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    Adult Smokers Wanted

    Convenience retailers are keeping a watchful eye on the growth of tobacco specialty shops.

    By John Lofstock

    Arnold Frichter is looking for converts in Louisiana. But he isn't promising a religious experience. What he is offering customers, however, is an opportunity to visit the "other side," a smoker-friendly outpost behind age-restricted doors designed exclusively for adults.

    Frichter, a principal with TBM Management, which operates a chain of 40 Smokers tobacco-only stores in Pearl River, La., sells cigarettes, cigars, snuff and dips. He, like many other tobacco-only store operators, plans to grow his business targeting adult smokers, many of whom shop at convenience stores.

    "We have our core group of smokers, but in an $8-billion category, there is plenty of room to grow and many new customers to target," Frichter said.

    And growth seems to be the theme in the world of discount tobacco-only stores. Paul Walsh, a 20-year tobacco industry veteran and publisher of Tobacco Outlet Business, a trade journal covering the tobacco-only store industry, said by the end of 2002, there will be more than 10,000 tobacco-only stores, up from 8,000 a year ago. He estimates these tobacco specialty shops will sell 9 million cartons weekly, approximately 900 cartons per store per week.

    The convenience store and petroleum marketing industry, with its 124,500 units, sells some 29 million cartons of cigarettes weekly, according to the Convenience Store News 2002 Industry Report. The 10,000 tobacco shops, by year's end, will move an estimated volume of almost one-third of the convenience store industry's weekly average, and those numbers are growing.

    While many convenience store operators have claimed an interest in reducing their dependence on tobacco sales, the CSNews Industry Report found that more than half the stores in the industry, 54 percent — derived more than 40 percent of overall sales from tobacco. Thats doesn't bode well for chains that now have to add tobacco-only shops to their list of competitors, a list that includes Wal-Mart, Costco, Albertson's and so on.

    "Clearly, tobacco shops are in growth mode," Walsh said. "They are poised not only to increase in store count, but in volume on a store-by-store basis because they are better equipped to handle additional customers and meet the increased demand."

    In bigger tobacco shops, retailers are moving an unfathomable 7,000 cartons per week, Walsh said. Plus, these stores have walk-in humidors, an average of 16 feet for the smokeless tobacco section and 4 feet to 8 feet just for roll-your-own accessories. "C-stores aren't built for that kind of volume," he said, adding that the volume also helps these high-volume tobacco chains offset higher taxes and buydown restriction placed by many states on cigarette packs.

    Tobacco-only shops have other advantages, such as less overhead and more effective hours, Walsh said. "A tobacco shop that's open daily from 9 a.m. to 9 p.m. becomes a planned destination for customers because they look at it as a specialty shop," he said. "That cuts down on labor dollars and operational expenditures. Convenience stores are expected to always be open."

    In addition to increased tobacco costs, convenience store and petroleum marketing retailers have to deal with the scrutiny that goes with selling tobacco in stores accessible to minors. Tobacco-only retailers more and more are using the "adult-only" hook to attract legal smokers and avoid some of the pitfalls faced by convenience store operators, Walsh said.

    All Aboard

    The age-restricted hook is a factor not overlooked by convenience store retailers. At least three big convenience store chains — Uni-Marts Inc., Speedway SuperAmerica and Worsley Cos. Inc. — have jumped on the bandwagon and rolled out plans to grow their tobacco-only shops. Others, such as Clark Retail Enterprises Inc., have already developed the concept and are expanding it to markets where it makes sense.

    Worsley Cos. operator of 155 Scotchman and Young's Food Stores, just this month unveiled its Smoker's World tobacco store. The reason for creating the retail concept was simple, said Rich Mione, vice president of marketing for the Wilmington, N.C.-based chain. It wants to sell tobacco to adults in a controlled environment.

    "We are seeing rapid growth of tobacco-only stores in our markets and decided it was time to compete or lose that business," Mione said. "Merchandising age-restricted items is becoming a difficult challenge for our industry. Sting operations are more common by police, and customers want to know we are not selling tobacco to their kids. This is a win-win retailing concept for us."

    Speedway SuperAmerica knows all too well about the difficulties of retailing tobacco products at the convenience store level. The Enon, Ohio-based chain considered itself ahead of the curve on monitoring tobacco sales, training and recognizing employees who effectively identified minors attempting to buy cigarettes at its stores.

    But earlier this year, a Burnsville, Ohio, Speedway convenience store was caught selling tobacco to a minor for the fifth time in two years. The store's license was suspended by the city council for a year.

