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|Photo by Bob Gatty|
CHICAGO -- With an 18-percent contribution to margin for distributors, cigarettes remain a vital product category even though margins have dropped by some 5 percent since 2011, according to David Bishop, managing partner, Balvor LLC.
"Cigarettes are still a large contributor from an economic standpoint, and it is important to understand their strategic value if you want to protect and grow your business," he said during the AWMA C-Metrics Convenience Industry Outlook Forum, noting that tobacco sales help drive traffic and build the overall ring with the growth of ancillary products, such as coffee and snacks.
Bishop pointed out that today's economic climate, with continuing high unemployment, has hurt cigarette sales and shifted smokers to other, less costly forms of tobacco use. More than 46 percent of adult smokers earn less than $35,000 per year, and they comprise 36 percent of the U.S. population. Of course, smoking restrictions and increasing taxes have also had a significant influence, Bishop added.
According to C-Metrics numbers released at the Outlook Forum, for the first six months of 2012, cigarette volume declined by 1.8 percent, although dollar sales increased 1.7 percent due to higher prices of 3.5 percent. The outlook for 2012 calls for a 0.7-percent increase in dollar sales over 2011.
Premium is growing in part due to new manufacturer programs, pricing activity and menthol-related products, with a projected increase of 1.6 percent for the year. Branded discount smokes are projected to increase 4.2 percent, largely due to growth in the two top brands, Pall Mall and L&M.
Sub-generic/private label brands are projected to surge 8.6 percent as retailers and consumers search for greater value and lower price points, while fourth tier products and imports are expected to decline by 5.7 percent each.
Bishop urged distributors to be cognizant of the increased entry of dollar stores into tobacco retailing and said this could have a significant impact on market share among retailers in close proximity. Category-level margins are likely to contract further due to category dynamics, manufacturer programs and increasing pricing pressures, he noted.