Tobacco's Last Frontier

No product on the market today faces the merchandising challenges and obstacles befalling cigarette and tobacco brands. With more federal and state restrictions being imposed, marketers are looking for ways to meet retailers' needs while avoiding cumbersome or ineffective formats that might tempt stores to drop the products altogether. The result has been a shift in the channels of distribution and the merchandising approaches within, and more focus on maximizing the potential of P-O-P in the marketing mix."The regulations cause a nightmare for our retailers," says Robin Lanier, senior vice president for industry affairs at the International Mass Retail Association, which represents mass merchants such as Kmart and Wal-Mart. "Few of our members are doing much with tobacco P-O-P or promotions, and in fact, some of them are thinking of dropping cigarette displays altogether due to the requirement of having them in age-restricted areas. They become problematic from a store-operations standpoint. It has reached the point where the aggravation is outweighing the promotional benefits. There's a sort of bunker mentality out there."The recent agreement between the cigarette companies and 46 state attorneys general added to those restrictions, with the manufacturers agreeing to drop billboard advertising, reduce sponsorship of athletic events and eliminate sponsorship of other events such as music concerts. A number of states have placed additional restrictions on the products, including eliminating all self-serve operations unless access is age-restricted. A variety of newspapers and magazines are eliminating tobacco advertising, too."If you read the national settlement, it's apparent that P-O-P is basically what we'll be able to do, even if it's only in a limited form," says a spokesperson for one tobacco company. "With other media eliminated altogether, in-store retail P-O-P is where our promotional budget will have to be spent. But what direction or plan that will take as things develop, we can't say at this point."Certainly, the restrictions are causing tobacco makers to reformat and retarget their displays. Premium Cigar International, which sells mostly through c-stores, is working on that. "States that require tobacco products to be non-self-service items have had a big impact on how we merchandise our products," says Heather Schneider, marketing assistant manager for the Scottsdale, Ariz.-based cigar maker. "It's a progressing trend, with more states jumping on the bandwagon. We are trying to be proactive in everything we provide to retailers to anticipate what they will need."The company now supplies all of its humidors with locking lids, including those for its new PrimeTime line of small, flavored, tubed cigars. They are displayed in the company's Humidi-box, a disposable humidor that offers a small footprint and a locking top, which is accessible only by the person behind the counter."We're having to change our designs all the time to keep up with what's happening both at the state level and with retail chains," Schneider says. Several large c-store chains, for example, have their own requirements, including restricting all tobacco products to the back counter. This allows them to be self-service but cuts their visibility. "That means we have to create special racks to fit those spaces and find ways to make them stand out to customers on the other side of the counter." In some cases, the company has incorporated blinking lights to catch the customer's eye, she notes.At United States Tobacco Co., Greenwich, Conn., marketers are also looking at new technologies to find effective ways to attract attention, says Kevin Freudenthal, director of trade marketing. "We continue to develop a majority of our displays using corrugated, but new print capabilities have given us the opportunity to develop displays featuring holographic and lenticular processes," he says. "The new technology is creating exciting, visually stimulating P-O-S that distinguishes our products in the marketplace. We will continue to examine new technologies to ensure our materials encompass an ever-changing retail environment."One new technology option allows retailers to access cigarettes at the checkout while cutting pilferage and customer access. Admatic Industries Inc., Pittsburgh, installs overhead inventory bins in stores that let clerks key in a code and have specific products -- cigarettes, film, batteries or any highly pilfered product -- slide down a chute to the checkout in a few seconds. The bins can service up to five checkouts and require restocking about once a week. (For more information, see the sidebar on Page 39)."The best way to merchandise is via self-serve systems," says Richard F. Nestler, president of Admatic. "But it's not possible with these products, either due to legal restrictions or the high pilferage rates. It's become very, very hard for retailers to merchandise to and service their customers with these products and remain profitable."Moving tobacco products behind the counter definitely hurts sales, according to Ron Carroll, marketing and promotions manager