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They aren't called "premium" customers for nothing.
C-store customers buying premium moist smokeless brands are buying more smokeless tobacco during each trip into the store and spending more on other items with higher gross margins than customers of price/value or sub-price/value smokeless brands, according to a recent market basket analysis of more than 12,000 moist smokeless transactions by Willard Bishop Consulting of Barrington, Ill. (To see the entire white paper on the moist smokeless tobacco business, go to www.csnews.com.)
With retail prices of premium moist smokeless tobacco products, such as Copenhagen or Skoal, $2 to $3, even more in some markets higher than price/value or sub-price/value brands like Red Seal or Grizzly, a retailer might expect his premium customers would be spending a bit more each time they walk up to the cash register. But a closer look at exactly what they are buying reveals these customers are buying more smokeless tobacco than discount customers — and spending as much or more on non-smokeless items.
"There is a long-held belief, among suppliers and some retailers, that as consumers migrate to the lower tiers, they are economizing by buying the same quantity of the cheaper product," said David Bishop. "But this study shows they are actually buying less smokeless per transaction. Plus, transactions that include premium moist smokeless tobacco generate dollar sales 28 to 50 percent higher than transactions that include discounted brands."
The questions still unanswered are how often those premium customers are coming into the store and what their total value to the store is — questions the consulting group is tackling now. "This analysis starts to unravel the current logic," Bishop said. "Regardless of what is happening with the price of motor fuel right now, the premium customer is still buying more cans per transaction."
At an average weighted price of $3.52 (the everyday price was $4.39 per can), premium smokeless tobacco retailed for 71 cents more than a price/value category brand, which carried an average price tag of $2.81 per can, and $1.53 more than a sub-price/value brand, which retailed for $1.99 on average. But despite the price disparity, premium smokeless customers bought almost two units of premium smokeless, compared to an average of 1.27 price/value products per purchase by those customers and approximately one and a half SKUs bought by sub-price/value customers. (See Table 1.)
Premium brand customers also are spending as much outside the category as customers of the other two price segments — but those dollars are going to relatively higher-margin products. (See Tables 2 and 3.) Based on the sales mix of a typical basket, the non-smokeless tobacco items carry average margins more than 4 points higher than the other two pricing segments.
"While the premium customer is spending about the same amount on non-smokeless products as the sub-price/value customers, a higher percentage of those transactions included a foodservice item," Bishop noted. Nearly half of the premium brand customers purchased fresh foods, such as deli items, coffee or donuts, compared to 34 percent of the price/value and 35 percent of the sub-price/value customers.
Moist smokeless tobacco sales and gross profit dollars have grown double digits in the last two years at FasMart/Shore Stop stores, a chain of more than 158 company-operated units based in Mechanicsville, Va., where Grizzly was introduced in mid-2002. "But I'm not sure what role sub-price/value played in that," said Dave Arensdorf, category manager, who said the addition of the sub-price/value brands probably "took some gross profit dollars away, but the other tobacco products category has had so much growth overall we are seeing dramatic increases in sales and gross profit dollars despite the lower rings and penny profit of these subcategories."
FasMart and Shore Stop stores carry 23 to 30 SKUs of moist smokeless tobacco, depending on the set and volume. Of those, 71 percent are premium SKUs, 8 percent are price/value products and 11 percent are sub-price/value brands. The premium brands account for 80.1 percent of smokeless tobacco sales, with price/value making up 8.1 percent and sub-price/value another 11.8 percent.
While premium brand customers may be bringing in more gross profit dollars in non-category sales, Arensdorf said their buying behavior isn't likely to change the smokeless merchandise mix. "As long as there is a demand for price/value, we will continue to offer that product. If we didn't offer it, someone else would and we like to retain all of our customers, whenever possible!"
Daniel Moir, category manager, tobacco for Holiday Companies, operator of nearly 400 Holiday Stationstores, feels the same way. The chain, which self distributes, offers up to 50 SKUs of smokeless, with stores carrying 32. Approximately 65 to 70 percent are premium brands. The chain added Grizzly soon after it was introduced in late 2001.
"Like in cigarettes, you have to have a wide variety," Moir said, noting the gap between the retail price of premium brands and the lowest-priced discount brand is $3.20 in Minnesota, where smokeless is subject to a percentage tax, not a flat-rate tax. "Tobacco as a whole is no longer the high margin center it once was and you really need to incorporate the lower-tier into your product mix. But you want to get the volume and drive margins on the other products.
"The discounted brands now are a pretty big contributor to unit volume — accounting for about the same amount of sales as they are percentage of SKUs. But Grizzly Wintergreen is easily in our top 4 or 5 brands — it is moving up very, very quickly and taking up a bigger share of the category. But I really don't believe the premium customers are trading down much."
Manufacturers, in particular UST Inc., have supported premium brand sales through fully-funded multi-can promotions that give retailers the same higher margins, while offering customers a price break, Moir said. "Right now, in our Minnesota stores, we are offering 'buy two cans, save $3.' If you are buying one can for $5.99 and can get a second can for $2.99 more, you absolutely do it. Outside Minnesota, we send a number of pre-priced shippers to our stores every other week. With buydowns, our margin is the same as full-price. The customer is associating the savings with us and UST has essentially doubled their volume and preserved some of their market share for the premium brand."
Like Arensdorf and Moir, other retailers involved in Willard Bishop's study said the number one reason for adding sub-price/value products was maintaining a competitive assortment, Bishop said. "While this would appear to imply a turf-protecting strategy and would make sense, less than one in 10 retailers said they believe that offering the segment would attract more price-conscious consumers."
As with the cigarette category, Moir said, Holiday's value-for-money customer may be purchasing lower-margin items, such as lottery tickets, than the premium smokeless customer does.
"We don't want to take the premium business and erode it — it doesn't help us. But, in our markets, we know those Husky and Grizzly customers are out there. We need to bring them in. Even if that customer is not bringing in $1.48 additional profit, but will bring in $1.14 — hey, that's better than nothing."
Data collection from a loyalty program could help determine just how often premium customers are in the stores and what they are buying, compared to customers of the discounted brands, Moir said, noting it is difficult to track individual customers' visits.
"That would help identify customers and track habits. I just can't seem to get my customers to wear ID tags," he joked, "That would be ideal." Note: Part I of Willard Bishop Consulting's study of the moist smokeless tobacco category ran in the Oct. 24, 2005 issue of Convenience Store News.