Taking Back The Category


Looking back at the cigarette category, one begins to realize how drastically it has changed over the last 10 years. Besides an eroding unit count and diminishing profit margins, we have lost all control over a category that system-wide represents 23 percent of our sales and a good percentage of our stores’ gross profit dollars. Price increases, tax hikes and cigarette contracts that restrict the way we can do business have left our stores at the mercy of the government and a small handful of tobacco companies.

The new Altria contract, also known as the Marlboro Leadership Price Option, goes beyond dictating signing, merchandising and ordering requirements, to now restricting the maximum selling price stores are allowed to charge for a single pack of Marlboro cigarettes. As more tobacco manufacturers adopt this practice, our cigarette business will change. The brands we carry, how and when they are ordered, where they are merchandised, what POP we are required to have in place, and what price we sell them for will all be controlled by a select few cigarette companies.

Every other category in the store allows franchisees to merchandise the products our customers want and to control our inventory, product mix, and selling price. We ask all of our vendor partners to participate in Retailer Initiative, to bring innovative merchandising and marketing ideas to our stores, and to tailor programs to our customers’ needs—all of which allows us to grow our sales and gross profits.

We need to require the tobacco companies to do the same. We need to focus on category growth and stop giving the tobacco companies complete control over our stores. The cigarette contract requirements we are forced to adhere to limit our ability to provide our customers with the products they want, but at a price that allows us to make appropriate profit for our stores.

In today’s economy our customer has become more budget conscious than ever, so it is imperative that we as storeowners have the ability to focus on the growth areas within the cigarette category. Our premium cigarette units have continued to decline. Value-priced cigarettes have become a bigger part of our business and will continue to grow. Our ability to offer our customers value brands at the right price is critical to stop the downward trend in unit sales.

How important cigarettes are to our stores has been widely debated over the years. How to replace lost cigarette unit sales has been an even more difficult debate. To its credit, SEI for the first time has recognized the problem and is working on a solution. However, the fact remains that six of the top ten market basket purchases include cigarettes, and cigarettes have and always will (for the foreseeable future) play an important role in our stores’ profitability. Replacing lost cigarette sales and gross profit dollars will take time and will not be easy. How dependent we are on cigarette income can be compared to our country’s dependence on foreign oil. There is much debate on the issue, but no short-term solution. Increased profitability in the center of the store and our fresh foods initiatives are beginning to make a difference and can soften our dependence on cigarettes, but not eliminate it.

How we react to the new proposed changes in the cigarette contracts has yet to be completely determined and will take time. What impact on the category these changes will have ultimately will be determined by the customer. What approach we take to regaining control over the category has already started. Franchisees and SEI together have taken a bold and painful first step in the process. How it plays out in the end and what impact it will have on our stores will only be determined over time. As a retailer our goal is to be a destination for the cigarette customer. Letting the customer and not the cigarette companies decide our product selection and price is true Retailer Initiative. Working together with our vendor partners is the only long-term viable solution.

All stakeholders in this matter have a lot on the line. The time has come for SEI, franchisees and our cigarette vendor partners to come together and work on a solution that puts the customer first. Each region, market and store needs to take a hard look at what is right for individual stores. Together we need to find a solution that ultimately grows the category. Being in stock with the right products at the right price is only part of the solution for long-term category growth. Our customers have told us loud and clear that what we are doing is not working, so business as usual is not an option. It is time for all stakeholders to sit down together and start listening to our customers.