Federal Government statistics show that about 20% of the adult population smoke regularly (at least most days). The rate is slightly higher for males than females, and the rate is highest (nearly 30%) in the 20-29 age group.
In 2003, tobacco products contributed 36% to non-fuel sales and 23% of gross profit at the major franchised convenience stores, according to the Australian Association of Convenience Stores’ survey. This is confirmed by analysis of the category by PricewaterhouseCoopers. Well over 90% of tobacco sales and profits are generated by cigarettes. However, the fastest growing segment is cigars at 12% per annum.
These statistics only tell part of the story. According to research by Imperial Tobacco in the United Kingdom, smokers buy a wide range of products when purchasing their tobacco (in the UK, 14% will also buy newspapers, 12% will buy milk, 6% bread, 6% other cigarettes, and 7% will spend on financial services). Smoking customers spend 78% more than non-smoking customers, with 75% of them likely to make additional impulse purchases whilst in-store. They visit their local store more often, and 49% of smokers will leave a store if their chosen brand is not on sale.
All these numbers mean that whether you smoke or not, or whether you approve or disapprove of those who do, the tobacco category matters to convenience and route channel retailers. Not only is it one of the most important categories in your store, it is also the most regulated. That is why this feature considers what is happening to federal and state regulations and how they are affecting you, the retailer.
At a federal level, the most significant change is the introduction of new graphic health warnings to be phased in over 18 months. That means all tobacco products displayed in-store must have the new warnings on or before 1 March 2006. It will be an offence to display tobacco products with the old warnings after that date. The new warnings include information on an expanded range of health effects and comprise graphic images and explanatory messages which cover 30% of the front and 90% of the back of the pack. A set of cigar-specific health warnings will also be displayed on cigar packaging.
The phase-in period allows for printing companies to make the required investment in infrastructure, an issue raised by the tobacco manufacturers with the Government.
“ We did not oppose the new graphic health warnings because we think the public should get a clear message on the health effects of smoking and the message should come from the government,” says Colin Lippiatt, Manager Communications, Philip Morris Limited.
“ The consultation process was good and the Government listened to manufacturers and suppliers about the practical issues.”
The same level of consultation is now being sought in relation to proposed changes to state regulations, an issue taken up later in this article.
It is not clear what impact the new health warnings will have on smokers, but those consumers that are a bit squeamish may choose to cover the warnings up. For those that do, Trio Trading is introducing reusable, but disposable and therefore affordable, cigarette cases in November 2004. The laminated cardboard “fun’ covers will retail for about $2 for two, with a gross profit of 50%.
“ Retailers increase earnings by selling lighters,” says Gaynor Scott, Corporate Sales Manager, Trio Trading. “Now they can on-sell fun covers which will be on the front counter in the same display as Trio lighters. The images will include bikini girls and smiley faces in a range to suit everybody.”
Make sure you do the right thing under state regulations. Cigarette cases cannot be bundled for sale with cigarettes nor can they be given away with cigarette purchases. There may be other restrictions. You should check your state regulatory authority if you have any concerns. This applies across the board for this category. You, the retailer, are responsible for compliance with the law. Neither Australian Convenience Store News nor suppliers of tobacco products and accessories can be your source of advice in this area.
“ We give retailers our view of the legislation but we cannot advise,” says Reg Hodgson, Manager Corporate and Government Relations, Swedish Match Australia. “We say, ’As we read the legislation, you can do this, but if you are concerned about it you need to get your own advice from the health authorities’.”
“ We do not want to a situation where we are advising retailers they can do something and the health authorities take a different view.”
Colin Lippiat agrees: “If retailers have any doubts whatsoever in terms of this whole topic, they should talk to their state government authority to double check that they are doing the right thing.”
State laws that control product promotion and display at point of sale continue to have the biggest impact on retailers.
“ One of the issues retail groups face is the different legislation in each state. The legislation is convoluted and interpretation is difficult.” says Ross Barrett, Trade Marketing Manager, Stuart Alexander & Co.
A summary was compiled by the Queensland Health Department in May 1994 as part of its review of the 1991 Act that governs among other things, advertising, display and promotion of tobacco products.
38. Table 1 contains a summary of the current legislative arrangements in other States and Territories
39. Victoria has a more restrictive definition of a product line than Queensland. Whilst in Queensland a product line is distinguished by one or more of the trademark, brand name, nicotine or tar content, flavour, or number of items in the package, in Victoria a product line of tobacco is distinguished by the brand name, nicotine or tar content or flavour, but not by the size of the package, or the trademark. Therefore the number of products that can be displayed in Victoria is fewer than in Queensland.
