C S P October 2013 161

“I ’m excited to gather with

my fellow tobacco nerds,”

q u i p p e d o n e re t a i l e r

attending CSP’s 10th annual Tobacco

Category Review Meeting. “My coun-

terparts don’t always get the world we’re

dealing with.”

Truly, no category except perhaps

fuel offers retailers the most potential

sales while also boasting the regulatory,

taxation and squeezed-margin minefield

that goes along with it. Indeed, even after

giving a detailed presentation about local

regulatory issues, NATO executive director

Thomas Briant had to cut into another

speaker’s session with the news that New

York City had just announced intentions

to try to limit—or even ban—the sale of

many electronic-cigarette products.

Yet despite the many challenges in the

category, its importance to c-stores can-

not be understated. It was this question

of tobacco’s overall value to the channel

that Don Burke, senior vice president of

Pittsburgh-based Management Science

Associates (MSA), addressed during his

general session.

To explore this concept, Burke used

MSA and Paradigm Sample’s custom cci-

Panel data, a mobile research panel that

captures consumer shopping patterns

and is particularly useful for tracking the

behavior of the millennial segment.

“In this case, we looked at about 3,400

different visits to a c-store and what shop-

pers did on those occasions,” Burke said.

On the surface, tobacco did not appear

as crucial a category as others: Of the 15

categories tracked, tobacco was only the

fourth most purchased, falling behind gas

and other fuel, packaged beverages and

candy, gum and mints. When the cciPanel

buyers visited a c-store, they purchased

tobacco 21% of the time, compared to a

55% purchase rate for gas and fuel.

However, when Burke looked at how

much tobacco consumers were spending,

the category’s true importance began to

emerge. Sixty-seven percent of the time,

cciPanel’s average c-store shopper spent

less than $10; 20% of the time he or she

spent $10 to $20; and 13% of the time

it was more than $20. There was a per-

ceivable shift toward larger baskets when

MSA looked at tobacco consumers, who

spent less than $10 43% of the time, $10

to $20 32% of the time and more than

$20 25% of the time.

“Compare that to any other category

and it really is the strongest,” said Burke.

“That’s saying to you that your tobacco

purchaser has the largest cash purchases

per ring of any shopper in your store.”

And though some of that increased

basket could certainly be attributed to

the cost of tobacco itself, the cciPanel

data also shows that tobacco consumers

tend to purchase from a variety of other

categories within the store. Prominent

add-on purchases included gas and

fuel (which tobacco consumers also

purchased 52% of the time), packaged

beverages (35%), candy, gum and mints

(17%) and lottery/gaming (15%).

“The point about a tobacco purchaser

is that they will become involved in that

convenience shopping experience,”

said Burke. “They shop throughout the

store—much more so than the shoppers

in any other categories.”

This fact was even more apparent

when MSA broke down how consumers

of different segments within the tobacco

category interacted with the store. While

premium-cigarette shoppers tended to

purchase a wider variety of products

(interacting with 22 of the 27 categories

MSA tracked), large-cigar shoppers had a

strong tie to the important beer segment,

presenting retailers with a great potential

to increase sales.

“There’s a strong relationship—par-

[roundtable report]

A Inhalation

Retailers take in ideas on regulations, e-cigs, importance

of tobacco shopper

By Melissa Vonder Haar mvonderhaar@cspnet.com

ticularly on the weekends—between

cigars and beer,” Burke said, pointing out

that weekend consumers buying large

cigars were more likely to pick up beer

than any other category besides packaged

beverages. “If you have some cross-mer-

chandising opportunities, ways on the

weekend of putting the cigars on display

near the beer aisle, you’re probably going

to sell more.”

As valuable as those add-on purchases

and cross-merchandising opportuni-

ties are, perhaps nothing highlighted

tobacco’s importance to convenience

stores more than the cciPanel data on the

frequency that tobacco shoppers visited

c-stores. Roughly 10% of the cciPanel’s

average consumers visited a store on a

daily basis, but 16% of tobacco consum-

ers were daily shoppers. Thirty-seven per-

cent of average c-store consumers visited

two to three times a week, yet that number

was 55% for tobacco shoppers. And 23%

of average consumers visited once a week;

for tobacco, that figure declined to 16%.

