’s director of purchasing, said OTP sales dollars and unit movement had increased by double-digits in 2011 through June.

“We made the decision five years ago to downsize our cigarette presence and increase or enhance our cigar presence wherever possible,” Monaco said. “If you walked into a Tedeschi store seven years ago, you would have seen a back-bar presence of about 6-8 feet of cigarettes from Philip Morris, R.J. Reynolds, Lorillard, U.S. Tobacco, etc.”

If you walk into a Tedeschi store today, you’ll see a maximum of four feet dedicated to cigarettes. But you’ll also see up to four feet of cigars. “We went from two feet of cigars, to three or four feet depending on the store, and from 6-8 feet of cigarettes to 3-4 feet,” Monaco said. “We split it so that there was a much bigger presence of OTP. Not just cigars, but moist snuff, rolling papers and pipe tobacco. As a result, our whole OTP category has grown proportionately. Where the growth continues to come from—and it’s been this way for the last three years—has been the single-cigar category.”

Within the cigar category, single cigars for Tedeschi are up more than 111% in units sold and about a 50% increase in dollars. “It’s definitely been a strong upward growth patter over the past two years,” Monaco said. “The growth these days is predominantly from little cigars versus multipacks.”

Monaco said Altadis’s Dutch Master vanilla cigarillo is the chain’s top cigar SKU. Other top movers include Swedish Match’s Game series, especially the white grape, vanilla and berry flavors; Altadis’s Backwoods; and little cigar brands that come in cartons of 20 packs of 10, including Double Diamond (A&T), Cheyenne (Cheyenne) and Santa Fe (Swisher).

“We are certainly a destination for cigars in our markets,” Monaco said. “It’s been proven to me just in the numbers that we’re generating. Adult smokers that enjoy smoking a cigar know they can find what they’re looking for at Tedeschi and hopefully once in a while we’ll give them a deal as well to reward them.”

Effective Promotions
So rapid has been OTP’s growth—and cigars specifically—that Monaco admits to still trying to get a handle on the best way to promote them to elevate sales to an even higher level.

“There are numerous opportunities during the course of the year to promote cigars as each and every one of the cigar manufacturers competes for shelf space. Those are the deals we are looking for,” Monaco said. “Right now we’re doing a lot of pre-booking on display units, such as buy three boxes, get two free, or pushing pre-priced cigarillos at 69 cents. We’re just dabbling into the temporary price reduction piece of it.”

While conventional wisdom says aggressive price promotions will help boost sales, the jury’s still out on whether just reducing a cigar by 20 cents is going to sell that many more of them. “Our strategy has been to offer the consumer a ‘three for the price of two,’ promotion or a deal on a pre-priced cigar, such as 99 cents for a single-serve cigar that might retail for $1.49. Right now the bulk of our promotional activity is done through pre-books that the manufacturers offer.”

A couple of considerations come into play when deciding on promotions, Monaco said.

“You have to pick and choose your spots when you have promotional opportunities because each of the cigar companies has them, but you don’t want to inundate the stores with product and have displays sitting in the back room without being on the checkout or out front,” he said. “So we try to plan them out accordingly during the course of the year so that we do justice to each manufacturer, and we give everybody an opportunity to be part of the pre-book process. We spread them out during the course of the year based on presentations that are made by each of the manufacturers.”

Dealing With Supply Contracts
It’s not news that cigar manufacturers are now conducting business like cigarette suppliers. Contracts based on SKU presentation and availability are becoming normal, and Tedeschi has a unique division of category management for OTP. It has a contract with Altadis, but its category captain is Swedish Match.
“The one that really came to the front and was really aggressive in trying to gain some space was Altadis,” Monaco said. “There’s a growth piece to the contract. There’s also a number-of-SKUs piece to the contract, and certainly a percentage-of-sales piece to the contract. They really stepped up to the table and said, ‘We’re aggressive with what we’re doing with the category. Do you want to be aggressive with us?’”
The one piece that stands out is the growth piece—something not typically found in cigarette contracts.

“The cigar contracts have a clause in place where, if you grow their business, the money that changes hands grows accordingly, so it has evolved as kind of a dual partnership,” Monaco said.

That reward was a key tipping point for Tedeschi, which is looking to maximize profits and margins.

“The Altadis contract says you need to carry this many SKUs and these SKUs need to be merchandised in a prominent position on that rack, but it wasn’t like they were asking for something they didn’t deserve because their SKUs deserved the top billing based on the sales they generated,” Monaco said. “It wasn’t like we had to go out of our way to make all these changes or were hesitant about doing something because the space wasn’t necessarily justified for a particular item. With the Altadis contract those items were already at the top of the list.”

Williamson, of the Cigar Association of America, said the arrangement between Tedeschi and Altadis is far from the norm.

“My member companies generally don’t buy shelf space because they don’t have the money to compete,” Williamson said. “There’s no way a convenience store can carry all our products. It’s very competitive for my members to get in those convenience stores and fight for that shelf space or whatever shelf space is remaining that the cigarette guys haven’t purchased.”

Monaco said Swedish Match, as category captain for Tedeschi, is responsible for the OTP sets, with or without help from the other manufacturers. Tedeschi has meetings with all manufacturers at once, in the same room, said Monaco. Scan data and Nielsen data are discussed and the  space is allocated accordingly.

“There’s a constant reshuffling of the deck so that we’ve got the best presence of the items that are showing the biggest potential,” Monaco said. “We keep it fresh, we keep it innovative and we’re rotating product in and out based on the planograms.”

For example, since we have seen dramatic growth spurts on single cigars, we’re allocating more space accordingly to that one subset.
“Swedish Match has their marching orders to go out and set each store, and the other manufacturers are more than welcome to accompany Swedish Match to assist them in that endeavor,” Monaco said. “Typically, they follow up after the reset is accomplished to make sure they’re getting their piece of the pie as well. There have been some difficult negotiations that take place, but for the most part all manufacturers agree that the category is growing and there is room on the shelves for everyone.”

 

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