If recent reports of increased shipments are an indication, 2016 may very well be a robust year for tobacco sales.
The Alcohol and Tobacco Tax and Trade Bureau has recently reported that cigarette shipments for the first half of 2015 had increased from the same period the previous year. This marks the first year-over-year increase in cigarette shipments since 2006. While retailers have been accustomed to 3-4% declines in volume, reports show that Reynolds American was up 40% and Altria reporting a 12% increase in 2015.
In November 2015, Wells Fargo LLC reported that the overall combustible tobacco environment continued to remain robust. According to some analysts, the spike in customers up-trading to more premium brands is primarily due to lower gas prices, which have left consumers with more money in their pockets. If retail gas prices remain low, most expect to see better-than-trend cigarette volumes continue into 2016.
Additionally, 2015 reports show an increase in overall convenience store sales of 6.4%. Chewing tobacco and snuff rose to more than $5.8 billion, up 7.59%, while spitless tobacco saw sales climb 17.22%, to nearly $238 million. Electronic smoking devices topped $712 million, rising by 6.2%.
Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities, predicted that tobacco consumers will continue to opt for premium brands, having a favorable impact on the category. â€śWe also expect strong manufacturer pricing in 2016 to continue, which should generate robust profit growth,â€ť Herzog said.
WHAT RETAILERS SAYING
A survey of retailers reveals a mixed bag of responses. Some saw declines, while many others report that sales are up over last year. Some report that e-cigarettes have remained strong, while others report a decline with customers moving away from electronics back to cigarettes.
Sean Higgins, director of marketing for Hutchinson Oil Co., based in Elk City, Okla., reported that electronic cigarette sales remaining strong in his stores. â€śI have noticed that e-cigarettes have been a trend lately,â€ť Higgins said. â€śPeople are seeing that as an alternative to regular smoking.â€ť Higgins sees one of the keys to growth in cigarettes, during the year ahead, will involve offering consumers something new and different. â€śWeâ€™ll be seeing if there are some new flavors or even some new brands that we would want to expand on that might grab some more attention, something like that,â€ť he said.
Moti Balyan, chief operating officer of Macland Investmentsâ€™ Mac Chevron in Woodland Hills, Calif., which operates 40 convenience stores, said cigarette sales at his stores are doing very well. â€śSales are up over last year.â€ť He credits the strong performance to one factor. â€śItâ€™s because we have the lowest everyday price. Price is still the key.â€ť The average carton price at his locations is about $56, he said. â€śBut there arenâ€™t that many people who are buying cartons. They are far more likely to buy by the single pack. The average pack price is between $5 and $5.50, which he said is about $1 per pack less expensive than nearby 7-Eleven stores. â€śMy cigarette margin is very low, around 14% or 15%…we keep the lower price throughout the year.â€ť
FOUR KEYS TO BOOSTING SALES IN 2016
A survey of retailers, that reported steady sales or growth, revealed four keys to help fuel cigarette sales in 2016.
- More customer service:Â The consumer is the most important person in the convenience store.Â If a convenience store associate gives consumers extraordinary and friendly service, the consumer will most likely return to the store.
- Lower product price: Retailers that saw cigarette sales remain steady or grow, in 2015, maintained lower profit margins and competitive pricing on tobacco products.
- Maintain fresh product: Phillip Morris provides a Julian date code, revelaingÂ the “born on” date, on each of their products for freshness verification. Â Although theyÂ claim their products have a 52-week shelf life, a product over six months old will tend to have a harsher taste than a fresher product. This is especially true for chew-type tobacco products.
- Keep bathroomsÂ cleanÂ : It may sound silly and unrelated, but as one retailer stated, “Those who smoke are the highest spenders; they spend the most time and the most money in the store, and they like the clean bathrooms.”
2016 LEGISLATION CONCERNS
That cigarettes continue to fare as well as they have is noteworthy due to, for one thing, the ongoing legislative assault. More than three years after California voters nixed a dollar-per-pack increase in the stateâ€™s cigarette tax, it appeared that voters would have another chance to decide the issue.
According to the San Jose Mercury News, the stateâ€™s 2016 ballot will likely include a proposed $2-per-pack tax increase, which for the first time would include electronic cigarettes.
Much of the emphasis is on the age at which Americans can purchase tobacco products.
According to the National Association of Tobacco Outlets, the following age legislation may impact tobacco sales in 2016:
- Senate Bill 602, which increases the legal purchase age to 21 for tobacco and electronic smoking devices, passed the Assembly Health & Senior Services Committee Dec. 10, 2015.
- Last December, the Boston Public Health Commission held a public hearing on a proposed ordinance that would, among other things, increase the age to purchase tobacco products to age 21 from 18.
- Cleveland City Council voted to adopt an ordinance raising the legal age to purchase tobacco products and electronic cigarette/vapor products to 21 from 18.
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