OAKBROOK TERRACE, Ill. —Typically, it’s not exactly welcome news when a retailer sees category sales go flat. But cigarettes are hardly a typical category. Cigarettes are a crucial driver of convenience-store traffic (NACS data suggests it commands 35.9% of all in-store sales), yet the category is widely expected to decline 3% to 4% with every passing year.
But in 2014, cigarette sales did not decline by 3% to 4%. In fact, same-store cigarette sales grew by 0.1% according to NACS State of the Industry (SOI) numbers, prompting Kevin Smartt, CEO of the Austin, Texas-based Kwik Chek Food Stores Inc., to proclaim at the April SOI Summit that “flat is the new up.”
As 2015 has progressed, an even more shocking trend has surfaced in the category: Up is the new up. Nielsen reported U.S. cigarette industry volumes grew by 0.5% in first-quarter 2015, while Management Science Associates (MSA) retail shipment data suggests premium cigarette volumes were up as much as 2% in June 2015.
At the store-level, many retailers report the Nielsen/SOI/MSA numbers are accurate.
“We finished 2014 flat, right along with NACS data,” said Andrea Myers, president of Kocolene Marketing LLC, Seymour, Ind. “In spring, when gas prices started to decline, sales really started picking up. People have more money to spend.”
For others, a 0.5% to 2% increase is on the conservative side. Speedee Mart operations manager Ray Johnson said the Las Vegas-based retailer has seen its year-over-year cigarette sales increase by 5% as of July.
Even retailers in notoriously anti-tobacco states are noticing this phenomenon. Despite operating in a state with the second highest excise taxes in the country, cigarette sales at Cumberland Farms are up according to Anne Flint, senior category manager for the Framingham, Mass.-based operator.
“In the state of Massachusetts, you’d have to take a second mortgage on your house to buy a carton of Marlboros,” Flint said. “But I am seeing growth (even in carton sales), which is surprising.”
“We’re definitely seeing much better than expected volumes,” said RBC Capital Markets tobacco analyst Nik Modi. “I don’t think there are new consumers coming into the category. What’s probably happening is we’re seeing people buying cartons or multiple packs at a time.”
Myers said premiums are the big benefactor of this cigarette renaissance, and numbers from Nielsen back her up. The firm reported premium cigarettes accounted for 80.4% of c-store cigarette sales and were up 0.4% in 2014. By contrast, branded discount sales were flat and sub-gen/private and fourth-tier cigarette sales declined.
“People are trading up,” Flint said. “They go up to premium because they can buy a Marlboro now whereas they couldn’t before.”
Like Myers, Modi believes more favorable gas prices are playing a major role in the positive cigarette sales. Sure, gas prices are no longer as low as they were in late 2014 and early 2015; but even the $2.61-per-gallon average reported by FactSet in July is significantly lower than the $3.22-per-gallon cost the United States has averaged over the last three years.
“Everyone talks about [how] gas prices coming down didn’t really help the consumer, but I think that’s taking too much of a cookie-cutter approach,” said Modi. “If you sell in the convenience channel and you sell an impulse-driven good, then you’re actually seeing the good of lower gas prices.”
It has been a double positive for convenience-store operators.
“I always say, (retailers) like low gas prices because remember, we have to pay for the gas first,” Myers said. “With lower gas prices comes better sales inside the stores because consumers aren’t spending all their money filling up their tank.”
While lower gas prices have benefitted everyone, an extra $10 carries a whole lot more weight for the low-income consumers that make up the core of both convenience-store and tobacco shoppers. Modi has long tracked the “core tobacco consumer” and sees a slew of positive trends, including a 6% increase in payroll for workers without a high school diploma (vs. a 3.5% increase for workers with a bachelor’s degree or more) and construction, manufacturing and hospitality unemployment rates dipping below 7% for the first time since before the recession.
“The unweighted tobacco consumer curve we’ve been tracking for some time continues to go in the right direction,” he says. “I’m feeling very good overall about the tobacco consumer.”
“More disposable income year-over-year definitely plays a big role,” agrees Flint. “We’re seeing that play out in our stores.”
Another factor: CVS pulling tobacco from its shelves in October 2014.
“With CVS getting out of the tobacco business, we’re finally starting to see the benefits accrue towards the convenience store channel,” said Modi. “I think that is going to continue.”
More than just the CVS smokers, it’s possible that convenience stores are gaining customers from other drug chains.
“Even though drug stores still carry them, c-stores are one of the few places that people still feel okay to buy cigarettes,” Flint said. “With CVS [exiting the category], does that give the wrong connotation for people to go into a drug store to buy cigarettes? There might be some psychological effects on purchase patterns.”
Other retailers, such as Johnson of Speedee Mart, credit a waning interest in electronic cigarettes.
“For a while it was looking like e-cigs were going to be so much more cost-effective,” he says, also citing a lack of major e-cig product innovation. “Consumers are losing interest and maybe going back to cigarettes.”
Taxes—or the lack thereof—are also a likely source of the uptick. In 2014, only Vermont raised its excise tax on cigarettes (by just 13 cents per pack) and the federal excise tax has not been raised since 2009.
Even regional issues such as weather have played a role. Though bad weather typically hurts sales, not helps, Flint says the Northeast’s record-breaking snowy winter actually improved cigarette sales for a variety of reasons.
“People figured they were never going to be able to buy another pack of cigarettes because they were snowed in, so they bought a carton or stocked up,” she said. “Some of it might also be people were home more, so they could smoke more because of all the smoking bans.”
Watch for more coverage on cigarette sales in the September issue of CSP magazine.