Rising Above Average

Learn what top-quartile tobacco retailers are doing

You've likely heard the saying, “what gets measured, gets managed.”

This is a fairly accurate statement, but it doesn't guarantee that you're managing things effectively. That's because defining the “what gets measured” largely determines how you'll view opportunity gaps. So, when benchmarking your performance versus others, do you want to be an average retailer or one of the top 25 percent?

This article shares the average results from the Balvor/CSN 2011 Tobacco Retailing Survey and compares them to how the top-quartile retailers — defined based on weekly carton sales per store — are performing in key areas.

The insights are based on responses from a total of 162 retailers that collectively represent over 17,000 stores in the U.S. (Chart 4). While the survey also examined the OTP category, this article focuses only on cigarettes.

CHECKING THE SCORECARD

According to this year's survey, the median number of cigarettes sold per store averages 120 cartons per week and category dollar sales grew 2.2 percent in 2010. And given that the Consumer Price Index for cigarettes was up 5.7 percent in December 2010 versus the previous year, real dollar growth decreased by approximately 3.5 percent last year.

As a result, being an average retailer in 2010 meant your base business was declining and top-line dollar sales growth was highly dependent on manufacturer price increases. However, there are still opportunities to build the business even during today's challenging environment.

Top-quartile retailers are demonstrating that growth is possible as their sales are up more than 2 percentage points above all other retailers (Chart 1). This performance is even more impressive when recognizing that top-quartile retailers sell nearly 3.5 times the cigarette volume per store compared to the rest.

These metrics also suggest that top-quartile retailers are increasingly becoming the destination of choice for more smokers. The benefit of this accomplishment isn't lost on retailers, as most covet the value these consumers create in terms of visit frequency and amount spent at the stores.

MERCHANDISING SPACE

In 2011, the sales space for cigarettes contracted slightly as 18 percent of the retailers decreased the amount of shelf space the category occupied as compared to only 7 percent that increased it versus last year (Chart 3). Top-quartile retailers were slightly more likely than the average to adjust the category space downward.

It's worth noting this decline is not simply due to retailers expanding the space for the OTP category, as in fact less than half of the retailers who did decrease cigarette's space also increased OTP's space.

What happened to the space if it didn't go to OTP? The space essentially disappeared — or at least from a merchandising standpoint — as retailers no longer used all the same space in the store as compared to a year ago.

This change related to the self-service display restrictions that went into effect in June 2010 that limited how retailers could use areas that were directly accessible by consumers for tobacco retailing. And even though some retailers did utilize locked display cabinets for some segments, most still had to find new locations for cigars and smokeless products behind the checkout counter.

In the end, cigarettes lost space this year mainly as the result of retailers relocating displaced OTP products in order to comply with new regulations that went into effect within the last 12 months.

PRODUCT INVENTORY

Retailers reduced cigarette inventory levels year over year by 3.0 percent in 2010, according to results from last year's survey. Balvor estimates that 2011 retailer inventories are down another 1.5 percent versus 2010.

The lower rate of decline this year is likely associated with the fact that retailers haven't had to respond to a major, industry-wide price shock within the past 12 months — like the one experienced in April 2009 when the federal excise tax (FET) increased to $1 per pack.

As far as the inventory targets, retailers are now attempting to maintain just over 12 days of supply on-hand in the store as opposed to 17 to 20 days that was common practice just a few year ago.

Top-quartile retailers haven't dramatically adjusted their inventories downward like the rest. The straightforward reason is because they run leaner operations. Whether it's better inventory-ordering systems, more frequent wholesale deliveries, or simply higher sales volume, their inventory targets for cigarettes are 20 percent lower than all the other retailers (Chart 2).

OUTLOOK

Retailers anticipate that cigarette dollar sales will increase by nearly 4 percent on average in 2011, although there are many factors that can impact the remainder of the year.

According to some estimates, industry-wide cigarette volume is expected to decline in 2011 by approximately 4 percent. As a result, the average retailer will need retail prices to climb around 8 percent this year in order to hit the dollar sales target.

There are still plenty of threats and uncertainties facing the category given the current economic and political climate facing the country. This reality may partially explain why the outlook that top-quartile retailers have for the year interestingly isn't that different from all the rest.

What is clear from these insights is that you need to rise above average to truly grow the cigarette business today.

Editor's note: To hear more insights and perspectives based on the Balvor/CSN 2011 Tobacco Retailing Survey, attend the April 26 CSN tobacco Web cast.

David Bishop specializes in convenience retail and is the managing partner at Balvor LLC, a sales and marketing firm located in Barrington, Ill., and can be reached at [email protected].