What Your Cigar Customers Want

CIGARS1Whether it’s flavored products or low-cost brands, OTP customers remain among the most loyal in the store.
By Howard Riell, Associate Editor.

How much is too much is a fundamental question in retailing, and all the more so when it comes to cigars. With so many new products, flavors and line extensions to choose from, retailers are working overtime to find the right product mix so their shelves aren’t lined with products going stale and collecting dust.
Keeping offerings fresh means knowing the markets and trends, and listening to consumers—especially the ones retailers see all the time.

A big advantage the convenience store channel enjoys, according to J. Michael Marks, managing partner of Melbourne, Fla.-based Indian River Consulting Group, is that much of what happens is predictable. “C-stores have a fairly well-defined demographic in terms of the bulk of what they’re selling.” One of the challenges, however, is that store managers have to turn inventory. “You can’t let things sit.”

Keeping the assortment vital is a function of mass market trends and programs from suppliers. How do convenience stores usually handle the rising number of SKUs?

“They mostly ignore it,” Marks insisted. “What happens is the noise in the channel goes up from the manufacturers as they keep trying to proliferate more and more products. What’s really happening is they are fragmenting the market. That makes it harder for a convenience store retailer to make money.”

The most important way to strike that difficult balance is to help consumers understand the differences between brands, Marks suggested. “In other words, somebody behind the counter, if asked, should at least, in 10 words or less, be able to explain the differences in the products. There has got to be meaningful differentiation.”

Value-Driven Customers
“More and more, people are looking for that value: the three-for two’s, and two-for-one’s,” said Robert Perkins, vice president of marketing, Rutter’s Farm Stores York, Pa. “That is the packaging that most of the companies have gone to, and that they seem to be doing very well with.” Swisher Sweets, Dutch Masters, Garcia Vega and Black & Mild remain the top brands. Cigarillos and the tipped cigars have done very well, he added. “Wine and white grape still continue to be two of the dominant flavors.”

While many convenience store operators have found success in transitioning some cigarette customers to cigars, Perkins said he has not seen much of that sort of movement. “I think there are still some other alternatives that they are actually switching to, such as electronic cigarettes, snus and even moist smokeless.”

Rutter’s 58 stores typically go with about a three-foot vertical space. Its cigar offerings range from 80 to a maximum of 120 SKUs.
Perkins sees strength rather than weakness for the category in the coming months, but not necessarily much growth. “My big business used to be five- and four-packs, and now it’s singles and doubles and triples. In other words, the volume is increasing but the dollars are holding steady which, given the category’s economics, is probably the best we could hope for.”

Force of Habit
One big reason that less expensive cigars do as well as they do in convenience stores is that they, like the channel itself, rely heavily on force of habit—a force that retailers can use to their own advantage.

“One of the things you’ll find with packaged cigars is that there is a high repeat rate of sales,” Marks said. “What will happen is that you will have the guy who comes in there to buy gas and a Slurpee, or whatever he’s going to get, and he’ll buy his cigars from you over and over and over. So what you do is tailor your inventory.”

Indeed, Marks continued, repeat business means that shoppers take on increased importance, something many operators fail to take advantage of. “There are a lot of familiar faces that people ignore,” he said. “The convenience store should be tailoring its inventory to that clientele.”

In other words, your regular shoppers will tell you what to include and exclude from your assortment, if you let them. Running sales reports on what’s selling is also key.

“If you have too much of a proliferation of brands, too many SKUs that you’re stocking, you’re not going to be able to do anything meaningful for anybody,” Marks said. “The poor sections that I see have way too many SKUs. What happens is they get dusty and then they get stale and they’re just a poor example of what you should be doing.”

Notice what people are asking for and respond—even if it is just one customer. “If a customer comes in and asks for a cigar and you don’t have it, you need to consider carrying it,” Marks insisted. “Yes, even one customer, because most people who come in looking for that thing aren’t going to say anything to you. They’re not going to see it and then they will walk out of your store. And so if one guy asks you, put it in your store.”

What Marks called the beauty of the packaged cigar business is the price point, which allows for some experimentation. “They are not horribly expensive and the manufacturers want to work with you. That allows you to take some risk and be a little proactive to create a strong cigar business.”

Eying The Tax Man

Convenience store operators who keep a justifiably wary eye on state legislatures and their seemingly unquenchable thirst for tobacco tax revenue basically had the summer off, but are tensing up again as fall approaches.

Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO), said that the Food and Drug Administration (FDA) plans to release its proposed rule on other tobacco products—including cigars, e-cigarettes, e-cigars and pipe tobacco—by October. “They initially said they would issue it in April of this year, but April came and went. Now their target date is this fall.”
That said, legislative action on tobacco tax bills has been finalized in three additional states, NATO reported. In Delaware, House Bill 138, which would have increased the tax on other tobacco products (OTP) from 15% to 30% died in committee. In New Hampshire House Bill 2, which proposed raising the cigarette tax from $1.68 to $1.98 per pack and increasing the OTP tax from 48% to 56.6% did not pass the legislature. And in Ohio, Governor John Kasich signed into law a state budget bill that, among other things, raised the tax on little cigars from 17% to 37% of the wholesale price effective Oct. 1.

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