Meyer & Associates - Best Practices
  Best Practices
Cigarette Category Management
by Meyer & Associates

  NACS 1998 State of the Industry Report states "the cigarette category continues to dominate the top ten sales categories in the convenience store industry." On a per-store/annualized basis, in 1997, cigarettes accounted for $208,900 in sales and $47,400 gross profit dollars according to NACS data. To put a global perspective to your cigarettes CM approach, print Meyer & Associates' Cigarette Category Profile and compare your Company's performance to the industry.

The smoker is our industry's most loyal consumer, shopping us 4 - 6 times a week. Therefore, the strategies that retailers employ to earn this VIP's business (including their gas and other merchandise potential) are critical to the store's overall success. In this section, M&A presents the best CM practices of c-store retailers related to cigarettes, after analyzing the last two years of research done by the Company and/or others. Since this page is subject to change as more feedback is received from retailers and other events occur (including new legislation), we confirm this information is as of Fall, 1998.

  • Sell Their Brand or Forfeit Business - All CM experts agree that if you applied the 80/20 rule of inventory management to cigarettes you would be out of business. Tell consumers that you're in the cigarettes business by carrying enough brands to satisfy at least a 95% Consumer Satisfaction Level. A recent survey of 20,000 retail stores by McLane Company, Inc. concluded that "stores lost volume if there was inadequate selection." It added that "all high volume stores in the survey stocked special request brands for regular customers."

  • Consumers Vote with Their Feet - Findings from multiple research venues are universally conclusive. Unless you give the cigarette buyer their brand at a good price they'll shop elsewhere, and take their gas and other merchandise business with them. According to Convenience Store News "In Stock Means In Business" (Feb 1998) "the message from consumers is clear. There is nothing convenient about being out-of-stock." Further, a tobacco manufacturer's market basket study concluded "67% of smokers will switch stores" if you don't carry their cigarette brand. Finally, the McLane survey found "the adult cigarette consumer will switch stores before they switch brands."

  • Exclusivity Loses Customers - You cannot afford to solely promote a single manufacturer's brands without jeopardizing smoker-traffic to other retailers. This is validated by the conversion of over 10,000 c-stores from single manufacturer programs in the last couple years and statistics published on cigarette/tobacco stores, revealing that industry approach outlets sell over 50% more cartons per store than those with a single manufacturer approach. Fundamentally, it's hard to imagine any amount of RDAs that can replace the impact of lost gross profit dollars, from customers who take their cigarettes and gas and other merchandise business elsewhere, because they don't feel the c-store offers and promotes an adequate variety of brands.

  • RDAs Should Not Dictate CM Decisions - The quarterly checks for cigarette display allowances are tempting, but they comprise only 15% of total gross profit dollars from cigarettes, according to the McLane study. Evaluate the two or three RDA programs that provide your stores with a reasonable representation of the top brands. And, remember that 85% of cigarettes gross profit dollars are earned, pack-by-pack or carton-by-carton, when the register rings their sale!

  • Beware of Uninformed Accountants - Imagine a smoker buying his/her same brand for 20 years despite it never being promoted. Then one day your Controller says that brand accounts for less than 1% of total cigarette sales so, mathematically, it should be eliminated to enhance cash flow. If that occurs in your Company, it's time to educate your fiduciary of the funds on how to be a responsible merchant and the peripheral sales benefits of this brand-loyal smoker.

  • Market Data - Most retailers sign an agreement with their wholesaler that allows them to provide the cigarettes manufacturers with details of their weekly cigarette purchases by brand. Because all tobacco suppliers have these data for each store and market, the good news is that they can report to you the brands where you are leading in share of market (SOM) and those where you trail your competitors. Ask your tobacco company representatives to provide you with these analyses for each of your markets, along with their opinions on how to maximize your overall SOM.

  • Avoid Category Manipulation - What you desire from tobacco manufacturers is their counsel on what brands you should carry (and promote) to maximize your store's overall gross profit dollars (i.e. from cigarettes and non-tobacco). Don't allow yourself to be manipulated into making important CM decisions based upon incomplete and/or convenient data interpretation by a supplier prejudicing their own brands. If that happens, call the supplier on it and tell your retailer friends to beware of them. Alternatively, when you find a supplier (for any category) that genuinely tells you the best ideas for your company to increase gross profit dollars (albeit even at the risk of some of their own products), tell the industry about this "class" long-term "advisor."

  • Calculating the Opportunity Dollars - At least one manufacturer has developed a great worksheet using by-brand/by-market data, that allows retailers to quantify the gross profit dollars they are forfeiting by not adequately carrying and/or promoting specific brands. The worksheet values that customer's aggregate sales and gross profit dollars benefit to the retailer, which encompasses their estimated non-cigarettes purchases. Take advantage of this free analysis and determine your Company's potential for increasing overall gross profit dollars. This exercise will prove extremely enlightening for cigarettes, while providing a meaningful tutorial on how to approach CM studies for other categories.

  • Measuring Programs' Effectiveness - Category management is not about increasing one tobacco manufacturer's SOM. To validate the true worth of your change in RDA or related cigarette marketing programs, you need to examine the right data elements before and after any program change. Factors and statistics that are critical to monitor and analyze include: units growth (equivalent number of cartons sold per week); margin dollars plus/minus, for cigarettes and total inside sales; pricing changes; and other traffic related barometers (e.g. customer counts, average selling price, etc.).

  • Product Display Criteria - As manufacturers compete for precious display space in a potentially non self-service environment (required in some areas who have pre-empted Federal legislation), watch out for agreements that insist on a higher percentage of visible space than a manufacturer's SOM warrants. Retailers who have argued against such biased requests in RDA programs have prevailed in getting agreements revised to provide more appropriate parity. Space allocation must consider where product is shown on the counter, overhead or back-wall "waterfall" type units.

  • Cigarettes Ain't Groceries - Because the Consumer Satisfaction Level criteria related to marketing cigarettes is so different from groceries, existing templates for CM only confuse the process of looking at cigarettes. While a category-specific template is being developed for cigarettes (more details later), we suggest that you think of cigarettes CM as unique as your gasoline business. Maybe it's as easy as thinking "there is gas, there is cigarettes, there is foodservice and there is everything else." The first 3 product categories are unique to themselves and generic CM principles just don't apply.

  • Control Your Own Destiny - Time and again this industry has found ways that retailers successfully fought suppliers who may try to dictate terms for selling their products and/or earning certain promotional dollars. Don't lose track that you are the merchant of your business! For all categories in your store, look for the manufacturers and suppliers who exhibit, by their deed, that they are truly interested in helping you grow the category, not solely their product line.

  • Research Materials - Three relevant tutorials addressing cigarettes category management include: Convenience Store News February, 1998 publication "In Stock Means In Business"; McLane Companies April, 1998 report "1998 A Critical Year For Decisions and Actions in Cigarette Retailing" and CSP April 1998 interview of M&A's President "Warning: Incomplete Cigarette Category Management Can Be Hazardous to Your Company's Profitability."

    Additionally, the Information and Speaking sections of this web site provide extensive research results completed by M&A including: the "State of the Tobacco Category" CSP Publications 4/97 article, which proved to be the industry's most comprehensive thesis on the market dynamics of cigarettes to that date; and NACS Outlook Report on Tobacco, as presented at NACS Leadership Assembly in February, 1998.



OPINIONS WELCOME

The "best practices" expressed above are primarily sourced to feedback from a multitude of retailers and suppliers, plus a study of what has worked and has not. The value of our web site is enhanced when we receive comments that we're on target or when we may not have addressed dynamics that may not have been evaluated to date. Your e-mail opinions are welcome.

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