for Swisher International, Darien, Conn., which sells both smokeless tobacco and cigars. "Texas recently began requiring stores to move tobacco products behind the counter, and we've noticed that the number of units sold decreases a bit," he says. To counter that, the company has redesigned all of its packaging to create a "billboard" effect across the entire line to attract consumer attention."We believe our packaging is our P-O-P," he says. "It's becoming harder and harder to do anything in a self-service format. If you're not the leader in the category, it's becoming hard to pop off the shelf, and consumers can't shop the rack like they used to. More and more, outlets are shying away from tobacco products in general. That's why I think tobacco specialty outlets will become a bigger part of this industry."Indeed, while traditional supermarkets, drugstores and mass merchants are putting less emphasis on tobacco sales, other channels are picking up the slack. C-stores now represent more than 50 percent of all tobacco sales, according to data from R.J. Reynolds Tobacco Co., Winston-Salem, N.C., and the tobacco specialty stores that began to open in the early 1990s are growing rapidly due to their ability to specialize in these products and restrict access if required. Typically located in high-traffic highway or mall locations, often in states with low cigarette taxes, they account for about 15 percent of all sales today, the data indicates."The emergence of this retail channel [tobacco specialty stores] is very exciting," says U.S. Tobacco's Freudenthal. The company's category management guide notes that "Each month it is estimated that 225 new stores open across the country. Adult consumers who appreciate tobacco-friendly environments and discount pricing are turning to these stores as the retail channel of choice for purchasing their favorite tobacco products and brands."Stores that restrict entry to those over 18 open the door to more attractive self-service displays that aren't allowed in other retail channels where under-age consumers pose a marketing challenge. The specialty focus has led U.S. Tobacco to produce more modular, high-volume displays that are effective for this market, says Freudenthal. "This new channel gives us the opportunity to assist retailers in P-O-P development that reflects high-volume merchandising environments.""Tobacco outlet stores are becoming a major part of where we want to increase our distribution," says Swisher's Carroll. "You can do more in that environment. Everything is out where you can touch it and view it and really shop the rack without having to ask for service. We're even beginning to see some c-store chains that are considering converting some of their stores into these types of outlets." In part, that's because cigarette and tobacco sales are the largest category of weekly merchandise sales in c-stores, according to industry data. Tobacco's average sales are nearly double the average sales of the number-two category, beer.In many instances, the cigarette companies contract for space in these stores, ensuring them prominent placement. The result has been more emphasis on attractive floor displays, impulse-oriented pieces, and displays that merchandise an entire line or provide a dramatic presentation. A prime example is a kiosk produced by R.J. Reynolds Tobacco for its Camel brand. The in-line unit consists of a back wall panel with a large illuminated transparency and wire waterfall shelving, two wings that create an "amphitheater" effect, and a tower topped with a locked, downlit acrylic showcase housing Camel memorabilia."The Camel CTS display is unlike any other cigarette display available today," says W. David Cook, who heads the company's retail presence development unit. "Traditional cigarette merchandisers are built primarily to inventory product, and they include some type of point-of-sale advertising. This display was designed and built to reinforce Camel's total brand equity first and to display cigarette products second."Tobacco makers are also focusing on the need to be flexible and modular, which are key elements in many P-O-P programs today, regardless of product. An example can be seen in the FlexMaster 2010 displays introduced last summer by Brown & Williamson Tobacco Corp., Louisville, Ky. The program added half-depth and minimum-depth versions to accommodate the company's lower-volume pack outlet customers. The displays are offered in both self- and non-self-service formats in multiple heights, widths and depths, according to a spokeswoman, and they can be assembled in hundreds of different ways to meet each retailer's needs.Category-management programs are becoming more important and effective in helping retailers manage their space. R.J. Reynolds, for instance, notes in the retail presentation on its web site that its merchandising plans in the future will focus on encouraging retailers to "display and promote top-selling, full-price brands, plan and allocate retail space according to category sales, and employ category-management principles."Swisher is also focusing attention on managing the category. It