Higher selling prices helped boost cigarette maker Philip Morris International Inc.'s first-quarter profit 15 percent, but results missed expectations due to pressure from steep excise taxes in some countries, and the weak economy.
The seller of Marlboro and other brands overseas says profit rose to $1.7 billion, or 90 cents per share, up from $1.48 billion, or 74 cents, a year earlier.
Revenue rose 17 percent to $15.59 billion from $13.29 billion. Excluding the benefit of the weaker dollar, revenue rose 8 percent, mainly due to higher cigarette prices across all business segments.
The world's second-biggest cigarette maker also reaffirmed full-year guidance of $3.75 to $3.85 per share. Analysts expect a profit of $3.84 per share
Cigarette shipment volume edged up less than 1 percent. Volume fell in the Baltics, Romania, Turkey and the Ukraine because of a steep excise tax. Volume was stronger in Asia, particularly in Indonesia, Korea and volume from a new business combination in the Philippines.
While tax hikes, smoking bans, health concerns and social stigma have cut cigarette demand worldwide, the decline is less stark in markets outside of the United States.
The company, which has offices in Lausanne, Switzerland, and New York, has compensated for consumers buying cheaper cigarettes worldwide _ and for the weak economy _ by raising its prices, increasing its market share and cutting costs.
Growing demand in Africa, Asia and the Middle East also has helped to offset declines in the European Union, Latin America and Canada.
In recent quarters, Philip Morris International's earnings have been hindered as the stronger dollar shrank the profit it earned in other currencies. But the weaker dollar helped results in the current quarter.
When the dollar is strong, companies that sell goods internationally and must convert revenue from foreign currencies usually take a hit unless they raise prices abroad. Conversely the weaker dollar is a benefit.
That effect is particularly strong for Philip Morris International, because all its business is overseas.
Altria Group Inc. in Richmond, Va., owner of Philip Morris USA, spun off Philip Morris International in 2008.
понедельник, 26 апреля 2010 г.
понедельник, 19 апреля 2010 г.
Smokeless tobacco products target teens
They bear the names "Wild Honey" blunt wraps and "Peppermint" snus, but they are not the latest confections from Willy Wonka.
They are part of an effort by tobacco companies to market products to adolescents and teenagers, said Judith Coykendall at Partners for Clean Air, a Seven Hills Behavioral Health program in New Bedford.
"They smell delicious," she said, reaching into her American Cancer Society tote bag, which she calls her "bag of poisons," to pull out the cheerfully colored packets of "blunt wraps," which look to the undiscerning eye like fruit rollups and come in enticing flavors — watermelon, strawberry, blueberry and "sexual chocolate," the wrapper of which features a pair of bare female legs dripping with what appears to be melted chocolate.
Snus are marketed on the Camels website as a "smoke-free, spit-free" product and come in intriguing flavors, such as "frost" and "mellow." According to the American Cancer Society website, snus are commonly used in Scandinavia as quitting aids. The clinical-sounding "Nicogel," which looks exactly like a portable hand wipe and absorbs through the skin, is also marketed as a quitting aid.
However, Coykendall said she is concerned that what might help alleviate a seasoned smoker's cravings might also get a young person hooked for the first time. After all, she said, although most teenagers have heard that smoking is bad for their health, nicotine and tobacco are harmful whether smoked or not.
"Their natural assumption is that, if it doesn't have smoke, it doesn't have the dangers," Coykendall said. According to the U.S. National Library of Medicine, smokeless tobacco can still increase risk of mouth or nasal cancer and cause high blood pressure. Then there is the risk of becoming addicted to nicotine, Coykendall said, which leads to smoking.
According to the National Institute for Drug Abuse, "The amount of nicotine in smokeless tobacco is three to four times greater than that delivered by a cigarette." The nicotine also stays in the bloodstream longer.
