Packaging and Flavor Drive Cigars

Cigar_4Cigar sales are holding steady despite increased taxation across many states, thanks to cheaper price points and innovative flavors.

Overall, for the 52 weeks ended Dec. 31, 2012, SymphonyIRI reported that cigar sales in convenience stores slipped a modest 3.16% to $2.41 billion. Unit sales were down just 0.84% indicating that increased taxes are eroding the industry’s profitability from this important core tobacco category. The average unit price for a cigar in 2012 was $1.64.

“Cigars are a more cost-effective tobacco product for price-sensitive customers, but increased taxes are causing customers to look at the category a little differently lately,” said Amer Hawatmeh, president of St. George Oil in St. Louis, operator of six Coast to Coast convenience stores.

Flavorful Future
While any customer is a welcome customer, those who are showing up to buy most of the cigars that Coast to Coast stores sell are watching their pennies, said Hawatmeh. “Mostly, the kind of person it’s bringing in is a low-tier customer base. They come in and buy that pack of cigars and that’s all they seem to buy.”

For that reason probably more than any other, he is counting on new flavors, discounted pricing and other product innovations to drive incremental sales.

“What’s really selling right now are the little cigars. The big hand-rolled cigars are OK. I have one store that has a whole freestanding humidor, and it has a following, but it’s not the hook I hoped it would be for tobacco customers,” Hawatmeh said. “The problem with the big cigars is that they have grown so pricey. What used to be a $3 Arturo Fuente torpedo now is selling for $13 or $14. Your cost is nearly $9 now. So even though the tax base has not hit those products too hard, those prices have really jumped up.”

The FDA’s ban on flavored cigarettes in 2009 opened the door for both little and large cigars to capture that flavored niche. For example, Djarum clove cigarettes were banned under the FDA ruling. The company, like many others, reblended and changed the product to become a filtered cigar, while maintaining the flavor profile customers enjoyed. The change from cigarettes, which are inhaled, to filtered cigars, which generally are not, took a while for consumers to adapt to.

Mike Patel, operator of three Five Points Mobil convenience stores in Flagstaff, Ariz., said once his customers got used to the transition, sales have picked up. “The flavored Djarums are selling very well,” Patel said, adding that flavored cigars overall “are picking up big time. Swisher’s peach flavor is my No. 1 seller in little cigars. Customers really like the fruit flavors.”

The opportunity in this category in the year ahead hinges largely on the surrounding marketplace. If it is a high-end demographic, said Hawatmeh, operators can feel confident in going after it with the high-end cigars. “But with the demographic that goes for low-end cigars that are 99 cents, I’m left with a margin of about a quarter. Then, you’ve got to make sure you can turn enough quarters in a day for it to make sense to give up the space,” he said.

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