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    Pack Half Full

    Despite the many roadblocks, retailers can be optimistic about the tobacco category.

    By Mehgan Belanger

    When turning to this column or other Convenience Store News features on tobacco throughout 2008, the mood could be depressing: discussions on category-killing legislation, dwindling profit margins, the threat of excise tax hikes, limiting contracts, tax evasion and the black market, trading down, the list goes on. Let's face it -- the tobacco section is one of the most integral, yet most difficult sections to profit from inside the c-store. But is there anything concerning the category worth smiling about?

    Indeed there is, but it requires looking beyond the headlines. For example, sales of the high margin other tobacco products (OTP) category grew 10.5 percent on a per store basis in 2007, according to CSNews' 2008 Industry Report. And in 2008, the category's unit volume was recently forecast to grow a respectable 8.2 percent, according to the 2008 CSNews' Midterm Forecast.

    An abundance of "new" in the category is helping push that growth, from new varieties of tobacco products, such as snus; new brands in the segment like Philip Morris USA's (PM USA) Marlboro moist smokeless tobacco; and the endless march of new flavors. In addition, the smokeless segment is drawing in new customers, including smokers looking for an alternative to cigarettes as smoking bans expand across the country.

    Cigars can also provide some happiness, as the segment will continue to shine in the OTP category. Like the smokeless segment, cigars will adopt the latest flavor profiles consumers are seeking. While it takes a nimble retailer to stay on top of the latest trends, there are always flavor mainstays -- grape, banana and peach, according to retailers across the nation -- that will keep customers interested in the segment.

    The OTP section is not the only area retailers can get excited about. While cigarettes can be taxing -- pardon the pun -- manufacturers are offering ways for retailers to succeed in the category. PM USA unveiled a loyalty program offering additional promotional opportunities as part of the highest tier in its Retail Leaders 2008 program.

    Meanwhile, R.J. Reynolds Tobacco Co. continues to focus on new products and innovation. So far this year, the company unveiled a new package and blend for its iconic Camel line, debuted the Camel Crush customizable menthol cigarette, and most recently, launched new two-way box packaging for its Winston and Doral brands.

    On the retailing side, c-stores should be encouraged by a trend in grocery and drug channels where an increasing number of operators are discontinuing the sale of tobacco. Published reports state grocers, including Wegmans Food Markets, DeCicco Markets, six New Jersey ShopRite stores and California-based Andronico's, all dropped tobacco products in 2008, while chain drug store CVS has contemplated halting the sale and Wal-Mart is being pressured by lawmakers to stop selling tobacco.

    Moreover, several states -- New York, Rhode Island, New Hampshire, Tennessee and Illinois, along with Boston and San Francisco -- have introduced or proposed bills to ban the sale of tobacco at retailers with a pharmacy. While no bills were passed to date, it is evidence of lawmakers' increasing concern that retailers who sell wellness products should not also sell tobacco.

    C-stores, with 88 percent market share in OTP and 66 percent in cigarettes, are positioned to benefit from these actions.

    Lastly, within the bill that would give the Food and Drug Administration the ability to regulate tobacco products, there lies a measure that could bring another tobacco segment to convenience stores -- tobacco cessation products. The amendment, advocated by NACS, would allow any retailer, including c-stores, to have the ability to sell these products, such as cessation gum, patches and more, provided identification is checked for age verification -- thus opening a new profit opportunity for convenience stores.

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