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    Excise Taxes Hurting Cigarettes Cheaper

    Tobacco store chain also blames the Internet and sales of counterfeit products at c-stores for weak growth.

    SAN ANTONIO -- When Cigarettes Cheaper blew into town in 1999, the California-based company talked about setting up two dozen locations in San Antonio and 500 stores nationwide. Four years later, the discount cigarette retailer has dwindled to five local stores, and its 480 U.S. locations have slipped to 328.

    Company President Ned Roscoe told the San Antonio Express-News he doesn't see the city's looming smoking ban as another kick to the business, but he does see it as an example of politicians going after an easy target: the smoker. "When you have a city council trying to pass a smoking ordinance, what it usually means is they have something else they don't want to pay attention to," Roscoe said.

    Roscoe said the number of San Antonio locations dropped sharply because the company goes into locations with short-term leases that it can easily ditch if things aren't working out. It didn't help that Roscoe's Silicon Valley-based bankers got considerably less enthusiastic about expansions in 2000. What has been worse for Roscoe's business is that cash-strapped state governments have increasingly turned to cigarette taxes to help deal with their deficits.

    New Jersey recently boosted its state tax to $2.05 per pack, while New Yorkers pay a $1.50 state tax and a $1.50 city tax. Texas recently considered, but did not pass, a $1 tax on top of the 41 cents a pack it already charges, and it's one of the cheaper states. Also, after a 1998 master settlement in which the big tobacco companies agreed to pay states almost $250 billion over 25 years, the companies passed those costs on to big-brand smokers. Texas came to its own settlement with the manufacturers.

    Combine those rising costs with opportunities on the Internet and black market, and you have smokers shopping somewhere besides smoke shops and convenience stores, the report said.

    "The Internet," said Jeff Lenard, spokesman for the National Association of Convenience Stores. "That's where I'm sure Cigarettes Cheaper found ... the competition that wouldn't go away."

    Online sales certainly have hurt convenience stores. In 2001, convenience stores sold $43.4 billion in cigarettes, and last year that figure dropped to $39.3 billion. Two years ago, 3 percent of cigarettes were bought online, Lenard said. By 2005 that figure will increase to 14 percent, he projected. But Cigarettes Cheaper is losing sales to some convenience stores, Roscoe said, because many stores are selling counterfeit smokes to preferred customers. Philip Morris Co. is suing hundreds of California retailers, accusing them of selling counterfeit Marlboros, probably made in overseas.

    Both convenience stores and smoke shops are finding that more people are rolling their own cigarettes to avoid state taxes. Cigarettes Cheaper promotes the small but growing category as "load-your-own," and selling small devices that stuff paper tubes with tobacco under its Geronimo, Noble and Revenge brands. "Or you can make your own special blends," the company suggests. It advertises a $10.49 can of Revenge tobacco as making the equivalent of a carton of cigarettes that can cost up to three times as much.

    Cigarettes Cheaper still is a little cheaper than average convenience store. According to the report, a carton of Marlboros at a chain store in San Antonio was selling for $24.99, some $2.50 to $5 less than at many area c-stores.

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