In 2009, largely because of smoking bans and anti-smoking campaigns, cigarette use among high school students in Massachusetts fell to 16 percent, an almost 20 percent reduction since 1995. However, according to the same study, released by the Department of Public Health and the Department of Elementary and Secondary Education, sales of cigars and smokeless tobacco products in Massachusetts, like the Snus, have surpassed sales of regular cigarettes among minors in the last year, at 17.6 percent, a steady increase since 2003.
Over the past year, Nic Charest, director of the Greater New Bedford Tobacco Control Program, said he has seen these alternative tobacco products gain in popularity throughout New Bedford, Fairhaven and Dartmouth.
Charest works with a dozen high school students in Greater New Bedford, ages 15 to 17, to do compliance checks on the sale of cigarettes, part of a state initiative to make sure that stores are not selling tobacco-related products to minors — those under 18. In a carefully planned sting, the students try to buy cigarettes without producing identification.
State law requires retailers to ask for an ID if a customer appears to be under 27. "If they're successful" buying cigarettes, Charest said of his undercover crew, "we have enforcement that we'll follow up on."
Over the past few years, Charest said, tobacco sales to minors took place at 13 percent of the stores in Greater New Bedford, although that number dipped to 5 percent last year.
There might be a bright side for concerned anti-smoking advocates: A lot of teenagers around here haven't yet heard of products such as snus or Nicogel. In a room filled with teens at the Boys & Girls Club of New Bedford, no one nods when asked whether they have friends who use snus.
Cameron Lewis, an eighth-grader at Keith Middle School, and Katherine Sullivan, a 10th-grader at New Bedford High School, have parents who smoke, but neither uses tobacco.
Coykendall, however, said it might only be a matter of time for the trend to catch on.
"The tobacco industry had to come up with a product that could get their sales up tremendously," she said.
Alesha Gilbert and Markus Watson, both juniors from BMC Durfee High School in Fall River, have participated in Teaching Against Drug Abuse, an extracurricular program in Fall River that surveyed 49 stores that sell tobacco, looking at marketing rather than compliance.
Watson said he discovered that in most of the stores, the ads were placed at a 3-foot eye level.
"So it's not really targeting adults," he said. "Because most adults are not 3 feet tall."
Asked what makes her friends buy cigarettes, Gilbert said, "I think it's whatever is cheap. Whatever you can get your hands on."
According to information from the Massachusetts Department of Public Health, the price difference between cigarettes and snus is significant. Camel's frost-flavored snus, for instance, which come in a pack of 12, cost less than $4. Cigarettes cost at least $9 a pack.
Coykendall said these products fall into a legal "loophole" in which they are not subject to the state's cigarette tax. Nor do they fall under the state's ban on flavored cigarettes.
She also said the packaging for these products is attractive and enticing. Plus, snus dissolve in the mouth, making it hard to detect in school.
"If I used tobacco, I can imagine I would probably turn to another tobacco product that's more concealable so that I can get my nicotine for the day," Watson said. "Like kids who have to go through that eight-hour day and are not allowed to smoke."
Is nicotine consumption in class that easy?
"Like texting isn't allowed, but somebody manages to do it anyway," Gilbert said.
They are part of an effort by tobacco companies to market products to adolescents and teenagers, said Judith Coykendall at Partners for Clean Air, a Seven Hills Behavioral Health program in New Bedford.
"They smell delicious," she said, reaching into her American Cancer Society tote bag, which she calls her "bag of poisons," to pull out the cheerfully colored packets of "blunt wraps," which look to the undiscerning eye like fruit rollups and come in enticing flavors — watermelon, strawberry, blueberry and "sexual chocolate," the wrapper of which features a pair of bare female legs dripping with what appears to be melted chocolate.
Snus are marketed on the Camels website as a "smoke-free, spit-free" product and come in intriguing flavors, such as "frost" and "mellow." According to the American Cancer Society website, snus are commonly used in Scandinavia as quitting aids. The clinical-sounding "Nicogel," which looks exactly like a portable hand wipe and absorbs through the skin, is also marketed as a quitting aid.
