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LOUSIVILLE, Ky. -- The increase of federal and state cigarette excise taxes will have a far-reaching, negative impact on the convenience store industry, according to Tony Miller, senior vice president of sales and marketing for Thorntons Inc., the 166-store convenience chain based here. In a letter to CSNews Online, Miller wrote: "With the exception of petroleum products, no other category is more vital to our success than tobacco products. Given cigarettes represent 30 to 45 percent of convenience store inside sales; the deterioration of this category will have devastating consequences."
According to Miller, the Federal Excise Tax (FET) hike will dramatically increase the cost of doing business. Inventory cost will increase by an average of $6,000 per store -- or about $1 million for a chain of Thorntons’ size -- resulting in higher interest expenses. In addition, credit card transaction fees will increase due to soaring cigarette retails and internal shrink dollars will escalate due to the higher cost per carton. Miller also points out external theft will rise due to the value of cigarettes and the amount of inventory dollars stores carry. In addition to the FET, Thorntons is wary of Kentucky legislators, who are proposing an incremental 30 to 45 cents per pack State Excise Tax (SET) increase that will compound these issues.
"The FET is a direct tax on the middle-class, as 80 percent of cigarette smokers are in lower-income brackets, and in Kentucky the average annual household income for cigarette smokers is less than $32,000. During these difficult economic times, it is impossible for the average cigarette smoker to assume a higher tax burden. As a result, increased cigarette taxes will significantly alter the purchase behaviors of our core consumers," Miller wrote.
The cigarette industry is declining at 3 to 4 percent annually. "Excise taxes at these levels are unprecedented," said Miller. While it is difficult to project the potential sales loss, many industry experts are predicting additional 6- to 10-percent declines on top of the current 3 to 4 percent trends. In addition to the reduction in cigarette sales and gross profit dollars, retailers will also lose the sales and gross profit dollars associated with other products purchased with cigarettes, according to Miller.
"If the convenience store industry experiences double-digit sales declines in its largest inside-sales category, it will have an epic impact on the way we do business -- an impact that influences our total retail strategy. With unit sales predicted to decline by more than 10 percent, retailers will need double-digit percentage increases in average retails to make up the loss in revenue dollars. While retail increases associated with the FET will make up the revenue short-fall, they will not make up the deficit in gross profit and net income dollars," Miller pointed out.
Faced with reduced gross profit dollars on their largest in-store category, reduced affinity sales, increased interest expense and increased cigarettes shrink dollars, retailers will be forced to make up the loss in net income, with consumers mostly likely absorbing additional increases above and beyond the excise taxes.
"This daunting economy has already made it difficult for most retailers to maintain shareholder-value, and the impending FET and SET [in Kentucky] will place an additional burden on the convenience store industry. This burden will challenge us to evaluate our cigarette categories and possibly re-engineer our overall strategies. In time, prudent retailers will overcome this adversity and will prevail with a much stronger business model."
Thorntons is listed as one of the largest privately held firms in America -- ranking No. 250 in the latest issue of Forbes magazine. With more than 1.9 billion dollars in annual revenue, Thorntons is recognized as one of the nation’s leading independent gasoline and convenience store retailers. The company operates convenience stores in six states: Kentucky, Illinois, Indiana, Ohio, Tennessee and Connecticut.
To read Miller’s full letter and express your opinion about the new FET on cigarettes, go to CSNews’ Spare Change blog by clicking here.