With a raft of regulations governing how it can be advertised, marketed and displayed, tobacco is a notoriously complicated category for convenience stores to manage and yet it remains an incredibly important one.
It offers good margins, attracts loyal customers, and commonly inspires additional sales. In short, it's well worth the effort.
While around 96% of tobacco sales within the convenience channel are tailor made cigarettes (TMC), stocking an adequate range of the other products such as roll-your-own (RYO) tobacco, rolling paper and other accessories, and cigars is absolutely crucial for C-Stores seeking to maximise tobacco sales.
In terms of RYO tobacco through convenience, British American Tobacco Australia (BATA) has a more than 40% market share, driven largely by Winfield with a 31.03% share, and Port Royal with a 9.56% share.
"Although RYO may not generate the sales volume that TMC products deliver, it's important to recognise that a lot of consumers purchase within this channel because of the convenience it offers," said a BATA RYO executive. "Therefore, by not ranging RYO products, there is the potential of losing other sales as well."
This is a risk that most C-Stores will not want to run, particularly as busy, time-poor convenience consumers are generally not overly cash conscious, and demand availability of their favourite products.
Imperial Tobacco is the market leader within the RYO segment with close to 60% market share, thanks to its popular brands like Champion, White Ox and Drum.
"The RYO category as a whole is in growth (2.61%, Feb MAT) whilst the TMC segment is in decline," said Imperial Tobacco's National Business Manager, Andrew Matheson. "With the continued increase in costs of tobacco products, consumers are increasingly willing to trade off the convenience of a TMC for the value and flavour that the RYO category represents."
This all suggests that a closer look at RYO would be an extremely worthwhile exercise. Most importantly, it seems that RYO products continue to provide excellent margins for C-Store operators over 20% on average. Given the unit price of a pouch, this can mean a margin of over $2 for every pouch sold.
Research shows that approximately 45% of all RYO consumers smoke both TMC and RYO. In general, RYO consumers are gender neutral and their age varies depending on what their favoured brand is.
BATA's Port Royal Rum & Wine 50g is a premium priced RYO offering, usually enjoyed by those who consider themselves to be connoisseur smokers. The company's market-leading Winfield brand comes in Red, Blue and Gold variants in both 30g and 50g and performs strongly with new RYO consumers. Holiday is BATA's VFM (Value For Money) offering and the category anchor.
"Our RYO portfolio offers brands that each have a different consumer offering," said the BATA RYO executive. "We have an ongoing commitment to add consumer value to brands within our RYO portfolio."
Imperial Tobacco's Champion is currently the second largest RYO brand with 30% market share in the Convenience channel and it has enjoyed 7% growth in the past seven years.
"From an emotional context the brand is seen as an original, legendary Australian RYO, and a classic brand that appeals to many smokers," said Imperial Tobacco's Andrew Matheson.
"The growth of Champion is also attributed to the continued consumer taste profile preference for a Virginia RYO blend. The blend is a mix of carefully selected premium quality bright tobaccos, that all combine for a smooth, flavoursome taste."
For its part, White Ox with a 13.84% overall market share has also experienced long-term growth, thanks in part to its unique selling proposition as the only full dark tobacco in the Australian market.
Imperial Tobacco's other strong RYO performer is Drum, which boasts a 15.9% overall market share. Again, it has been helped by the fact that it is the only Halfzware tobacco (a Dutch blend composed of a variety of golden to deep rich brown tobaccos) in the Australian market, making it a unique proposition for the RYO consumer.
"At present the amount of RYO that is ranged and visible varies greatly across accounts and channels," said Mr Matheson. "However, despite an increasingly darkening market (display restrictions are getting tighter), the category continues to grow."
There are then a variety of RYO tobacco products catering to all consumer needs, but what about those regulations governing marketing and display? In general terms, display legislation applies in the same manner across both TMC and RYO. The variations however come across each state's specific legislation, often making it difficult for the trade to understand what can and cannot be displayed.
