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By Mehgan Belanger
Many convenience store operators consider posting signs advertising bare-bottom prices, or in the case of fair trade states, where minimum retail price markups are required, signs alerting customers of cigarettes at state minimum prices.
However, this pricing and marketing strategy takes a carefully crafted plan to avoid being a "me-too," or worse, getting caught in a world of sacrificed margins not offset by increased unit volume.
"Advertising this retail positioning is effective in communicating to cigarette consumers that your location has the very best price available," said Ken Hagler, senior vice president of sales and marketing for GPM Investments, operator of Fas Mart and Shore Stop convenience stores. While GPM's chains do not use this strategy, Hagler experienced these tactics during his time with other retailers in the c-store industry.
The main objectives for minimum pricing are to grow incremental unit volume in cigarettes and cultivate ancillary sales on other products generated by increased customer traffic, Hagler explained, adding this approach is especially effective, and in some cases required, when setting cigarette carton prices. Carton-oriented customers are price sensitive, and not pricing these packages at or near the minimum prices "will usually take c-stores out of being in the carton business at any significant volume level," he said.
Retailers considering minimum pricing strategies on single and multi-packs, though, must weigh the risks and benefits, as the strategy is "significantly more risky," than pricing cartons at the minimums, according to Hagler.
One aspect for retailers to weigh is the projected increase in unit volume needed to be successful. If a retailer reduces cigarette pack prices to a minimum level, unit volume would have to double or triple to break even at current gross profit dollar levels, Hagler said.
Another factor to consider is the local competition. If the primary competition advertises minimum prices, convenience stores may want to consider taking this approach to retain cigarette customer traffic. However, if the competition is not pricing cigarettes in this manner, or if it is not bringing the fact to consumers' attention, retailers have an opportunity to lead the minimum price strategy in the market, and have a "greater opportunity to drive increased traffic and category volume," he said.
But retailers leading minimum price levels in their markets must keep a watchful eye on the competition. "If the competition responds, you may find yourself in the unfortunate situation of creating a market condition where your retail prices are at the minimum, along with the competition, and everyone is making significantly lower margins with little opportunity to significantly grow volume," Hagler said.
Dallas-based 7-Eleven operates in several states where retailers are required to adhere to minimum price laws, and it gives franchisees the choice of marketing cigarettes with the lowest price allowed by law. The company does this to maintain competitiveness and protect its key cigarette business, according to Terry Kailey, tobacco category manager for 7-Eleven.
In fair trade states, 7-Eleven recommends cigarette pricing to franchisees based on a formula that starts at the state minimum price and takes into account overall product mix and profitability. The largest factor in setting retail prices, though, is the immediate competition and what they charge for the same product, according to Kailey.
C-stores considering a minimum pricing strategy should measure its performance by the lift in unit volume and gross margin dollars generated, according to Hagler. "If you can break even in gross profit dollars, the increased consumer traffic will surely generate additional sales and gross profit on ancillary sales," he said.
The success of the minimum pricing strategy at 7-Eleven stores is measured in several ways, the first of which is whether it is economically viable. This measure is determined by weighing several factors, including whether the store hits the sales and profitability targets; if it satisfies customers by having the right brands at the right times; and measuring the impact the tactic has on other areas of the business. Several other factors also weigh in on the success of this program -- such as tax and manufacturer price increases, Kailey said. Overall, the strategy provides varied results for 7-Eleven.
"We know the importance of the tobacco shopper and how much more their average transaction size is within the store and within other categories," he said. "While [state minimum prices] may drive the customer count to the store, it lowers overall margins in some cases when it is not necessarily needed."