    Although the company promptly fired the store manager and district manager and dismissed all of the clerks that were working at the time of each of the five sales, the company faced a public relations nightmare.

    "It wasn't pretty," said Linda Casey, a spokeswoman for Speedway. In July, Speedway, in part due to its long track record of responsible retailing, was able to work out a deal with the Burnsville City Council to have its tobacco license reinstated, but not before fines and lost sales over the five months cost the company an estimated $350,000.

    The Burnsville incident was especially disappointing to Speedway, not because it feared a backlash against its 2,300 convenience stores that sell tobacco without incident daily, but because the company has developed one of the largest chains of tobacco-only shops in the country. It considers itself one of the leading tobacco retailers in any trade channel. "We have all of the parameters in place to sell tobacco responsibly, but errors were still made," she said.

    Speedway's Smokes for Less discount cigarette chain has 94 stores in six states. At these stores, all customers are asked for ID upon entering, eliminating virtually all of the opportunity for a minor to slip through the cracks, Casey said.

    Having customers show ID before entering the store opens the door to a variety of new sales and merchandising opportunities no longer enjoyed by convenience store retailers. While cartons are in plain view of customers at convenience stores, they can't simply reach out and grab a pack or carton. In tobacco-only shops, customers are free to touch, grab, sniff — "pretty much whatever they prefer to do [to cigarette cartons]," Casey said.

    Smokes for Less, which opened in 1995, hasn't yet experienced a noticeable sales spike as a result of the cigarette tax hikes levied by several midwestern states, Casey said. But the company is positioned to increase sales volume when the customers come calling. "Cigarette customers may not be among the most price-conscious consumers now, but as taxes add $7 to $10 to a carton of cigarettes, we expect they will be," she said.

    Identify Yourself

    Who is the tobacco-only customer? The answer to that question is the demographic coveted by convenience store owners for years — upscale consumers. According to Walsh, 49 percent of them are women.

    "Tobacco shops are a different culture and attract consumers with a different mindset," said Mione, of Worsley Cos. "We are seeing a lot more female customers who are buying by the carton, and returning on a more regular basis."

    Casey said tobacco-only customers enjoy buying tobacco from a retail venue they feel was "developed exclusively for them."

    With so much uncertainty about the future of tobacco, specialty stores may well be the last outlets standing in the end, experts say, and that could spell trouble for convenience store chains, supermarkets, drug stores and mass merchandisers.

    "The pressure will be greater and greater on major chains to cut back on what they sell. Meanwhile, specialty stores can, in fact, be much more in tune with what smokers are looking for," Walsh said, adding that c-stores are in a better position than mass retailers to pick up residual business from drugstores and supermarkets.

    Eric Jungklaus, president and founder of Zips Tobacco Outlet Inc., based in Lakeland, Fla., said his chain isn't focusing on where customers are coming from as long as they keep coming. "We aren't really concerned where consumers used to shop or where they buy their groceries," he said. "Our top priority is to get them to buy their tobacco from us always."

    Big Market Focus

    As part of their ongoing effort to capitalize on the adult-only concept, and as tobacco taxes continue spiraling upward, tobacco-only chains are branching out. And the expansion, which used to be limited to strategic markets where they could fill a niche, is now clearly visible in markets historically dominated by c-stores. For example, Zips has targeted Orlando, Fla., for its next expansion.

    Zips plans to open the first in a series of local shops aimed at competing with convenience stores. The Orlando unit will be the 10th store in the privately owned chain, which was founded in 1997 and now reports annual sales of $8 million. Company officials say small, upscale "boutique" tobacco shops help counter the social stigma smokers feel elsewhere.

    "Obviously, tobacco is increasingly regarded as a negative thing, and that's why we think people like these type of stores, which present a positive image," said Jungklaus.

    "People who choose to smoke, even knowing the health risks involved, want to go to a place where they are treated well and don't have to worry about someone berating them for smoking."

    The tobacco-shop approach may represent the future for tobacco retailing in general, he said.

    Tobacco-only retailers such as Zips are trying to position themselves for that big payday, when the major players leave the market. Meanwhile, the specialty stores are trying to increase their market share by attracting customers looking for an alternative, Jungklaus said.

    He says the company's goal is not to have more smokers on a mass level, but to win more of those within the existing market. Zips has a strict policy prohibiting minors from coming into a store unless they are accompanied by an adult. Identification is routinely checked and verified.

    "It's not a matter of trying to get more people to smoke," Jungklaus said. "We're just trying to take care of the adult individuals who do choose to smoke or use other tobacco products."

    By John Lofstock
    • About John Lofstock

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