For example, in Victoria, an outlet may display one facing of one variant in one pack size only. This applies to both TMC and RYO. So, if an outlet has a 30g pouch and a 50g of a particular brand variant, then only one of them may be displayed.
In Queensland, legislation states that one facing of one brand variant in one brand pack size may be displayed, and this must be within an area of one square metre. This legislation applies to both TMC and RYO.
The papers and accessories category is more complicated again, as in some states they are treated as tobacco products while in others they are not.
As tobacco retailers are subject to state specific legislation, it is obviously essential that they keep abreast of all the requirements in their particular geographic location.
Things in the RYO tobacco category are then always on the move, and that extends to product innovation. For example, BATA recently introduced a double sticky tab to keep its tobacco fresher, and is currently working on what it calls an exciting global innovation, which should hit the market next year. Its message to retailers and consumers alike is clear: "Watch this space!"
Similarly, Imperial Tobacco has been extremely busy in the innovation department. Its Drum Laminate was launched with the added benefits of longer lasting packaging material and a Velcro seal, as well as an adhesive tab for consumers to place their papers.
A more recent innovation was the Golden Virginia Poly Laminate pouch which, as well as added durability, also offered a Zip Lock seal to increase freshness and reduce tobacco loss.
But innovation has not been restricted to pouch technology. Tally-Ho, the market leader in the rolling papers category, has in the last couple of years extended the brand into the accessories category with a range of filters. Tally-Ho now offers Slim, Ultra Slim and Micro Slim / Pop a Tip filters (filters in a box). It has already achieved a strong share of the market, driven off the back of the Tally-Ho papers brand recognition.
Imperial Tobacco says the heritage and functional quality of Tally-Ho papers is what helped it to achieve market leadership. It says activities over the last three years have focused on the brand's benefits as consumers' preferred paper, its overwhelming availability, and its functionality inasmuch as it doesn't come undone.
While Tally-Ho currently has 54% share of the Papers market, it is by no means the only game in town.
Swedish Match markets the well-known Ventti range of accessories and Cricket lighters.
"By offering a tobacco category solution comprising of market leading brands including cigarettes, RYO, cigars, pipe tobacco and smoking accessories including RYO filters and papers, the retailer can ensure the majority of tobacco consumer tastes and preferences are catered for," said the company's Marketing Manager, Paul Halloran. "Convenience stores play an important role as being one of the major destination points for tobacco consumers in Australia."
And Australian Products and Accessories now imports and distributes the aLeda transparent cigarette rolling papers in Australia.
"aLeda transparent rolling papers are unique to any other cigarette papers on the market because they are an all natural rolling paper composed of 100% regenerated cellulose from the eucalyptus tree," said the Director of Australian Products and Accessories, Eran Rimmer.
"It is this composition which creates an all natural, completely transparent cigarette paper that is 100% biodegradable."
He says the papers that are available in three sizes are durable, water resistant, self-adhesive, odourless, tasteless, easy to roll, have a slow combustion rate, and come at competitive prices.
Interestingly, Australian Products and Accessories says it has found a high proportion of RYO purchases are made in convenience stores, and so it has concentrated its efforts on the channel.
"Our customers know what they want to buy but do not want to travel big distances to make a purchase, so it only makes sense for aLeda to be available in convenience stores everywhere," Mr Rimmer said. "Sales data indicates that aLeda's initial focus on the convenience sector is paying dividends."
Mr Rimmer makes the point that customers are generally satisfied with the available range of RYO products being sold in C-Stores, but he warns that it is imperative that C-Store owners 'stay with the times' and do not fall behind in stocking new RYO products.
"RYO consumers more often than not tend to purchase other products unrelated to tobacco when in a convenience store, such as bread, milk and newspapers," he said. "If C-Stores do not stock a variety of leading RYO brands or new RYO products in high demand, customers may decide to shop elsewhere and sales may be lost."
He says that consumers expect to be informed of any new product being sold and it is the role of the convenience store owner to educate both staff and consumers of any new RYO products available in store.
Cigars are another tobacco product which, when the range is right, will draw in customers who may then make additional sales while in store. But there are challenges.
