Despite the seemingly endless series of challenges it faces, tobacco has always demonstrated remarkable resilience to remain a critical part of convenience store profitability. Faced with severe restrictions on display and marketing, plain packaging legislation and an ongoing series of sharp excise duty hikes, sales of the category through the channel remained remarkably strong.
However, careful and continued management will be necessary for them to remain so.
With the latest round of 12.5% ââannual increases in excise duty not due to end before September 1, 2020, how store operators manage their prices will be particularly critical. While better hours of operation, ease of parking, and accessible locations mean that price may not be as important to local customers as it is in other channels, there are limits.
Michelle Park, Director of Communications for Imperial Tobacco Australia (ITA), said: âThe proportion of convenience buyers who have compared prices with the last buying opportunity has been steadily increasing.
âOver the past 12 months, the proportion of people who compared prices has increased from 23.1% to 30.9,â she said.
However, despite its higher prices, it said the trade share of gasoline and convenience channels remained strong as retailers managed to maintain a consumer-focused range while rationalizing percentage margins.
Imperial Tobacco says the chain’s future success in tobacco sales will, in part, be driven by its desire to reduce its price differential with other discounters, and therefore attract and retain more buyers.
He said traders should make sure prices are consistent by avoiding frequent changes.
âSporadic discounts should be avoided in favor of a consistent and competitive price,â Ms. Park said.
“This approach will encourage repeat purchases from shoppers as they get used to the store’s offering and slowly integrate it into their routine.”
Philip Morris Australia said that while price is a factor to consider, it’s not the only one that convenience can benefit from.
National Group Director of Philip Morris – Impulse Daniel King said: “The opportunity for this chain remains its distinct point of difference, being a wide range of convenience outlets and the ability to be open for hours longer. long compared to other chains. “
âConvenience continues to perform admirably given the rising price trends. “
While it is true that tobacco grew 4.5% in dollar terms thanks to convenience in 2016, a closer look at data in the latest Australasian Association of Convenience Stores (AACS) confirms that it does not there’s no reason to let go. In 2015, the dollar’s growth was 5.2%, and in 2014 it was even stronger at 8.9%. And, in terms of volume rather than value, tobacco is on the decline in all channels.
Nonetheless, British American Tobacco Australia (BATA) said there was no evidence that increases in excise duties and plain packaging legislation led to a decrease in smoking rates beyond the long-term trend.
Josh Fett, Senior Director of Corporate and Government Affairs at BATA, said: âThe big change in the market in recent years has been that price-sensitive smokers are looking for cheaper alternatives. “
“The nature of convenience shoppers has somewhat isolated the channel and it has a better sales mix, but the low price segment is growing rapidly.”
For all retailers looking to get the most out of the tobacco category, it is therefore important to focus on range and price consistency. Stores need to implement a core product line that balances value-driven brands for price-conscious consumers with premium brands for discerning smokers.
The tobacco industry as a whole also remains deeply concerned that sharp increases in excise taxes and plain packaging legislation have fueled the black market by making it even more lucrative for organized criminals to smuggle illegal tobacco. in Australia. A pack of 20 cigarettes is up to eight times more expensive in Australia than in South Korea, for example, and these high profit margins can be an attractive and valuable source of income for organized crime.
KPMG’s latest report on illicit tobacco in Australia was released in May 2017 and showed that illicit tobacco now accounts for a 13.9% share of total consumption. This means that about one in seven cigarettes is now illegal. Major players in the tobacco industry say convenience stores should always make sure they buy their products directly from the tobacco industry or reputable wholesalers.
With price-conscious consumers continuing to drop sales, sales of undervalued cigarettes have been strong across all channels, but they have been particularly relevant in convenience stores where prices are typically higher than those in supermarkets or tobacconists. .
Imperial Tobaccos said this trend has led to incredible growth for the JPS family of brands over the past three years, and Peter Stuyvesant also said the 20 and 25 year olds were also in the convenience business.
For its part, BATA said its portfolio is well aligned on convenience with brands such as Dunhill, Benson & Hedges and Winfield selling well through the channel, with cheaper brands such as Rothmans growing rapidly as well.