However, Coykendall said she is concerned that what might help alleviate a seasoned smoker's cravings might also get a young person hooked for the first time. After all, she said, although most teenagers have heard that smoking is bad for their health, nicotine and tobacco are harmful whether smoked or not.
"Their natural assumption is that, if it doesn't have smoke, it doesn't have the dangers," Coykendall said. According to the U.S. National Library of Medicine, smokeless tobacco can still increase risk of mouth or nasal cancer and cause high blood pressure. Then there is the risk of becoming addicted to nicotine, Coykendall said, which leads to smoking.
According to the National Institute for Drug Abuse, "The amount of nicotine in smokeless tobacco is three to four times greater than that delivered by a cigarette." The nicotine also stays in the bloodstream longer.
In 2009, largely because of smoking bans and anti-smoking campaigns, cigarette use among high school students in Massachusetts fell to 16 percent, an almost 20 percent reduction since 1995. However, according to the same study, released by the Department of Public Health and the Department of Elementary and Secondary Education, sales of cigars and smokeless tobacco products in Massachusetts, like the Snus, have surpassed sales of regular cigarettes among minors in the last year, at 17.6 percent, a steady increase since 2003.
Over the past year, Nic Charest, director of the Greater New Bedford Tobacco Control Program, said he has seen these alternative tobacco products gain in popularity throughout New Bedford, Fairhaven and Dartmouth.
Charest works with a dozen high school students in Greater New Bedford, ages 15 to 17, to do compliance checks on the sale of cigarettes, part of a state initiative to make sure that stores are not selling tobacco-related products to minors — those under 18. In a carefully planned sting, the students try to buy cigarettes without producing identification.
State law requires retailers to ask for an ID if a customer appears to be under 27. "If they're successful" buying cigarettes, Charest said of his undercover crew, "we have enforcement that we'll follow up on."
Over the past few years, Charest said, tobacco sales to minors took place at 13 percent of the stores in Greater New Bedford, although that number dipped to 5 percent last year.
There might be a bright side for concerned anti-smoking advocates: A lot of teenagers around here haven't yet heard of products such as snus or Nicogel. In a room filled with teens at the Boys & Girls Club of New Bedford, no one nods when asked whether they have friends who use snus.
Cameron Lewis, an eighth-grader at Keith Middle School, and Katherine Sullivan, a 10th-grader at New Bedford High School, have parents who smoke, but neither uses tobacco.
Coykendall, however, said it might only be a matter of time for the trend to catch on.
"The tobacco industry had to come up with a product that could get their sales up tremendously," she said.
Alesha Gilbert and Markus Watson, both juniors from BMC Durfee High School in Fall River, have participated in Teaching Against Drug Abuse, an extracurricular program in Fall River that surveyed 49 stores that sell tobacco, looking at marketing rather than compliance.
Watson said he discovered that in most of the stores, the ads were placed at a 3-foot eye level.
"So it's not really targeting adults," he said. "Because most adults are not 3 feet tall."
Asked what makes her friends buy cigarettes, Gilbert said, "I think it's whatever is cheap. Whatever you can get your hands on."
According to information from the Massachusetts Department of Public Health, the price difference between cigarettes and snus is significant. Camel's frost-flavored snus, for instance, which come in a pack of 12, cost less than $4. Cigarettes cost at least $9 a pack.
Coykendall said these products fall into a legal "loophole" in which they are not subject to the state's cigarette tax. Nor do they fall under the state's ban on flavored cigarettes.
She also said the packaging for these products is attractive and enticing. Plus, snus dissolve in the mouth, making it hard to detect in school.
"If I used tobacco, I can imagine I would probably turn to another tobacco product that's more concealable so that I can get my nicotine for the day," Watson said. "Like kids who have to go through that eight-hour day and are not allowed to smoke."
Is nicotine consumption in class that easy?
"Like texting isn't allowed, but somebody manages to do it anyway," Gilbert said.
четверг, 15 апреля 2010 г.