Taking into account the amount

tobacco consumers spend, the variety of

other categories they shop and the fre-

quency of their shopping trips, Burke’s

data solidly showed what many retailers

already know: Tobacco consumers are

invaluable to the business.

“Not only are they buying more, but

they’re visiting your store more often,”

Burke said. “This is a critical point in

understanding how very important

tobacco shoppers are in this channel.”

Keys to ‘Big Electronic’ SuccessThe importance of the tobacco shopper is

likely to only increase as more consumers

turn to the margin-friendly and yet-to-be

regulated electronic-cigarette segment. As

managing director of beverage, tobacco

and convenience store research for New

York-based Wells Fargo Securities LLC,

Bonnie Herzog has been far from shy in

her enthusiasm for the nascent segment,

going so far as to call herself a “bull” for

the category.

“E-cigs remain the biggest excitement

for 2013, according to our survey respon-

dents,” said Herzog during her “Industry

Trends and Insights: An Analyst’s View”

session.

And this excitement is growing now

that Big Tobacco is getting into the game.

Lorillard Inc. was the first, acquiring blu

eCigs in April 2012; R.J. Reynolds Tobacco

Co. recently announced plans to take its

Vuse digital cigarette national; and Altria

Group Inc. is about to start test markets of

its new MarkTen offering.

Yet, with more than 200 private e-cig-

arette companies already on the market,

the question remains: Who will be the

C S P October 2013162

Retailers

Certified Oil Co.Wayne Wills

Country Fair Inc.Jim Kupniewski

Cumberland FarmsAnne Flint

Family ExpressRyan Fasel

Forward Corp.Lundy Edwards

Power Mart Corp.Sam Odeh

Royal Buying Group Inc.James Conrad

Shop Rite/ Tobacco Plus StoresSusan Dorsett

Smoker Friendly/GasamatTerry Gallagher

Speedy StopNatalie Teinert

Sunoco Inc.Steve Jones

The Pantry Inc.Kevin Taylor

Tri Star ServicesRick Staley

Tri-State PetroleumFrank White

Suppliers

CB Distributors Inc./21st Century SmokeCarlos Bengoa, Mark Hopkins, Pat Johnson

Commonwealth- AltadisMike Di Donato, Brion Gillett

General Cigar Co.Chris Rohr

Harbor Industries Inc.Mike Detenber, Craig Neuhoff

Kretek InternationalPatrick Hurd

Logic Technology Development LLCChris Colon, Miguel Martin

Nat Sherman Inc.Vic Coons

National Tobacco Co.Steve Clark

Nicotek/Metro Electronic CigaretteDavid Hoffman

NJOY Electronic CigarettesVito Maurici, Jim Presley

Republic TobaccoMark Lopofsky

S&M Brands Inc.Greg Chapman, John Greene

Scandinavian Tobacco Group-LaneGreg Hixson

Swisher InternationalMark Humphreys

Tantus TobaccoRoss Haynes, Joe Nicolaus

Vapor CoutureMark McLeod

Participants in CSP’s 2013 Tobacco Category Review Meeting,held Aug. 7-8 in Chicago:

Bloomberg Strikes Again: NATO’s Tom Briant gives an unexpected update on regulation and taxation of e-cigarettes in New York.

C S P October 2013164

dominant player in this profitable space,

especially if—or when—the FDA issues

regulations?

“With the Big Three entering, there is a

good chance that they will win, along with

several of the private companies that are in

the market today,” said Herzog. “I do think

with regulations, the barriers to entry do

increase. It increases the cost of entry. It’s

something to think about.”

Clearly, companies such as Lorillard,

Reynolds and Altria have plenty of experi-

ence dealing with both regulatory issues

and the highly competitive tobacco mar-

ket. The fact that they have ample funds

to support e-cigarette endeavors, as well

as relationships already established with

retailers, may also help solidify their slots

in the space.

However, Herzog doesn’t believe this

automatically means the e-cigarette seg-

ment will mirror that of traditional ciga-

rettes, in which Altria’s Marlboro brand

has long been the market leader.

“The market share will be different

than what it is with traditional cigarettes

today,” she said. “It’s potentially a great

opportunity for Lorillard. I think Loril-

lard’s purchase of blu was very smart.

They paid $135 million just over a year

ago, and it’s already contributing to their

bottom line.”

Meanwhile, she was surprised to see

Altria enter the market so quickly with

MarkTen. It’s possible that the move may

have had more to do with strategy than

the product itself.