40. Victoria has also banned non-branded outdoor advertising, which has resulted in the removal of street and highway signs advertising discounted cigarettes.
41. The New South Wales Government has recently announced that it will be considering aproposal to greatly limit the display of tobacco products at a point of sale. If the proposal goes ahead, all tobacco products could be concealed from view.
42. Victoria, Tasmania, and Western Australia are also currently investigating the option of completely banning the display of tobacco products in retail outlets, with some limited
Table 1: Summary of point of sale restrictions by jurisdiction |
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| Faces per product line | Display site restrictions | Cartons per product line | Single cigars (per product line) | Location of display | Minimum amount in pack | Quitline sign | Sales to minors sign | POS advertising | |
|---|---|---|---|---|---|---|---|---|---|
| ACT | 1 | no limit | x | 13 | POS* (behind counter) | 20 | POS | VM** | x |
| NSW | 1 | 2m2 | 1 | no limit | POS* (behind counter) | 20 | POS VM | POS VM | x |
| NT | 1 | 4m2 | 1 | 2 | POS* (behind counter) | 20 | POS | POS | x |
| SA | no limit | no limit | no limit | no limit | no limit | 20 | x | POS VM | |
| TAS | 1 | 4m2 | x (if cig packs also displayed) | 1 | POS* (behind counter) | 20 | POS VM | POS VM | x |
| VIC | 1 | 4m2 | x | 13 | POS | 20 | POS (or entrance to shop) | POS (or entrance to shop) | x |
| WA | no limit | no limit | no limit | no limit | no limit | 20 | (must be 50% of advertising area) | x | (but 50% of area must be health warning and can't be seen from public place, and no electronic images or sounds) |
| QLD | 1 | no limit | 1 | 13 | POS* (behind counter) | 20 | POS | POS VM | x |
| * POS – Point of Sale ** VM – Vending machine The Tobacco and Other Smoking Products Act 1998 Review Discussion Paper - Qld Health Dept |
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Note: the Queensland restrictions shown are before the recent changes. The changes are discussed below.
“ Retailers should be conscious of both federal and state laws and make sure they abide by both the letter and spirit of the law,” says Colin Lippiatt.
“ Licensed retailers need to have their licence clearly displayed. We see licensing as a means to further strengthen across-the-board efforts to restrict tobacco products to people under 18. No-one wants kids to smoke.”
Even though regulation limits what you can do in-store, there is still scope to merchandise within the restrictions. Manufacturers and suppliers can assist with ranging within the legal frameworks.
“ Our merchandising department assists retailers with store layout using a ‘ready reckoner’ that covers regulations in each state,” says Matt Logan, Channel Manager Convenience, British American Tobacco Australia.
“ We cannot legally advise retailers, but we can make sure they are aware of their responsibilities and help them merchandise within the law.”
With limited display opportunities in the cigarette dispensing cabinet, your product range needs to reflect trends in the convenience channel which is skewed towards premium brands. You also need to range value brands, RYOs and cigars to cover the category. The RYO category has been through a period of solid growth in the past two years, and cigars may represent an opportunity to expand the range in the tobacco category within the law.
“ Cigar buyers tend to be different types of consumer – older and less-frequent smokers,” says Reg Hodgson.
“ Health authorities acknowledge this and the need to store some cigars in humidors. This means retailers can, in some states, increase the overall size of their display, show singles next to packs, and place cigars in a separate location. “This is an opportunity to earn incremental profits from the top-selling cigar packs and singles.”
Out of more than 250 cigarette SKUs, the average C-Store keeps about 150 in stock. This presents the challenge of getting the range right.
” Imperial Tobacco is the third largest supplier and takes a category approach to management,” says Andrew Matheson, National Business Manager Convenience, Imperial Tobacco Australia (ITA).
ITA believes it has the right portfolio of brands and products to be able to act as the "honest broker" for the tobacco category.
“ It is about doing the best for the category as a whole. We collect a lot of data from AC Nielsen and from our marketing representatives. We use this to decide the best range for a particular store, taking into account the demographic and the location of the store,” adds Andrew Matheson.
You also need to allow for the many potential customers passing through your area that may be looking for their preferred pack. That means keeping a range wide enough to cater for a cross-section of smokers.
