Seizing Control of Smokeless Tobacco

With new flavors, brand extensions and increased promotional activity, MST sales continue to post strong gains at convenience stores.

By Howard Riell, Associate Editor.

The smokeless tobacco category remains strong, and not just because legislators have chased consumers away from cigarettes. New products and flavors combined with competitive pricing, increased promotional activity and effective merchandising are attracting new and veteran tobacco customers alike.

“Basically, the category is growing,” reported Bonnie Herzog, managing director at Wells Fargo Securities. “It’s profitable. Reynolds’ Grizzly brand is on fire. It has been generating very strong growth.”

The smokeless category continues to evolve with a variety of product and flavor extensions, keeping it fresh in consumers’ eyes. “We have different varieties of smokeless, like snus, hitting the market. And then the leading brands, Copenhagen and Skoal have been coming out with different flavors and line extensions,” Herzog said.

The bottom line, Herzog concluded, is win-win. “I think it’s all positive. For the retailers, this is a category that they should be giving shelf space to, and counter space when possible, given that there is faster growth than the cigarette category, which is declining.”

Herzog sees strong similarities between the tobacco category and another product category she covers for Wells Fargo: beverages. “I characterize the smokeless category sort of like the noncarbonated drinks in the beverage category. When you think about the beverage category, you’ve got carbonated soft drinks which are large, but declining, like the cigarette category. But then you’ve got smokeless, which is smaller but growing faster, like noncarbonated.”

Brand Business
At retail, promotions are helping to push the needle forward. “Smokeless is continuing to grow at a rapid pace, depending on the SKU,” said Matt Hieb, category manager for Jacksonville, Fla.-based Gate Petroleum, which operates 225 convenience stores in six Southeastern states.

“Grizzly is on fire right now, and we couldn’t be happier to see the success. It appears that our core Copenhagen brands continue to taper in volume, primarily, because of the lack of promotional activity and high ad valorem state excise taxes (a set percentage of the wholesale price). We recently allocated more space to the category in hopes that it would fuel exponential growth, and our timing was perfect.”

Who the smokeless consumer is these days is fairly clear, according to Herzog. “Generally speaking, the demographics are younger males,” she said. “For the last handful of years there are more females who are consuming, but  they’re probably more attracted to products like snus and e-cigarettes, which of course are not smokeless, but I’m thinking of non-cigarettes. Snus is a product where you don’t have to spit.”

Industry watchers are also seeing more of what they term dual usage over the last year or two. As Herzog explained, “Now that we’ve had so many smoking bans go into effect it’s harder to smoke, so people will consume both. When they cannot light up they will, potentially, dip.”

It also appears that fewer Americans are being deterred by warnings of health threats from smokeless products. “I think there is a broad, general awareness that tobacco is harmful—all tobacco,” Herzog acknowledged. “There is a relative risk factor that is very important that consumers understand. I think the perception is that smokeless, or noncombustible products, are less harmful, and so the relative risk is lower.”

As for those who believe the same legislative axe that has fallen on cigarettes must inevitably slice into smokeless, Herzog believes that view may not be completely accurate. “I would say that as experts continue to study and understand the relative risks, everyone is better off.”

Building Sales
Reaching consumers with the right promotions and value proposition can be tricky. But right now, Herzog said, Grizzly is firing on all cylinders. “I think it’s just resonating well with consumers. The price point has been very attractive as a lower-priced brand,” she said. “This is the pretty interesting statistic: the brand is only about 10 years old. Can you imagine that it came onto the market just over 10 years ago and now it’s the largest brand? Think of Copenhagen, which I think is 125 years old, if I’m not mistaken. This is a product with the right taste that has resonated with its consumers, and I think a lot of it has had to do with the price/value propositions.”

As the two brands compete, retailers could be in line to see even additional promotional activity. As Wells Fargo noted in its second quarter 2012 U.S. Tobacco Retailer Survey, “Around 89% of our contacts noted category growth during Q2 driven by continued promotional activity. Grizzly remains the growth driver in the smokeless category. However, we remain concerned due to an increasing downtrading trend, particularly with the launch of value-priced line extensions of Copenhagen and Skoal. Is another Battle of the Brands brewing?”

Merchandising Tweaks
When it comes to in-store merchandising, Hieb explained, things get pretty basic. “The only thing at this point that is fueling growth is fresh product, space and visibility.”

The lack of promotional support on other core brands, he added, has given Grizzly and the others an opportunity to get a much better price in front of the consumer. “These customer like to see their product and what they will be paying for it.”

Taking advantage of two- and three-can promotions has also spurred some category growth, but it needs to be monitored closely.

“Vendor price-promoted product could become a burden if it’s not managed right, primarily due to the quantities that manufacturers are shipping in,” Hieb said. “Too many promotions on certain SKUs mean they stop ordering the open stock, which leads to out of stocks.”

One of the biggest keys to Gate’s success and subsequent growth in this category has been giving the stores some ownership over the category. “But,” Hieb advised, “we make sure managers have the tools and an understanding of what it takes to keep the offering fresh and in stock.”

Gate is currently in the process of making what Hieb characterized as “some tweaks” to the category. “USST is taking an approach similar to the cigarette planogram by blocking brands off and, in some cases, adding a large sign featuring the price of their new brands. The only problem with this approach is you’re taking visually stimulated customers and covering up their product.”

That said, Hieb would prefer less signs and more visible products so the customers can see the cans and displays. “We are expanding into larger sets wherever we can,” he said. “There is too much growth potential out there right now.”

The results of Gate’s reset have been extremely positive and will have positive trickle-down for all manufacturers.

“The larger we make the smokeless category, the more resources we will get from manufacturers to grow it and ultimately grow our overall store sales,” Hieb said. “We have seen great results from the most recent Copenhagen Southern Blend launch and anticipate this brand to nestle well within the Copenhagen brand family.”

The added benefit of this new product, according to Hieb, is that it had been difficult for the core Copenhagen Long Cut consumer to have anything comparable to trade down to within the brand family. “Therefore, I believe Southern Blend is a g
reat vehicle for this.”

The future of the smokeless category, Hieb concluded, is bright. “If we allocate enough space to smokeless, properly train our people to manage the category and get creative with promotions, we should all see success in growing this business.

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