“I’m not convinced [MarkTen] is

going to be their final product, but I

think it gives them a voice in this category

to have conversations with the regula-

tors,” Herzog said. “They do have a prod-

uct; they couldn’t go to the table without

that. I don’t think [MarkTen] is their

endgame. I still wouldn’t be surprised if

[Altria] bought a private company.”

The big appeal of a private e-cigarette

company comes down to a very impor-

tant factor for consumer products such

as e-cigs: brand. And though Lorillard,

Reynolds and Altria may have more

money and established relationships,

many electronic-cigarette players have

years on Big Tobacco when it comes to

brand development.

“I certainly give some of the private

companies a lot of credit for building

some strong brands already,” said Herzog.

“I think it’s ultimately very important to

have a strong brand. That will be the key

to success. This category is a consumer

product; don’t underestimate that.

“There’s still certainly plenty of room

for some of the other players we all know

of,” she continued. “It will be interesting to

see how that all shakes out.”

Pre-K Plan WarningPlayfully introduced as a true “superhero

of our industry,” NATO executive director

Briant has developed a stellar reputation

for educating tobacco retailers on state

and local tobacco regulations threaten-

ing their business. However, this year,

Briant’s cautionary tale was not local,

but national.

Briant put the spotlight on President

Obama’s pre-K expansion proposal. And

like Herzog on e-cigs, Briant is certainly

interested to see how this plan “shakes

out.”

Announced earlier this year, the initia-

tive would expand preschool education

to all low-income 4-year-olds. The $75

billion project would be funded by a 93%

increase in both the cigarette and OTP fed-

eral excise taxes. Cigarette and little-cigar

taxes would go up by 94 cents per pack,

from $1.01 to $1.95; chewing tobacco

would go up to 97 cents per pound and

moist snuff to $2.91 per pound; pipe

tobacco would go from $2.83 per pound to

Deep Breath: Kristi Prior of CSP welcomes attendees to the roundtable.

C S P October 2013166

$5.64; and RYO would be devastated,

going from $24.78 per pound to $47.82

per pound.

“These are significant increases, almost

doubling tax rates across the board,” Briant

said.

One need look no further than 2009

to glimpse how such increases could

cause significant problems for tobacco

retailers. When cigarette excise taxes were

raised by 62 cents per pack, the Federal

Trade Commission (FTC) reported that

volumes fell by 13% through 2010.

“The president almost doubling the

tax is going to have an even more sig-

nificant impact on cigarette and OTP vol-

ume,” said Briant. “It’s just an estimate,

but the increase would probably result in

more than a 13% [volume] decline across

the board.”

While most retailers are aware that

doubling excise taxes will have a definite

effect on their business, there are plenty

of aspects about Obama’s pre-K initiative

the public is not aware of.

‘What’s not widely reported is the fact

that the states have to pay a significant

percentage [of the pre-K funds],” Briant

said. “It increases every year. In years one

and two, a state needs to contribute 10%

of the federal funds they receive for this

program. By year 10, the states have to

put in three times the amount the federal

government’s putting in. And after year

10, it’s all up to the states.”

This means that if a state needs $100

million a year to cover the program, the

federal government will cover roughly

$90 million of the costs during the first

two years, with the states contributing

just $10 million a year. However, come

the 10th year, the state will be on the

hook for $75 million, with the federal

government covering only $25 million.

“The unanswered question is: Where

are the states going to find that money?”

Briant said.

And while Secretary of Education

Arne Duncan has been traveling to

Republican-governed states such as

Georgia and Michigan to try and garner

support for the program, NATO is doing

its part to make sure such governors

know the steep cost that would come

along with the proposed pre-K expan-

sion.

“We’re issuing letters saying this is not

going to work—and that states had better

take notice because they’re going to be on

the hook for significant funding going

forward,” he said.

It’s a fight that’s far from over: Most

Republican governors may like the con-

cept of expanding pre-K education, but

not if it means raising taxes to do so. Simi-

larly, House Republicans are very cool on

the idea of raising taxes again, especially

after agreeing to an earlier tax increase (on

the wealthy) earlier this year.

“This is going to be significant if it gets

any traction,” Briant said. “That’s the real

question: Will it get any traction?” n

Value Add: Don Burke of MSA shares data on the value

of the tobacco consumer to convenience stores.