Catering To ‘First Class’ And ‘Luggage’

The cigarette business can be maximized by focusing on opposite ends of the smoker spectrum — premium and fourth tier

There is virtually no “middle class” in Convenient Food Mart's cigarette section, a strategy that is proving to be a best practice throughout the convenience channel.

“We've become more in tune with what our customers want, and in cigarettes, we basically have two kinds of customers — those who want their favorite premium brand no matter the cost, and those who want to smoke at the cheapest price — the off-off brands,” explained John Call, managing member of CF Capital Assets LLC in Cleveland, Ohio, which oversees the 210 Convenient Food Mart stores in Ohio, Nebraska and Illinois. “It's first class and luggage, no business class or economy.”

As a result, Convenient Food Mart stores hone in on the top 15 or 20 brands and forsake most others. “We are also limiting new product entries; retailers are looking much more partially at any cigarette innovation,” Call said. “Cigarette brands that come out with new flavors are not going to get the shelf play they used to.”

And as for new waterfall racks or other new displays, “we basically don't put those in now,” he added.

A 10-STICK PACK?

While Convenient Food Mart stores are shying away from most new cigarette SKUs, one innovation Call said he would pay attention to, because it could potentially offer a good boost to the category, is a reduced-stick package of core offerings.

“I have been begging for a 10-stick cigarette pack,” he said. “[Cigarette manufacturers] need to come up with a smaller pack size and the best way is to cut it in half or perhaps put out a five-stick pack.”

Not only would this type of reduced pack make it easier on customers' wallets, according to Call, it would be a winning move from a freshness standpoint, too. His thinking is that more customers would buy it, just like more are buying packs over cartons currently.

From the retailer's view, Call offered that “capital is everybody's worst enemy” and he said replacing some 20-pack cigarette SKUs with SKUs of 10 or fewer sticks per pack would greatly alleviate inventory cost pressure in the category.

Regardless of whether or not a smaller/more affordable pack is in the category's future, c-store retailers are finding ways of squeezing profit out now. Like Convenient Food Mart, Maverik Inc. saw merit in an off-price brand, or “control” brand, as Jeff Arnold, category manager, referred to it, alongside a premium program.

“We just kicked off our control brand program because it allows us to have higher profits,” he explained. Arnold told Convenience Store News that the control brand is “taking off and increasing sales and share every day. Prior to that, we were a premium cigarette retailer.”

PRICE FOR VOLUME

In addition to the best practice of a premium/control brand strategy, c-store retailers are winning in the cigarette category with what David Bishop, managing partner at Balvor LLC, referred to as a “price for volume” strategy.

In research that Bishop conducted in part for CSNews, he highlighted the practices of “top-quartile” or best-performing convenience retailers. In the case of cigarettes, “top-quartile retailers will sell about 40 percent more retailers sell about 40 percent more sales in the category as opposed to the average convenience retailer, and they'll do so with much lower gross margins,” he said. “It illustrates top retailers are aggressive in maintaining a lowest price position in premium brands — Marlboro, Camel, Newport. They're making less per pack, but they're selling more packs, so they're making more money.”

This, in turn, positively affects just that: turns. Retailers who sell more packs turn inventory over more often, so their return on inventory is higher with a greater utilization of space, and they maintain a fresher supply of product — all vital to category success.

Bishop added that this “price for volume” strategy does more than simply build the category, it also drives more traffic and gives retailers the ability to sell other products. “Candy, coffee or OTP (other tobacco products) have the strongest affinity with cigarette sales,” he noted.

Building loyalty, therefore, can be anchored in a cigarette low-price strategy. However, Bishop cautioned there are different triggers for different states and areas of the country.

Cenex Zip Trip, for example, has stores “in seven different states with the state cigarette taxes varying from 57 cents per pack to almost $3.03 per pack,” said Jon Fleck, merchandising manager.

“Some states have state-mandated minimums you can't sell below — Montana, for example, has a 9.1-percent margin minimum.”

In the past, Fleck said it was tough to “get down and dirty” with tobacco shops in the “low price game” because taking a margin cut on a category that generates almost 30 percent of its total inside sales required a volume sales increase that it didn't meet to make up for the profit loss. But taking its cue from the type of “price for volume” strategy Bishop outlined, Zip Trip tried again in its Montana stores this past year.

“Although our penny profit on cigarettes has gone down slightly because we went almost to the state minimum, our total penny profit increased overall,” Fleck reported. “Bottom line for us, low retails work in certain areas, but not in others.”