Managing a Changing Tobacco Category

It is not surprising that the OTP has become an important part of any successful action against tobacco. “It is a little train that could,” said David Bishop, managing partner of Barrington, I’ll.-based sales and marketing at Baylor LLC, and the moderator of the “Tobacco: Managing the Changes” educational sessions in 2012 NACS Show in Las Vegas. “And it’s getting bigger every day.”

Just how big were the “other tobacco products” (OTP) received? Bishop showed OTP seen by 3.3 points increased its market share in the sale of tobacco dollars in the last 10 years, but the true impact on the bottom line of gross margin dollars, where the OTP has almost tripled its contribution from 10.6 point gain.

“The shift is dramatic,” Bishop said. “The business is not just about cigarettes anymore.”

“You have to look at tobacco as an entire category,” said Mary Szarmach, senior vice president of trade market and government relations for Boulder, Co-retailer Smoker Friendly. “Cigarettes are not going to bring in the money you need to survive.”

By contrast, OTP boasts better margins and less restrictive contracts, representing retailers with much greater flexibility in its category.

“Get rid of these low turn SKU,” advised Nik Modi, a senior analyst at New York-based banking and financial services group UBS. “[With OTP], customers may be more loyal to your shop than a specific brand.”

Innovation to smokeless pouches, retail figure, Snus phenomenon and the growing potential of electronic cigarettes are only a few changes to the OTP panel attributed the growth category.

“The growth in the next several ways, based on the different parts of the business,” Bishop said.

The value of OTP only increases as retailers look to reduce the cost of cigarettes – a regime that predicts will continue to decrease by about 3% to 4% per year. But this does not mean that cigarettes are not still important drivers of sales for retailers.

“From the point of view of driving traffic, virtually no other category that compares,” said Bishop, noting that a whopping 90% to 95% of cigarette sales are planned purchase. And those purchases do not stop with cigarettes: Bishop reported that one in five buyers of cigarettes as select high profit margin fountain soda.

“You have to look at the value of the transaction as a whole,” Bishop concluded.

“The industry has traditionally been slow to change,” said Modi of the importance of cigarettes. “It’s still the largest category – it does not go away.”

Tobacco control category in which OTP is the greatest potential for growth, but cigarettes are still the most important driver of sales may seem impossible for retailers for dealing with limited space or restrictive cigarettes contracts. It is true that tobacco is a re-categorization – and successful retailers need to constantly adapt to changing trends.

“Good retail is looking at the category every day,” Szarmach said. “They’re slicing and dicing their business to achieve the best fit.”