has developed a new racking program and uses it as an entry to create full-line impact at retail, Carroll says. "We have 48 percent of the market in little cigars, and that helps us dominate the planogram and create a presentation to attract customers," he says. He has also had some success with single-unit countertop displays. "Retailers are receptive to new ideas if the displays are attractive, compact and sell the product. Impulse cigar sales are a strong profit center, so they're a plus for many retailers."U.S. Tobacco also focuses on modular, flexible approaches, supported with retail incentives for those who use the complete program. It recently developed a Customer Alliance Program (CAP), which rewards customers for reaching certain sales goals and using procedures that tie into inventory-management programs and the use of P-O-P materials. The effort is supported by the company's new category-management guide, which was introduced earlier this year. The 32-page manual reviews the market dynamics for moist, smokeless tobacco across four major channels of trade and provides an overview and demographic trends. "As partners with the retail community, we want to provide them with the information they need to take full advantage of the opportunities presented in the marketplace," Freudenthal says.Category management has also taken a lead position at Philip Morris U.S.A., New York, with the introduction last fall of its Retail Leaders plan. The program "assists retailers with category management by employing principles based on trends occurring with consumer preferences," explains Michael Pfeil, director of communications. "Consumers tend to identify with the big brands and want to see that inventory in the stores. We believe that retailers, by adhering to the key principles of category management, can build their business and grow their profits."In conjunction with the program, the company introduced a new array of fixtures to help meet the needs of each retailer in any channel. "Retailers have told us they're looking for ways to eliminate front-end clutter and reduce shrinkage," Pfeil says, explaining that the fixtures come in both self- and non-self-serve formats. "They also want the flexibility to compete with outside channels of trade if they need to. So we have created a line of very flexible fixtures they can use for packs, cartons or promotions depending on their needs. Our goal is to help manage their inventory, create category presence, reduce shrinkage and clutter, and let them tell their customers that they are selling tobacco products."Pricing is becoming more of a factor in retailing and merchandising the products, too. In May, Philip Morris introduced an eight-week-long price promotion for Retail Leaders members, according to Adweek magazine. The company told Adweek that it often offers such price promotions. These promotions indicate how price-sensitive cigarettes have become, say some observers."The price-value brands have gained considerable ground in all product lines," says Swisher's Carroll. "It's even happening in cigarette brands, and I never thought that would happen." In chewing tobacco, he says, once-loyal buyers are now looking for what's on sale. In part, that's brought on by large taxes added to tobacco products in some states, adding cost that is out of the manufacturer's control.Specialty retailers say that trend is growing. "Promotions are what get customers' attention," says Bill Craft, owner of Tobacco Town, a chain centered in Richland, Miss. "Dump bins and P-O-P materials at the register always add sales, but today any tobacco item, if it has a good price on it, is going to sell. There is some brand loyalty, but the way prices keep going up, there's a good percentage of people who will look only at the price. Our house brands are doing very well for us."That's also the case at Tobacco Express, a retail outlet in Harstsell, Ala. "Price and location are the keys to selling tobacco products here, more so than displays," says owner Cindy Holland. Due to pilferage, she has had to restrict single-pack displays by putting them behind the counter, but cartons remain self-service.With specialty stores gaining ground and offering more options for displays, the challenge focuses on reinforcing brand loyalties within the restricted merchandising options available. Other new distribution channels are being considered, too. "The next big industry for us will be bars and restaurants," says Premium Cigar's Schneider. "We've been expanding our presence and introducing options through trade shows for those markets." She also expects the company to move into golf pro shops. All of these markets can use the company's existing locking humidor displays to strong advantage, she notes."We're constantly developing new ideas," Schneider says. "We have to respond to what needs to be done in the field. We have to work with what's available to us and find the best approaches to serve our retailers. It's a versatile industry, and we're trying to make the best of it."

Tobacco's Last Frontier

P2PI MEMBERS

JOIN P2PI

Related Images

Business Topic

Company

Market Segment