Designing a Winning OTP Strategy

Convenience stores have evolved from being a destination for cigarettes to a destination for tobacco products as a whole.

By Joe Bush, Contributing Editor.

It was inevitable that the conversation on convenience store cigar sales would shift eventually from rapid growth to supplier relations, category management and marketing.

As cigarette regulations and prices and taxes increased, OTP sales did too as consumers looked for a cheaper alternative.

Cigars provide many alternatives, from size to flavor to pack-count, and have flown beneath government regulation radar thus far. With the advent of foil packs the past two years, keeping cigars fresh is less of a challenge.

Helping the cigar segment grow has been the push by bigger tobacco companies into the category. Altria, parent company of Philip Morris, bought cigar maker John Middleton in 2007 and British giant Imperial Tobacco bought Altadis in 2008.

Terry Schmitz, zone leader for 39-store Tobacco Outlets Plus, a subsidiary of LaCrosse, Wis.-based Kwik Trip Inc., said cigars have earned their way from being “hidden in a cabinet” to garnering as much as a four-foot section with two shelves.

“Companies who bought their cigar business have had some difficulty understanding the cigar business because it’s not like the cigarette business,” said Schmitz, whose stores are in Iowa and Wisconsin.

As cigars have become more important they have been treated more like cigarettes, with inventory and space requirements. But Schmitz said the two products are not the same, from contents to appearance to consumer use.

“It’s tough telling the retailers how to place the product, where it’s supposed to be, when they’d never had that before. They come in and say ‘I want this space, and this is what you need to give me, or I want this number of facings to make this program work and to pay you this.’ That’s kind of a tough nut to swallow for the retailers,” Schmitz said. “They dealt so long with cigarettes and could do just about anything they wanted to in that category, and now that they’re working with cigars they’d like to get to the same thing. They’re not there yet, but I think they’d like it to be the same.”

Furthermore, cigar customers are much more willing to try new products, which means having a wide variety and multiple price points is crucial for driving sales.

“A cigar is something the consumer spends a little time thinking about. What kind of flavor do they want or how much are they willing to spend?” Schmitz said. “With a cigarette, it’s a routine purchase. I can go three months without a cigar. But when I want one, I expect my store to have a good variety to meet my needs.”

Competition Driving Sales
Mike Zielinski, president and CEO of category management consultant firm Royal Buying Group of Lisle, Ill., said he sees Altria coming along nicely in its retailer relations, putting pressure on non-cigarette companies Swisher International and Swedish Match. The result is that everyone is raising their game for the benefit of c-store retailers.

“Altria has done a great job of taking what they have learned from the cigarette category and applying it to cigars,” Zielinski said. “Their John Middleton brand has definitely been pushing the other brands to come up with some promotional activity.”

Zielinski said it’s an important time for retailers to polish their planogramming and inventory management. He thinks there will be more consolidation, citing rumors involving Swedish Match and Swisher. He expects Middleton’s business—primarily the Black & Mild line—to benefit in the meantime.

“It’s really a crazy time right now,” said Zielinski. “You would like to have a true cigarette company be the category captain for cigarettes and a true cigar company be the category captain for cigars. What you are seeing now is a lot of crossover.”

Schmitz agreed. “A lot of the cigars are now controlled by cigarette companies,” he said. “They’re trying to blend the contracts together. Even though there’s still a little separation, eventually, down the road there’ll be a blended contract for cigarettes and OTP. It isn’t that way just yet, but I think that’s how it’ll happen.”

Growing Product Line
Complicating the tobacco space—cigarettes and OTP—is the influx of alternative products, such as snus, electronic items and other nicotine delivery systems like gels, which have only entered the set in the past five years.

“The space gets really confusing,” said Zielinski. “Altria is a player now in three major tobacco segments. RJ Reynolds, with their snus product, is garnering a lot of attention from convenience stores. It’s a constant battle for the premium space. Altria has come up with more flexible ways of going to market.”

Zielinski said flexibility always resonates well with retailers, but some operators may not adjust to freedom as well as others.

“A retailer that gets a choice and is a good category manager benefits quite a bit from it,” he said. “In some cases, retailers don’t know what to do, and then once they’re given these options don’t analyze it well enough in order to decide what’s the best way to go. As a result they end up losing money until they make a decision on which way to go. Sometimes it takes them up to six months to figure out what’s the best strategy for them to pursue.”

Zielinski compared the time before cigarettes began declining and OTP began rising as “the Wild West,” with fewer space requirements for OTP. Now, Altria’s contract with his company requires space for Middleton, as do the contracts with Altadis and Swisher. He said it’s a natural result of the cigar subcategory evolving, and the change can be good if it’s handled correctly.

“As long as you do the planograms based on demand, it’s best for the consumer and the retailer for a more organized category, and you probably end up reducing the amount of SKUs you carry because once you analyze this data you can see which products don’t belong in the set because all they are doing is taking up valuable selling space,” Zielinski said.

The growth seen in cigars should continue for the next couple of years, Zielinski said. He foresees foil packs with more than five cigars having a strong run with cigar consumers.

Schmitz, of Kwik Trip, said that if the federal government doesn’t limit cigar flavors, the category’s outlook is positive, and may include foil packs with more than two or three cigars.

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