Cigarette Makers' India Pipe Dreams
Some hopes may have gone up in smoke.
After much deliberation, India has banned further foreign direct investment in the cigarette business.
That seems to be a blow to the likes of Japan Tobacco and British American Tobacco, which were lobbying to expand their small presence in the growing and increasingly affluent market. But the protectionist move should hardly come as a surprise, especially given that ITC, which has nearly 80% of the cigarette market, is 34%-government owned through state-run insurance companies. And it should give companies time to think if they really are missing out.
Despite rapid growth in disposable income and massive migration of people from rural to urban areas, cigarettes are the choice of only a slim segment of Indian tobacco users. Many prefer chewing tobacco. Among those who smoke, hand-rolled leaf tobacco is favored; a mere 15% smoke cigarettes.And profit margins are tight, in part because of competition from contraband cigarettes smuggled across the borders and illegally made local smokes. Though there are no specific estimates of how many such smokes circulate in the market, ITC says they are its biggest challenge.
On top of that, New Delhi, particularly the Health Ministry, is increasingly vocal about curbing smoking. Even before the formal investment ban, the government had rejected proposals by foreign players to increase their presence in India. Existing rules use licenses to cap the number of cigarettes a company can produce in a year, and there are loud calls for higher tax rates to reduce tobacco use. The country's tobacco tax already represents 69% of the retail price of a cigarette -- among the highest percentages in the region, according to the Tobacco Institute of India, a trade group.
And cigarette makers bear a disproportionate share of the tobacco tax. Though cigarettes represent only about 40% of India's $12 billion tobacco market, they generated 80% of the revenue collected from the tobacco industry in 2007-08. The non-cigarette industry is fragmented, consisting of many small-scale players.
Certainly, global companies may have hoped a market like India -- where cigarette consumption is growing around 5% a year, according to Datamonitor -- could offer growth potential they lack at home. Japan Tobacco is hunting for new markets as its domestic market shrinks due to a declining population and fewer people lighting up.
But when the smoke clears, foreign firms may see India's protected market has its own shortcomings.
After much deliberation, India has banned further foreign direct investment in the cigarette business.
That seems to be a blow to the likes of Japan Tobacco and British American Tobacco, which were lobbying to expand their small presence in the growing and increasingly affluent market. But the protectionist move should hardly come as a surprise, especially given that ITC, which has nearly 80% of the cigarette market, is 34%-government owned through state-run insurance companies. And it should give companies time to think if they really are missing out.
Despite rapid growth in disposable income and massive migration of people from rural to urban areas, cigarettes are the choice of only a slim segment of Indian tobacco users. Many prefer chewing tobacco. Among those who smoke, hand-rolled leaf tobacco is favored; a mere 15% smoke cigarettes.And profit margins are tight, in part because of competition from contraband cigarettes smuggled across the borders and illegally made local smokes. Though there are no specific estimates of how many such smokes circulate in the market, ITC says they are its biggest challenge.
On top of that, New Delhi, particularly the Health Ministry, is increasingly vocal about curbing smoking. Even before the formal investment ban, the government had rejected proposals by foreign players to increase their presence in India. Existing rules use licenses to cap the number of cigarettes a company can produce in a year, and there are loud calls for higher tax rates to reduce tobacco use. The country's tobacco tax already represents 69% of the retail price of a cigarette -- among the highest percentages in the region, according to the Tobacco Institute of India, a trade group.
And cigarette makers bear a disproportionate share of the tobacco tax. Though cigarettes represent only about 40% of India's $12 billion tobacco market, they generated 80% of the revenue collected from the tobacco industry in 2007-08. The non-cigarette industry is fragmented, consisting of many small-scale players.
Certainly, global companies may have hoped a market like India -- where cigarette consumption is growing around 5% a year, according to Datamonitor -- could offer growth potential they lack at home. Japan Tobacco is hunting for new markets as its domestic market shrinks due to a declining population and fewer people lighting up.
