Taking Back the RYO Business

ryoIt has been a wild 12 months for the roll-your-own (RYO) tobacco segment, but the good news for convenience store retailers is that legislation passed in 2012 will actually help the industry hold onto to its RYO market share.

In the wake of the 2009 shift in tax rates, pipe tobacco is taxed at a significantly lower rate than roll-your-own (RYO) tobacco or factory-made cigarettes. As entrepreneurs will, many roll-your-own manufacturers have switched to pipe tobacco, as have consumers. Commercial roll-your-own machines have soared in popularity, giving Americans the chance to save money by using them to make RYO cigarettes with pipe tobacco. These machines were free to use at tobacco shops, giving customers an opportunity to avoid paying the higher taxes associated with a traditional pack of cigarettes.

After significant lobbying by the National Association of Tobacco Outlets (NATO) and NACS, the federal Alcohol, Tobacco Tax and Trade Bureau (TTB) backed a U.S. Circuit Court of Appeals in August 2012, which ruled “all retailers that provide cigarette-making machines to customers are manufacturers of tobacco products.”

Based on the court decision, the TTB can now enforce the law and require that any person who, for commercial purposes, makes an RYO machine available to consumers must obtain a tobacco manufacturer’s permit from the TTB, secure a bond and pay the special occupational tax, comply with recordkeeping, reporting and inventory requirements, file tax returns and pay the applicable federal cigarette taxes.

The announcement also noted that anyone manufacturing tobacco products without first obtaining the necessary permit is subject to civil and criminal penalties.

Growing Opportunity
The ruling is significant because the practice of offering RYO machines by tobacco shops took a significant chunk of sales away from convenience stores, which typically do not sell pipe tobacco. For example, SymphonyIRI reported that total RYO sales in U.S. c-stores for the 52 weeks ended Dec. 31, 2012 were $68.90 million, down 12%. Pipe tobacco sales, however surged more than 65% to $67.34 million.

With this ruling, c-stores now have a chance to grow sales in the RYO segment, said Lou Maiellano principal of the TAZ Marketing & Consulting Group in Sevierville, Tenn. “I am one of the firm believers that convenience stores need to take a look at this category because there are opportunities out there in the marketplace.”

In these slow economic times, dedicating a few feet of space to this category could provide a much-needed revenue boost. “Remember, almost two-thirds of all tobacco is sold in a c-store. It would be an opportunity for me as a retailer to have an edge over other c-stores,” Maiellano said.

Along with roll-your-own tobacco, of course, comes an entire cottage industry of related paraphernalia, including tubes, filters, rollers, machine injectors, rolling papers, humidors, lighters, smoking screens, scales and more. As Maiellano readily pointed out, “That’s high margin stuff, so it’s a profitable space. The one negative is that it does take up space.”

It only makes sense that servicing a fuller range of tobacco needs will bring with it additional sales opportunities, he added. “You will bring other customers into the store who will be loyal to you. They will come to you and they’ll buy other stuff, so it’s a draw.”

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