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JERSEY CITY, N.J. -- There is a shift occurring in the tobacco segment, and it is not going unnoticed by the retail community. Whether due to taxes, prices or smoking bans, the OTP category is growing as smokers look for alternatives to cigarettes. The category's footprint in retail stores is following suit, but that is not to say cigarettes are going away any time soon. In fact, savvy retailers are using best practices in the category to stand out as a destination for tobacco to the consumer community.
In the CSNews Online Webinar, "Tobacco Retailing: Are You Positioned to Win?," sponsored by Swedish Match, industry insiders from the tobacco and convenience market addressed the changes in the tobacco category, bringing into focus the move from cigarettes to other tobacco products.
In a survey conducted earlier this year by Convenience Store News and Balvor LLC, the top quartile of retailers reported they sold an average of 414 cartons of cigarettes per store in 2010. This number is compared to roughly 100 by all other retailers. According to David Bishop, managing partner with Balvor, this statistic shows a very few select retailers in the market are becoming the retailer of choice for tobacco products above all others.
"The market is beginning to concentrate ever more so among certain chains and outlets," he said. "The big get bigger and the small get smaller."
But despite the number of cigarettes being sold every week, they are fighting for space with OTP, which is increasingly gaining the consumer's attention, and therefore, the retailer's attention. Bishop pointed out that top quartile retailers decreased cigarette space by 21 percent, as opposed to 9 percent who increased it. This is in contrast to OTP, which saw its retail space increase 47 percent. However, he explained the survey found less than half of retailers who decreased cigarette space increased OTP space, so cigarettes are not losing space to OTP.
Furthermore, Bishop explained OTP was not necessarily gaining new space, but finding different space because of display regulations that went into effect last year.
Cumberland Farms, a 600-store chain in the Northeast and Florida, strives to be the first-choice destination for consumers, according to Anne Flint, senior category manager of tobacco at Cumberland Farms, who presented during the Webcast. To fulfill that mission the chain implemented its AIM Concept -- Accelerated Inside Margin. The concept represents a new business model based on expanding foodservice and fountain beverages revenue to make up for the eroding tobacco revenue Cumberland Farms has been seeing, Flint explained.
The cigarette category dipped because of several factors: high unemployment; high excise tax in 11 states the chain operates in; and low household income among its customers, according to Flint, who specifically noted 48 percent of Cumberland Farms' customers earned less than $50,000 year.
"Given how low the income is of our typical smoker, low cigarette prices have now taken over where smokers buy their cigarettes," she said. "Price has become a major factor."
Flint also noted that to have a successful cigarette business, retailers need to heed several key factors: keep an eye on in-store stock conditions; do a vigilant analysis of the category on a store-by-store basis on a weekly and monthly time schedule; and stay on top of regulatory and legislative issues at the federal, state and local levels.
Competitive pricing is also a key to OTP success, as is having the right size space allocation in stores, she said. Cumberland Farms increased its OTP footprint by 50 percent, primarily by taking space away from cigarettes. "We are not downsizing the tobacco section. We are just being prepared for the shift," she added.
And that shift is something the best retailers -- and the smartest -- stay on top of, according Joe Teller, director, category management for Swedish Match. "Retailers keep getting more and more aggressive with the OTP category," he explained, adding that retailers are always asking him how they can become the best of the best when it comes to OTP.
"The best of the best understand there is a lot of shifting around in tobacco as cigarettes declines and OTP increase," Teller explained. "They need to be aware of that."
The top sellers in the OTP segment realize that better marketing, bigger space allocations and more variety are important to doing the segment right. Localizing assortment and keeping that assortment in stock are also key players to success, Teller noted. "The best OTP operators have figured out how to be in stock more than they are out of stock," he said.
Currently, the whole tobacco category is pretty stable, according to Teller. However, OTP could see its numbers up 50 percent in the next 15 years. He explained the category used to appeal to chewers, dippers and cigar smokers, but now cigarette smokers are drawn to moist snuff products.
"The smartest retailers out there recognize the shift and are getting smarter about OTP," he said, adding retailers need to not only know how they are going to handle the shift but how their competitors are handling it as well.
If you missed the Webcast and would like to view it in our archive, vist www.csnews.com/webcasts.