But when the smoke clears, foreign firms may see India's protected market has its own shortcomings.
понедельник, 29 марта 2010 г.
N.Y. Top Court Weighs Tax Claim On Indian Cigarettes
New York state and county attorneys argued last week in New York’s top court that the government can lawfully tax Indian cigarette and prosecute sellers of untaxed smokes, The Associated Press reports.
The Cayuga Indian Nation, in response, argued that such actions encroach on tribal rights and that the Cayugas do not have to collect the tax for the state from non-Indian smokers. "The liability for the tax is on the consumer," an attorney for the Cayugas said.
More than one-third of the cigarettes sold in New York go without tax stamps to Native American merchants, state officials said. If all were stamped and taxed, New York would have collected $825 million in revenue in 2008.
Governor Paterson has proposed enforcement rules that would limit supplies of tax-free reservation cigarettes to those for use by tribal members only.
The court is expected to rule on the issue, which has been a long and contentious one, next month.
The Cayuga Indian Nation, in response, argued that such actions encroach on tribal rights and that the Cayugas do not have to collect the tax for the state from non-Indian smokers. "The liability for the tax is on the consumer," an attorney for the Cayugas said.
More than one-third of the cigarettes sold in New York go without tax stamps to Native American merchants, state officials said. If all were stamped and taxed, New York would have collected $825 million in revenue in 2008.
Governor Paterson has proposed enforcement rules that would limit supplies of tax-free reservation cigarettes to those for use by tribal members only.
The court is expected to rule on the issue, which has been a long and contentious one, next month.
понедельник, 15 марта 2010 г.
URA destroys over 1,300 cigarette cartons
THE Uganda Revenue Authority (URA) has destroyed cartons of contraband Supermatch cigarettes that were impounded while being smuggled into the country.
James Abodi, a URA official, said 1,340 cartons of the cigarettes were seized between April 2009 and last month from Dibia, Arua, Adura and Lira.
The cigarettes were destroyed at the Bank of Uganda incinerator in Jinja on Friday.
Abodi said the cigarettes were valued at sh600m and about sh840m in taxes.
He explained that the three vehicles involved in the smuggling were also seized.
“We have managed to contain the smuggling and it has decreased,” Abodi said, adding that most smugglers hide the cigarettes in clothes, sacks or wrap the packets around their bodies.
He said the smugglers use ungazatted routes, warning that the roads are now known to URA enforcement officials.
Abodi cautioned business people to desist from smuggling, saying they risk being arrested and charged.
James Abodi, a URA official, said 1,340 cartons of the cigarettes were seized between April 2009 and last month from Dibia, Arua, Adura and Lira.
The cigarettes were destroyed at the Bank of Uganda incinerator in Jinja on Friday.
Abodi said the cigarettes were valued at sh600m and about sh840m in taxes.
He explained that the three vehicles involved in the smuggling were also seized.
“We have managed to contain the smuggling and it has decreased,” Abodi said, adding that most smugglers hide the cigarettes in clothes, sacks or wrap the packets around their bodies.
He said the smugglers use ungazatted routes, warning that the roads are now known to URA enforcement officials.
Abodi cautioned business people to desist from smuggling, saying they risk being arrested and charged.
вторник, 9 марта 2010 г.
North Korea Re-exported Cigarettes to Generate Currency, FT Says
North Korea has been generating foreign exchange by re-exporting cigarettes manufactured by British American Tobacco Plc, the Financial Times reported, citing documents that it had seen.
BAT sold the cigarettes, made and packaged in Singapore for the North Korean market, to a Singaporean distributor for shipment to Nampo, a port near Pyongyang, the FT said. At least 15,000 cases, worth $6.3 million, were re-exported out of Nampo to ports in Vietnam and the Philippines to go to markets where they commanded a higher price, the FT said.
BAT said it halted exports to North Korea after discovering a diverted cargo in August, the FT reported.