Philip Morris said the Marlboro, Peter Jackson and Bond Street brands performed strongly in the channel and that he has also seen a move towards smaller pack numbers, as well as a trend towards cheaper brands. He says that means convenience can still deliver results through brands like Bond Street which is well established at this end of the market.
The increase in demand for low-cost cigarettes has also prompted other companies such as tobacco wholesaler Richland Express and the Tobacco Imports Company (TIC) – which is part of the Kollaras Group – to seek greater market share. .
TIC says it aims to provide customers with competitive products that offer margins above industry standards and a significant point of difference.
Georgia Kollaras, ICT Marketing Manager, said: âWe have remained consistent with our pricing strategy – ‘delivering value every day’ – and our King Street / Brooklyn and Cleveland brands have continued to grow and perform very well in the world. the proximity channel. “
âConvenience store operators have historically been frustrated with their inability to compete and maintain their margins and we as a ‘low cost operator’ saw an opportunity to step in and help ensure that everything the world remains on an equal footing. “
Despite breakthroughs made by some less established companies, the AACS State of the Industry report finds that most tobacco consumers are still very brand loyal, with research showing that 85% of all tobacco smokers buy their usual brand. when they visit a gasoline and convenience store. According to Imperial Tobacco, the top five brands of custom cigarettes – JPS, Winfield, Rothmans, Bond Street and Peter Jackson – still account for 80% of commodity sales volume.
Data from the ITA Profiler Tracker (July to September 2017) found that 31% of convenience shoppers said they would leave the store if their products were not available. Tobacco that is out of stock can then be extremely expensive, as customers who cannot find their favorite product may never come back to that store again.
To avoid this, it is essential that stores regularly review their turnover rates and on-hand inventory to ensure an adequate inventory weight. The tobacco unit should be restocked during quieter times of the day to ensure the stock is on the shelf during peak times. Keeping extra inventory during peak times such as weekends and local events can also help avoid stockouts.
Understanding the customer in a rapidly changing tobacco environment is absolutely vital for stores seeking to maximize the continued potential of the category. According to the ITA Consumer Profiler database (October 16 – September 17), 60% of tobacco shoppers in convenience stores are men with an average age of 32. They are more likely to be employed full time and to smoke at least several days a week. On average, they will make more than 100 convenience store tobacco purchases per year. Some 49% of those smokers who visit convenience stores do so primarily to purchase tobacco. However, only 79% of their average spend of $ 42 per visit is on tobacco, they spend an average of $ 9 per visit spent on other items.
While custom cigarettes still account for 90.3% of dollar sales in the tobacco category, customers’ continued quest for greater value has also seen the demand for roll-your-own tobacco (RYO) increase sharply. Champion continues to be the leader of RYO attracting nearly 30% of consumers. Winfield and JPS RYO also continue to perform well, with other niche brands such as White Ox and Port Royal collectively capturing 11%. As RYO grows, complementary products such as papers and accessories such as filters and machines also develop.
While it is important for retailers to operate within tobacco display legislation, it is also important that they maximize any opportunity to communicate their offer to consumers. They should make sure to set up and maintain a price table or price tickets (when allowed) to communicate their offer and inform consumers who were previously unaware they were selling tobacco products.
Many buyers use the price chart, but others prefer to ask the retailer for a price comparison. It is therefore essential that all staff are trained in the category to ensure that these steps translate into transactions. Customers who may be frustrated with wait times, lack of category knowledge and general grocery service may prefer the convenience option.
While no one is arguing that the next three years of tobacco tax hikes won’t continue to pressure the category out of convenience, it is certainly not all pessimistic. Convenience stores have been successful in adapting to changing consumer needs by embracing the right range and competitive offering, and more is likely to be needed as the decline in sales is set to continue. There is every reason to believe, however, that with continued good management, the category will continue to be resilient and profitable.
* Convenience and Impulse Retailing would like to thank Imperial Tobacco Australia, British American Tobacco Australia, Philip Morris Australia and the Kollaras Group for providing information for this article.
IN THE BLINK OF AN EYE
- The proportion of local buyers who have compared prices with their last purchase is constantly increasing.
- Operators should avoid sporadic discounts on tobacco in favor of a consistent and competitive price that will encourage repeat purchases by buyers as they become accustomed to the store’s offer.
- Convenience store staff must exceed buyers’ expectations through category knowledge and customer service.