Ranging is only one of the four key business drivers for merchandising tobacco products, according to David Squires, Trade Marketing Manager, Philip Morris Limited. The others are stock weight, price and presentation.
“ It is really all about customer service,” says David Squires.
That means not running out of stock. Remember that half of your smoking customers will leave your shop if you do not have their preferred brand. Philip Morris can supply inventory books to monitor sales and make sure you have enough stock.
Although consumers are conscious of price – cigarettes are expensive – they expect to pay a little bit more in the convenience channel, and you may not need to display the price.
You might think presentation is an obvious factor but not everyone is getting it right.
“ I have seen packs put in the display upside down and sideways,” says David Squires. “Retailers should also keep all items that appeal to children well away from the tobacco unit, and make sure the multi-chute is uncluttered, clean and tidy.”
There is now universal acceptance that tobacco products carry health risks and there needs to be restrictions on advertising, display and promotion. One of the main aims of regulation is to ensure that tobacco products are not sold to minors (youth under 18 years of age). This is an important task for the responsible retailer, and everyone agrees on this. The challenge is how to cater for the 20% of the adult population that smokes.
“ The fact is, people smoke,” says Reg Hodgson. “And, they know shops sell tobacco products, so they go in looking for them. There are hundreds of packs because people buy them. I do not think that people who do not smoke are influenced by cigarettes being on view.”
State governments in Queensland, New South Wales and South Australia have been considering proposals to take them out of view by banning the display of all tobacco products at retail outlets. Concerned by the potential impact, a group of industry associations formed the National Alliance of Tobacco Retailers (NATR)* in June 2004.
As recently as September 2004, the Queensland Government announced that ‘display of tobacco product names and prices will be severely restricted’ with new regulations to come into force from 31 December 2005. These new restrictions will:
NATR responded quickly to the announcement of the new restrictions, raising concerns over the impact on small retailers.
“ These laws will simply crush the local corner store, and allow the big supermarkets to clean up. Smokers will go there instead of the corner store for their cigarettes, and all their other purchases,” says Ian Baldock, Executive Director, Queensland Retail Traders and Shopkeepers Association.
“ It is ludicrous that retailers will have only one square metre to display this legal product,” adds Peter Jowett, Chair of NATR.
Most States allow for four or more metres. Peter Jowett questioned the link between display and the incidence of smoking, and called for a national standard based on the Tasmanian regulations.
If a State does introduce a total ban on display, the others may follow to avoid the ‘dirty ashtray award’. Of greatest concern to the convenience and route channel is the disproportionate impact on the channel compared to other retailers.
“ When products are hidden it takes time to find them and this slows service – it affects ‘convenience’,” says Matt Logan.
More alarming is the concern that consumers will shift their buying habits towards tobacconists and supermarkets.
“ Smokers will go to the place most likely to have their brand and that will be the biggest suppliers,” says Reg Hodgson. “They will be less likely to go to C-Stores, and smaller retailers will reduce their range to just a few top sellers.”
This might even drive some suppliers out of business, reducing competition in the industry. Imperial Tobacco is particularly concerned that the smaller brands would be the first to disappear. The Federal Government, through the Australian Competition and Consumer Association, encouraged ITA to buy these brands when Rothmans and Wills merged in 1999.
“ Display is vital to competition,” says Charles Thomas, Head of Corporate Affairs, Imperial Tobacco Australia. "In 1999 the Federal Government was concerned to maintain competition in the tobacco category. The same government is now silent as state regulations which are anti-competitive are introduced.”
Meanwhile, Philip Morris Limited’s Colin Lippiatt argues that adults who have chosen to smoke should be able to see what brands are on offer in order to make that selection.
“ Preventing adult consumers from finding or seeing tobacco products on offer at retail would, in our view, promote consumer confusion. Additionally, it would make it very difficult to launch new brands,” says Mr Lippiatt.
Tobacco manufacturers and suppliers who are involved in the consultation process are now calling for retailers as stakeholders to engage in the process and make governments aware of the impact on their business.
* NATR members include: Australian Association of Convenience Stores, National Association of Retail Grocers of Australia, National Independent Retailers Association, Newsagents of Australia, Service Station Association, Motor Trades Association of Queensland, Victorian Automobile Chamber of Commerce, and Motor Trades Association of South Australia. NATR’s key objective is to protect tobacco retailers’ rights to display and sell a legal product to adults. For further information, contact the Chair, Peter Jowett, on 02 9369 5395 or the Secretary, Ken Henrick, on 02 9806 1915.