BAT sold the cigarettes, made and packaged in Singapore for the North Korean market, to a Singaporean distributor for shipment to Nampo, a port near Pyongyang, the FT said. At least 15,000 cases, worth $6.3 million, were re-exported out of Nampo to ports in Vietnam and the Philippines to go to markets where they commanded a higher price, the FT said.
BAT said it halted exports to North Korea after discovering a diverted cargo in August, the FT reported.
понедельник, 1 марта 2010 г.
Tobacco Category in Flux
Since gaining a tremendous share of market from supermarkets and drug stores in the last decade, the c-store industry's share of the tobacco category, particularly cigarettes, has been stable. But last April's increase in federal excise taxes (FET), further restrictions on public smoking and changing consumer preferences are stirring the pot.
On the radar: Some headway by the drug channel in cigarette sales, and greater consumer interest in other tobacco products (OTP), which is lifting sales at tobacco outlet stores and infiltrating convenience store strategies.
According to industry market share figures provided by c-store wholesaler Eby-Brown Co., the c-store/gas segment holds a 67-percent share of the cigarette market, up from 55 percent in 1998. Tobacco outlets account for 10 percent of the market -- the same as a decade ago -- and supermarket and grocery combined account for 9 percent, down from 22 percent. The drug channel accounts for 5 percent, up 1 percentage point, while liquor stores and "all other" retail sites maintained market share at 3 percent and 6 percent, respectively.
Sales in the last 10 months, though, have been shaken by unexpected, fast-changing shifts in consumer demand following the FET increase.
At United Refining Co. of Pa., operator of more than 290 Kwik Fill/Red Apple Stores and 25 Smoker Outlets tobacco stores, cigarette volume fell quickly, as smokers cut back or went to other sources, such as the Internet or Native American stores, after the FET increase, according to Cliff Brazie, director of retail marketing at the company. However, thanks to rethinking the generic category, aggressive promotional activity and additional buydowns, the retailer recovered to within 3 percent of last year's cigarette volume.
Sales in Kwik Fill/Red Apple Stores were strong last January through March, fell drastically after federal and state tax increases, whimpered through the summer, then began moving again last September. "We moved as many promotions out of Philip Morris and R.J. Reynolds as we could," Brazie said. "The Indian reservations can't tap into these promotions, so offering $2 off a pack was significant for our customers."
Lorillard's buydown allowances also helped the chain, especially on the Newport brand. Particularly powerful was the introduction of Liggett's Pyramid, which Kwik Fill/Red Apple began promoting in June. The stores displayed 38- by 48-inch signs outside that read "You deserve a bailout too," offering Pyramid at a very competitive price.
"They were the least expensive cigarette I could offer our customers," Brazie said.
Despite such creative marketing by c-store operators, the industry continues to buzz about Walgreens' attempts to increase its cigarette sales and the drug channel's threat. Total tobacco and tobacco accessory unit sales in drug stores (with at least $1 million in sales) grew nearly 12 percent for the 52 weeks ending Nov. 28, 2009, according to Nielsen. Unit sales of cigarettes were up nearly 14 percent, while chewing tobacco unit sales rose 10 percent.
Indeed, drug store customers spend almost twice the amount on cigarettes as on cold/allergy remedies, according to The Nielsen Co. Tobacco also accounted for nearly $3 billion in sales as of August 2009, an increase of 18 percent from the year before.
But some industry players see little threat from drug stores. "It will be a battle between the c-store channel and the tobacco outlet channel to win over the consumer who has been abandoned by drug, grocery and mass merchant," said Frank Davoli, director of purchasing for South Bend, Ind.-based Richmond-Master Distributors Inc., a supplier that owns and operates 10 Bonkers c-stores and 37 Low Bob's Discount Tobacco stores, plus has another 85-plus Low Bob's Discount Tobacco licensee sites.
Shoring up the discount tobacco channel: growing demand for OTP products. OTP sales were up nearly 5 percent in c-stores for the 52 weeks ending Oct. 31, 2009, according to Nielsen. Behind this growth was a 5.7-percent increase in cigars, 7.7-percent gain in papers and 4.1-percent bump in smokeless tobacco.
