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By Mehgan Belanger
BOULDER, Colo. -- For several reasons relating to recent legislation, performance and increased cost of goods, Smoker Friendly International, operator of 100 tobacco outlets based here, will strengthen its retail operation by closing or relocating 15 of its stores by April 1, CSNews Online has learned.
"On the first of the year we always look during the budgeting process at underperformers." Mary Szarmach, vice president of trade marketing for Smoker Friendly, told CSNews Online. However, this year, the recently passed SCHIP legislation, which increases the federal excise tax (FET) on tobacco products as of April 1, was the catalyst for shuttering about 10 of the 15 stores slated to close or be relocated to better locations.
In addition to the higher FET, a floor stocks tax is also weighed April 1, which calls for all tobacco retailers, wholesalers and distributors to use their current inventory levels to calculate a payment to the federal government that will equal the difference between the old and new federal excise tax rate on all tobacco products, excluding large cigars and minus a $500 credit per company. The measure will cost Smoker Friendly more than $1 million, Szarmach estimated.
"With the cost of goods so high, we can't afford to have any underperforming stores out there," she said. "We've moved inventory around to higher volume stores, but it will be a big bill for us. We'll sell down inventory, but you don’t want to be out of stock, and you also don't want to pay the government too much as of April 1."
The time before April 1, will be a good selling period, as tobacco consumers stock up ahead of the tax hike, she said, explaining volume will drop following the increase, and the summer months may be tough for retailers despite a historical increase in consumption.
In addition, Szarmach anticipates an 8 to 10 percent decline in tobacco consumption thanks to the FET hike. Moreover, store traffic by tobacco customers, and potentially their ancillary sales, could drop when the new tax rates go into effect.
"[Tobacco customers] have always been good foot traffic generators, so are they going to stop less?" Szarmach asked. "If they don’t need to stop, what will that do? It could affect a lot of impulse purchases."
Couple the FET and the floor stocks payment with the crumbling economy, and the environment could spell disaster for some players in the tobacco industry. "Small independent retailers will have a tough time weathering the storm, along with small, independent wholesalers that rely on tobacco and small independent manufacturers," Szarmach said, adding she hopes the roll-your-own and make-your-own segments of the other tobacco products segment survive the current environment.
As for the tobacco category in stores, Szarmach sees both the possibility that third tier and private-label fourth tier products will become more palatable to tobacco customers, while premium brands will maintain their market share.
"[Customers will say,] 'I'll smoke less but it'll be what I want to smoke.' Our Marlboro business has been really good, and has continued to grow. Obviously, we're in wait-and-see mode."