The consensus amongst the major cigarette suppliers is that, despite pressure on the category, the fundamentals of category management still apply.
Cigarette sales in the two top tiers of convenience indicate that while overall sales have slightly increased (up nearly 2%, (MAT 27 February 2005), volumes in terms of numbers of packets have fallen by just over 2%. This reflects higher prices and a shift to higher-priced premium and mainstream brands and away from value brands in the channel. Combined, premium and mainstream brands account for around 80% of sales.
The latest Queensland regulations of smoker behaviour and the prospect that other states may follow, means the downward trend for volumes is likely to continue. It may even result in a step-down change.
"On average, smokers consume 17 cigarettes per day and this has been relatively constant in recent years," says Andrew Matheson, National Business Manager, Imperial Tobacco Australia (ITA). "There was a bit of a reduction a couple of years ago when opportunities to smoke were reduced, and we expect another step down as the new hospitality legislation is implemented."
Nevertheless, the convenience channel is the second largest channel after grocery, accounting for 23% of all tobacco sales, and despite slow growth, the tobacco category is still the largest category in convenience.
"Convenience has always been an important and dynamic channel for tobacco products," says John Galligan, Director Corporate Affairs, British American Tobacco (BATA). "And, with the involvement of the supermarkets in the channel, tobacco category management will become increasingly sophisticated."
The most important aspect of category management is responsible retailing.
"Retailers should always be conscious of their obligations under both Federal and State legislation and ensure they abide by both the letter and spirit of the law," says Colin Lippiatt, Manager Communications, Philip Morris Limited.
"We have been working for many years with other tobacco companies and with retailers on our '18+, It's the Law' campaign, ensuring retailers are aware of their obligations under the law and providing education and resources to deal with difficult under-age customers.
"Although we provide signage and reminder cards, we are not experts on the law, and if retailers are not sure they should be talking to their local regulatory authority. They should also make sure all their staff are trained in responsible retailing," adds Mr Lippiatt.
It is both a moral and a legal obligation that makes commercial sense. Authorities are policing the rules and dishing out hefty fines to offenders. BATA also works closely with retailers on responsible retailing as well as working with the National Alliance of Tobacco Retailers (NATR) to improve retailers' rights.
"It is important that retailers have their own voice," says BATA's John Galligan. "Although we understand the issues we are not retailers, and the convenience channel has its own unique issues. For example, regulators do not understand the channel, and NATR is showing health ministers how C-Stores work and the implications of regulations."
Responsible retailing and compliance with all regulations are critical. This is a given. That does not mean that category management has to be driven by regulation. Other things matter too, in particular the key factors of range, stock weight and display.
Ranging is a delicate balancing act. You have to range the big brands - and state differences still apply - as well as offering choice to suit the wide variety of consumers. A key trend is consumers trading up and spending more. The convenience offer should be skewed more to mainstream and premium brands and less to value brands. The product mix changes slowly though.
"Popular brands are still popular," says ITA's Andrew Matheson. "Because we are limited in ways to market brands to consumers, product mix changes slowly."
There is still some scope for innovation but suppliers rely on retailers to get their message across. When BATA released its packs of limited edition Benson & Hedges in the last quarter of 2004, its distinctive packaging and retailer information was the only way it could let consumers know.
Another clear - if slowly moving trend - is the shift towards smaller pack sizes in convenience. Numbers of packs of 20 and 25 are growing, while numbers are falling for larger packs. The most popular pack size is 25s, accounting for nearly half of all packets sold. This and the trend to lighter varieties are continuing trends.
Stock weight might be an obvious factor but it remains an issue in the category.
"Out of stocks are still an issue," says Colin Lipiatt.
"It is particularly an issue over weekends and public holidays," adds Laurie Hoffman. "You can sell as much in a couple of days as you sell in all week, and there are no deliveries on the weekend. We encourage retailers to keep more stock of top-selling packs."
"The aim is to maximize return to the retailer," says Andrew Matheson. "You may need additional facings of some packs because you cannot afford to run out of stock for popular lines."
Positioning is also important and should reflect the value of the display space. That means shelving premium, mainstream and value brands from left to right with the most popular packs at the top. Blocks of brands and brand images appeal to consumers who want to see their favourite pack next to those with a similar image.
Manufacturers take a category approach to the cigarettes. Of course, they want to sell more of their own products but they realise the value of the limited space and are taking a more scientific approach to make the best of the category.
This logical display of cigarettes also helps your staff find the packs easily, promoting good customer service. Equally important is presentation. According to Andrew Matheson, it is the one thing that does not get discussed enough in the category.
"We have said it all before but it is critical to maintain a clean, uncluttered multi-chute," adds Colin Lippiatt. "Make sure the unit is fully stocked with all the packets facing the right way - that's a regulatory requirement - but it is surprising how often they are not. Price stickers should be clearly displayed and not be tatty or torn."
Although pricing is generally higher in the channel, there is more to it than across-the-board higher margins.
"Retailers need to be aware of the trends in their area and maintain competitiveness," says Colin Lippiatt.
"There is scope to selectively price higher on selected packs," adds Laurie Hoffman.