The April FET increase has some consumers moving to smokeless, cigars and pipe tobacco, which roll-your-own smokers are using instead of higher-priced cigarette tobacco, Davoli noted. Also on Davoli's watch list: Camel Snus, which gained wider distribution last winter, and new dissolvable products by R.J. Reynolds Tobacco Co.
The tobacco store channel has shrunk in recent years, accounting for 12 percent of the tobacco market today, down from a high of 16 percent in 2001, after which manufacturers no longer offered the channel special allowances based on the size of their inventory. Even so, survivors are positioned to gain market share, as they offer more variety and adults shop freely in stores that require consumers to be of legal age to enter, Davoli noted.
To keep up with the quick-changing dynamics of the tobacco category, Richmond-Master Distributing changes tobacco planograms daily. "It sounds nuts, but we went through a three-to-four month period where even the manufacturers were caught short on OTP products," Davoli said. "We thought the excise tax increase would wipe the OTP category out, but we saw the opposite. We learned a big lesson: Consumer moves are not always predictable and we better move fast."
One prime example was huge increases in pipe tobacco sales. "We reset the roll-your-own and pipe tobacco section five times between April and January," Davoli said.
The emergence of large-filter cigars also happened quickly. "As little cigars increased at retail more than $1 a pack, many shoppers shifted to large-filter cigars," Davoli said. "That is a segment that popped up overnight. If you were an operator who was aware of that, you gained new customers. But reaction time had to be very quick."
At United Refining's convenience stores, Brazie has seen "a nice increase" in sales of cigars of all types and of Copenhagen Wintergreen, "which has soared. Our customers see cigars as a treat they deserve, unlike cigarettes. Now Swisher and other OTP makers are stepping up with promotions and new products, making the segment very competitive."
A change in the tobacco company's strategies has led Brazie to adapt new cigarette sets in the convenience stores and Smoker Outlet sites. "We had 8 feet of cigarette packs and 10 feet of cartons in our Smoker Outlet sites. We are adjusting our sets to provide more room for new opportunities in OTP.
"Manufacturers are emphasizing OTP now, wanting us to take out cigarette SKUs," he said. "They want us to scale back on cartons and scale up on OTP -- for good reason."
On the radar: Some headway by the drug channel in cigarette sales, and greater consumer interest in other tobacco products (OTP), which is lifting sales at tobacco outlet stores and infiltrating convenience store strategies.
According to industry market share figures provided by c-store wholesaler Eby-Brown Co., the c-store/gas segment holds a 67-percent share of the cigarette market, up from 55 percent in 1998. Tobacco outlets account for 10 percent of the market -- the same as a decade ago -- and supermarket and grocery combined account for 9 percent, down from 22 percent. The drug channel accounts for 5 percent, up 1 percentage point, while liquor stores and "all other" retail sites maintained market share at 3 percent and 6 percent, respectively.
Sales in the last 10 months, though, have been shaken by unexpected, fast-changing shifts in consumer demand following the FET increase.
At United Refining Co. of Pa., operator of more than 290 Kwik Fill/Red Apple Stores and 25 Smoker Outlets tobacco stores, cigarette volume fell quickly, as smokers cut back or went to other sources, such as the Internet or Native American stores, after the FET increase, according to Cliff Brazie, director of retail marketing at the company. However, thanks to rethinking the generic category, aggressive promotional activity and additional buydowns, the retailer recovered to within 3 percent of last year's cigarette volume.
Sales in Kwik Fill/Red Apple Stores were strong last January through March, fell drastically after federal and state tax increases, whimpered through the summer, then began moving again last September. "We moved as many promotions out of Philip Morris and R.J. Reynolds as we could," Brazie said. "The Indian reservations can't tap into these promotions, so offering $2 off a pack was significant for our customers."