"Display restrictions are making it extremely difficult for convenience retailers to merchandise cigars in their stores," said a BATA cigar executive. "Tailor made cigarette brands take up the majority, if not all, of the available spacing in most convenience retail space. "
He argues therefore that C-Stores need to find a balance between TMC and cigar offers in the display space.
"Some key lines like Captain Black and Cafe Crθme cigars should be visible to the consumer to show that a store has cigar offers," the BATA cigar executive said. "This may prompt them to ask for other available products."
BATA's leading cigar products include Captain Black filtered cigars that come in classic, cherise and dark crema variants. Captain Black continues to grow sales in convenience and now accounts for more than 25% of total cigar sales through the channel.
The company's Dunhill Small Cigars, which were launched in October 2006, have also continued to grow in convenience. They are one of the few small dry cigar offers that has a 100% genuine cigar leaf wrapper.
BATA can provide in-unit humidors for merchandising premium hand-rolled Dunhill cigars. The humidors keep the cigars at their optimum storage conditions and remind consumers that they are on offer.
Swedish Match, which boasts the popular Willem II cigar range, also has cigar cabinets and humidors suitable for the display of all cigars. It offers display units specifically designed for petrol and convenience stores where space is at a premium, and these are also available for Cricket lighters and the Ventti range of smoking accessories.
"All tobacco products should be brand blocked and clearly priced," said Paul Halloran from Swedish Match. "As display space is limited in some markets, retailers should ensure market leading cigar SKUS such as Willem II Wee Willem Blue and Regular are displayed this will ensure cigar consumers are aware that cigars are stocked by the retailer."
Swedish Match, which also markets the leading Borkum Riff range of pipe tobacco, says cigar packaging and products are being continually updated to meet the emerging requirements of consumers. It cites cigar packs with as few as five cigars and smaller RYO filters as examples.
"Due to the nature of the convenience channel within the retail environment, most consumers of tobacco will look to source their brand from a convenience store from time to time," said Mr Halloran. "The Willem II brand continues to perform well within the market and includes a variety of sizes to suit all cigar consumer preferences."
Redline Internationale is a POS marketing company, that has formed a partnership with Natussi Tobacco in Singapore, to build a portfolio of imported tobacco products for the Australian market. Products handled by the joint entity known as Richland Express include Ashford TMC and RYO, Candlelight cigars and the all-natural Manitou cigarettes.
"In our opinion, 30% of smokers are looking for variety in what they smoke," said Richland Express Director, Kim Jessop. "It's not that they are switching exclusively to cigars or RYO, but they will look for a product that fits a specific occasion or time in their life."
Mr Jessop says the Candlelight cigar range is growing rapidly, thanks largely to its competitive pricing and innovative packaging. It includes: the Sceniorita 5 pack in vanilla, cherise, Havana, coffee and whisky; the Candlelight Mini in vanilla and cherise; and the Candlelight slim Corona in vanilla, whisky and Havana.
"The pricing on all three products is exceptional in value for money and in margin for retailers which is driving the success," Mr Jessop said. "But our major feature is the individual foil packaging and bar codes which means our cigars can be sold in their multiple pack size or individually."
Richland Express acknowledges that tobacco trends are largely governed by legislation.
"Although there's no telling what kind of future is on its way for the tobacco industry, retailers should be taking matters into their own hands where they can," Mr Jessop said. "It is about the range and what your customers are being offered."
He said C-Stores had the opportunity to provide a greater range of tobacco products to benefit both the consumer and their own bottom line.
"This retail segment is a major force driven by our lifestyles and each retailer should look to 'out-range' their competitors and offer not only conformity for ease of shopping, but real alternatives," he said.
Richland Express offers retailers all their in-store merchandising needs within the legislative requirements.
"The greatest reduction in any retailer's tobacco sales is from competition, but the effect of tobacco taxation and smoking restrictions has made it more difficult to rely on cigarette sales as the primary category for driving in-store profitability," Mr Jessop said. "With this in mind, retailers should look to bolster their category."