Over the past couple of years, cigars have shifted from being a niche category only available in some stores to being a core convenience channel product. Despite being available across the channel, sales growth is still robust at over 4% per year. As with cigarettes, it is not just about stocking only the big sellers. Small cigars are still the main product - but you need a good mix.
"Even though two SKUs represent 90% of volume, impulse sales of single cigar sticks also earn good returns," says Theo Chronopoulos, Trade Marketer Mass Market Cigars, Swedish Match Australia.
Margins are over 20% on mass-market cigars and more on premium cigars. Some locations warrant premium cigars placed in mini humidors. In these locations, retailers need to know how to maintain the humidors and preserve cigar quality. Swedish Match works with retailers to adjust the mix based on consumer surveys. They realise that some premium cigar smokers know what they are looking for.
Most convenience stores need to keep the major brands such as Wee Willem as well as a variety of other different sized cigars. Tubed cigars such as the La Paz range have proven to be appealing because they are easy to carry without damaging the cigar and are priced under $10 per stick.
In all stores, it is important to stock up for special occasions such as Christmas, Easter and Father's Day. Sales during these busy periods can increase dramatically and can often lead to repeat customers.
Cigars need as much, if not more, care than cigarettes. Stock rotation and placement are critical. For example, to keep cigars in good condition they need to be out of direct sunlight. For retailers that stock premium cigars, humidors are a must. They maintain and preserve the quality of the cigars.
"Our sales reps are cigar specialists," says Theo Chronopoulos. "They can pass on their knowledge of what succeeds in the channel and provide the appropriate display units. They work with retailers to find the best mix for the store.
"It is best to start small as it is a category best grown slowly."
Display options may be within the cigarette display when counter space is limited, or in display units tailored to the different jurisdictions.
Also increasing in popularity is roll-your-own (RYO) cigarettes.
"For some consumers, RYO is a better price option," says ITA's Andrew Matheson. "They can stretch a pouch of tobacco."
In convenience, smaller (30g) pouches in the $10 to $15 price range are more popular than 50g pouches which sell for more than $20. Further, you only need to stock the major brands to capture most sales. Winfield, Drum and Champion Ruby comprise over 75% of volume.
That being said, Peter Stuyvesant RYO in a 30g pack has more than doubled volume sold in the past year.
"It was launched initially in premium demographics with the major networks but now that it has established itself it will be targeted at a broader market," says Andrew Matheson.
The challenge is to balance space with return. The ratio of RYO sales to total category varies across the States from 2% to 7%. It varies even more across stores. You need to monitor your RYO sales relative to the total category and allocate space accordingly.
With RYO, you also need to stock accessories such as papers, filters, rolling machines, and perhaps even tubes and MYO (make-your-own) machines. And, of course, lighters (including gas and liquid) and matches go hand in hand with all tobacco products.
Depending on your state jurisdiction, regulation of accessories is less strict than those over tobacco products, and a good accessories display can enhance the total category. Even more importantly, margins are higher for accessories than for tobacco products.
The main convenience lines are papers, filters and lighters, though tubes and MYO machines are growing in popularity.
"We used to import only two containers of tubes per year. Now we bring in nearly 10," says Cathy Huang, Manager's Assistant, Zico Imports which specializes in smoking accessories. "The MYO products are an opportunity for C-Stores in some locations where smokers are more cost-conscious."
Swedish Match distributes a range of accessories under the Ventti brand in a dedicated counter-top unit. The unit incorporates a top layer of Cricket lighters.
"There was a need to clean up the counter," says Theo Chronopoulos, Trade Marketer Mass Market Cigars, Swedish Match Australia.
"Major convenience store chains have experienced greater growth over the last few years in this segment. As market leaders, we know where the market is heading and can advise on the best configuration for the outlet based on demographic and sales rotation. There are lots of products and variants but for most convenience outlets you only need regular and slim filters, one size of papers, plus matches and lighters."
"Some retailers have moved lighters off the counter, and some have even hidden them altogether," says Chris Sargent, Managing Director, AIP Distributors. "But lighters, in particular novelty lighters, are an impulse purchase. You do not get customers coming to the counter and asking: 'Do you have any novelty lighters under the counter?'"
The only restrictions are on the display of papers in Queensland, although it can be confusing. Chris adds that AIP Distributors' range of mini electronic lighters is selling well.
"They are disposable, but also refillable," says Chris. "But, you can double your revenue when you sell the little gas bottles that go with them. With a margin of around 75% that's a profitable combination."
The important thing to remember about lighters is safety. That means quality products that comply with Australian safety standards. The ISO 9994 standard requires that lighters carry appropriate warning labels, and have both a fire-proof body and child-proof lighting mechanism.
Swedish Match will test lighters if you are not sure about your range.
"We offer our expertise in quality assurance to retailers by testing any brand of lighters they have in their range - or are considering," says Theo Chronopoulos.
Compliance is not just desirable, it is mandatory. Fines for non-compliance are substantial. Then, there are the issues of occupational health and safety and insurance.
Seems that for good management across the category, responsible retailing is the key.