Lorillard's buydown allowances also helped the chain, especially on the Newport brand. Particularly powerful was the introduction of Liggett's Pyramid, which Kwik Fill/Red Apple began promoting in June. The stores displayed 38- by 48-inch signs outside that read "You deserve a bailout too," offering Pyramid at a very competitive price.
"They were the least expensive cigarette I could offer our customers," Brazie said.
Despite such creative marketing by c-store operators, the industry continues to buzz about Walgreens' attempts to increase its cigarette sales and the drug channel's threat. Total tobacco and tobacco accessory unit sales in drug stores (with at least $1 million in sales) grew nearly 12 percent for the 52 weeks ending Nov. 28, 2009, according to Nielsen. Unit sales of cigarettes were up nearly 14 percent, while chewing tobacco unit sales rose 10 percent.
Indeed, drug store customers spend almost twice the amount on cigarettes as on cold/allergy remedies, according to The Nielsen Co. Tobacco also accounted for nearly $3 billion in sales as of August 2009, an increase of 18 percent from the year before.
But some industry players see little threat from drug stores. "It will be a battle between the c-store channel and the tobacco outlet channel to win over the consumer who has been abandoned by drug, grocery and mass merchant," said Frank Davoli, director of purchasing for South Bend, Ind.-based Richmond-Master Distributors Inc., a supplier that owns and operates 10 Bonkers c-stores and 37 Low Bob's Discount Tobacco stores, plus has another 85-plus Low Bob's Discount Tobacco licensee sites.
Shoring up the discount tobacco channel: growing demand for OTP products. OTP sales were up nearly 5 percent in c-stores for the 52 weeks ending Oct. 31, 2009, according to Nielsen. Behind this growth was a 5.7-percent increase in cigars, 7.7-percent gain in papers and 4.1-percent bump in smokeless tobacco.
The April FET increase has some consumers moving to smokeless, cigars and pipe tobacco, which roll-your-own smokers are using instead of higher-priced cigarette tobacco, Davoli noted. Also on Davoli's watch list: Camel Snus, which gained wider distribution last winter, and new dissolvable products by R.J. Reynolds Tobacco Co.
The tobacco store channel has shrunk in recent years, accounting for 12 percent of the tobacco market today, down from a high of 16 percent in 2001, after which manufacturers no longer offered the channel special allowances based on the size of their inventory. Even so, survivors are positioned to gain market share, as they offer more variety and adults shop freely in stores that require consumers to be of legal age to enter, Davoli noted.
To keep up with the quick-changing dynamics of the tobacco category, Richmond-Master Distributing changes tobacco planograms daily. "It sounds nuts, but we went through a three-to-four month period where even the manufacturers were caught short on OTP products," Davoli said. "We thought the excise tax increase would wipe the OTP category out, but we saw the opposite. We learned a big lesson: Consumer moves are not always predictable and we better move fast."
One prime example was huge increases in pipe tobacco sales. "We reset the roll-your-own and pipe tobacco section five times between April and January," Davoli said.
The emergence of large-filter cigars also happened quickly. "As little cigars increased at retail more than $1 a pack, many shoppers shifted to large-filter cigars," Davoli said. "That is a segment that popped up overnight. If you were an operator who was aware of that, you gained new customers. But reaction time had to be very quick."
At United Refining's convenience stores, Brazie has seen "a nice increase" in sales of cigars of all types and of Copenhagen Wintergreen, "which has soared. Our customers see cigars as a treat they deserve, unlike cigarettes. Now Swisher and other OTP makers are stepping up with promotions and new products, making the segment very competitive."
A change in the tobacco company's strategies has led Brazie to adapt new cigarette sets in the convenience stores and Smoker Outlet sites. "We had 8 feet of cigarette packs and 10 feet of cartons in our Smoker Outlet sites. We are adjusting our sets to provide more room for new opportunities in OTP.
"Manufacturers are emphasizing OTP now, wanting us to take out cigarette SKUs," he said. "They want us to scale back on cartons and scale up on OTP -- for good reason."
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