OTP Sales Remain Strong

tobaccoSmokeless tobacco products have become increasingly important to the U.S. tobacco industry, which is seeking to push more of these products as Americans smoke fewer cigarettes.

By Howard Riell, Associate Editor.

With traditional cigarettes under fire on several fronts, convenience store retailers rightly view smokeless tobacco as an important part of the future of their tobacco business.

Indeed, smokeless tobacco sales increased 2.7% last year, according to the National Association of Convenience Stores’ (NACS) 2013 State of the Industry report.

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities in New York City, said total cigarette dollar sales in the U.S. c-store channel for the four-week period ended Oct. 26, 2013 fell by 0.5% versus a 0.1% gain for the same period last year, and a 0.3% rise overall for 2012.

“Though unit declines have generally moderated over the past several periods, c-store channel pricing power has not been robust enough to consistently drive sales gains,” Herzog said. “However, we expect net price realization for the manufacturers to accelerate to approximately 4% in fiscal year 2013, which should lead to dollar sales growth.”

Continued growth in dollars and units is expected to drive smokeless tobacco product sales over the next year or two. Smokeless tobacco, principally moist snuff, is the most consistent part of the other tobacco products (OTP) category when it comes to growth.

Can volume has grown by 4%-plus per month every month since at least late 2009, according to data provided to Convenience Store Decisions by Richmond, Va.-based Swedish Match. The moist smokeless tobacco (MST) category is up more than 5% on can growth year to date.

The growing consumption is being driven by adult smokers who enter the category looking for products as an alternative to smoking cigarettes. They are looking for these alternatives due to restrictions on where cigarettes can be smoked; the economic impact of dipping versus smoking—smoking costs more money; family and societal pressure to stop smoking; and the growing social acceptability of smokeless tobacco.

For the next two years, 5% can volume growth is expected, according to Swedish Match.

Hot products in this category include Longhorn, Copenhagen low price and Grizzly, which are among the fastest growing major brands. Note that all are in the low-price segment, which is why they are growing and why premium priced brands are declining.

Smokers and Smokeless
The newer smokeless consumer is different than smokeless consumers who have traditionally made up the consumer base. This is driven by smokers who enter the category. The older dippers tend to be adult males who have used the category for 20-plus years, most of whom don’t smoke.

Consumers new to the category, on the other hand, are younger adult males who started out smoking and who still smoke. However, they enjoy the tobacco experience, like to try new tobacco offerings, and concurrently use several different types of tobacco. These new adult consumers have so changed the smokeless consumer base that now about 75% of MST dippers also smoke cigarettes

To make the most of these opportunities, convenience store retailers should expand their MST offerings to include a broad array of products and brands, and price the products competitively. Use point-of-sale (POS) shelf callouts for pouch MST and five-can rolls, so the consumer is aware they are in the store.

“This subcategory of other tobacco products has seen significant increases in sales and units moved for the past several years,” noted Matthew Paduano, vice president of category management for Nice N Easy Grocery Shoppes Inc. in Canastota, N.Y. “Our success with this category goes back several years when we realized that many cigarette smokers were converting or substituting smokeless products in their everyday routines.”

As more and more companies banned smoking in work vehicles or in the office, Nice N Easy saw an opportunity to offer its current cigarette customers an alternative, and to also bring in new customers with expanded snuff sections, more smokeless SKUs and better retail prices, such as two-pack and  five-pack pricing. “This resonated with those customers, who also happen to be very good food customers. So as we continue to see the erosion of cigarette volume each year, we continue to see good growth in the smokeless,” Paduano said.

Growing Fast
Smokeless tobacco sales keep expanding at such a rapid pace it resembles the Energizer Bunny, said Lou Maiellano, president of TAZ Marketing & Consulting Group in Sevierville, Tenn. “It just keeps growing and growing and growing. It’s been a boost to the entire industry.”

Part of what is fueling the growth, Maiellano suggested, is word of mouth advertising and the desire on the part of retailers to get on the bandwagon. Pricing also is bringing about some of the growth, he added.

“Low price accounts for 67% of the total MST category canned growth. Low price products are assisting the growth; it’s a better value proposition,” Maiellano said. “The message is getting out, and retailers are responding. You should see the sizes of some of the sets out there. I can’t say that they’ve quadrupled, but there is more clarity in the offer.”

Maiellano’s recommendation to retailers is to first realize that, almost without exception, they could and should be doing better with the smokeless category then they are doing today. “I would definitely sit down and evaluate my product assortment and retails, look at my competitors and at the industry numbers and ask myself, ‘Why am I not growing at the rate that these others are?’ Or if I am, make sure I have a solid plan to continue fostering new growth.”

There is, Maiellano continued, a significant part of this growth that has to do both with pouches and lower-priced offerings. “If you’re asking me what’s driving growth, I would tell you that it is overall awareness of the category. Second, people are looking for options for when they cannot or choose not to smoke. Not everybody is going to an electronic cigarette, and I think that’s what’s fueling canned growth. There is also the value proposition of lower-priced snuff, which is more economical than cigarettes.”

Even with the aggressive pricing, Maiellano believes success will ultimately come down to category awareness. “Retailers making the move to expand this category by highlighting it in the convenience store is as important as any legislative issue,” he said. “I’m working with a retailer right now who has seen cigarette sales drop, only to realize that he can’t get new smokeless shipments in fast enough. It’s all about having variety and presentation.”

Some operators have not gotten with the program due to the hard fact of their store’s configuration and lack of square footage, and that is definitely a problem. “If you can’t put this three-foot rack on the back counter in your store because of space constraints, there are other alternatives,” Maiellano said. “But chains across the country are trying to do whatever they can do to market a greater variety of products, and they are the ones with strong sales increases. This isn’t by accident.”

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