Feature article: Tobacco

Despite the seemingly endless series of challenges it faces, tobacco has consistently demonstrated remarkable resilience to remain a critical component of convenience store profitability. In the face of severe restrictions on display and marketing, plain packaging legislation, and an ongoing series of hefty excise hikes, the category’s sales through the channel have stayed remarkably strong.

However, continued careful management will be required if they are to remains so.

With the latest round of annual 12.5% excise increases not due to end until September 1, 2020, the way in which store operators manage their pricing will be especially critical. While better opening hours, ease of car parking, and accessible locations means price may not be as important to convenience customers as it is in other channels, there are limits.

Imperial Tobacco Australia (ITA) communications executive Michelle Park said: “The proportion of convenience shoppers who compared prices with the last purchase occasion has been steadily growing.”

“Over the last 12 months the proportion who compared prices has grown from 23.1% to 30.9,” she said.

However, despite its higher pricing, she said the petrol and convenience channel share of trade has remained strong as retailers have successfully maintained a consumer-led range while rationalising percentage margins.

Imperial Tobacco says the channel’s future success in tobacco sales will, in part, be driven by its willingness to reduce its price differential to other discounters, and therefore attract and retain more shoppers.

It said that operators should ensure pricing is consistent by avoiding frequent changes.

“Sporadic discounts should be avoided in favour of a constant, competitive price,” said Ms Park.

“This approach will encourage repeat purchases from shoppers as they become accustomed to the store’s offer and slowly incorporate it into their routine.”

Philip Morris Australia said that while price is a factor to consider, it is not the only one that convenience can leverage.

Philip Morris’ national group manager – impulse Daniel King said: “The opportunity for this channel remains its distinct point of difference, being a large spread of convenience outlets and the ability to be open for longer hours compared to other channels.”

“Convenience continues to perform admirably given upward pricing trends.”

While it is true that tobacco saw 4.5% dollar growth through convenience in 2016, a closer look at the data contained in the latest Australasian Association of Convenience Stores (AACS) confirms there is no reason for complacency. In 2015, the dollar growth was 5.2% and, in 2014, it was even stronger at 8.9%. And, in terms of volume, rather than value, tobacco is in decline across all channels.

Nonetheless, British American Tobacco Australia (BATA) said there was no evidence that excise hikes and plain packaging legislation have resulted in any decreases in smoking rates beyond the long-term trend.

BATA’s Senior Corporate and Government Affairs Manager Josh Fett said: “The big shift in the market in recent years has been that price sensitive smokers are looking for cheaper alternatives.”

“The nature of convenience shoppers has somewhat insulated the channel and it has a better sales mix, but the low price segment is growing quickly.”

For any retailers looking to get the most out of the tobacco category then, it is important to focus on consistency in both range and price. Stores should implement a core range of products that balances value-oriented brands for price-conscious consumers with premium brands for the more discerning smoker.

The tobacco industry as a whole also remains deeply concerned that the large excise increases and plain packaging legislation has fuelled the black market by making it even more lucrative for organised criminals to smuggle illegal tobacco into Australia. A pack of 20 cigarettes is up to eight times more expensive in Australia than South Korea, for example and these high profit margins can provide an attractive and valuable source of income for organised crime.

The latest KPMG report on illicit tobacco in Australia was released in May 2017 and showed illicit tobacco now represents a 13.9% share of total consumption. This means that roughly one in seven cigarettes is now illegal. Leading tobacco industry players say convenience stores should ensure they always buy their products direct from the tobacco industry or from reputable wholesalers.

With price-conscious consumers continuing to trade down, sub-value cigarette sales have been strong through all channels but they have been particularly relevant in convenience where prices are generally higher than supermarkets or tobacconists.

Imperial Tobaccos said this trend has led to incredible growth for the JPS brand family over the past three years, and it says Peter Stuyvesant 20s and 25s also overtrade in convenience.

For its part, BATA said its portfolio is well aligned to convenience with brands such as Dunhill, Benson & Hedges and Winfield selling well through the channel, with cheaper brands such as Rothmans also growing quickly.

Philip Morris said it’s Marlboro, Peter Jackson and Bond Street brands have been performing strongly in the channel and it has also observed a shift to small pack counts, as well as one towards cheaper brands. It says this means convenience can still gain outcomes via brands like Bond Street which is well established at this end of the market.

The rise in demand for lower price cigarettes has also seen other companies such as tobacco wholesaler, Richland Express, and the Tobacco Imports Company (TIC) – which is part of the Kollaras Group – seek greater market share.

TIC says it aims to provide customers with competitive products that offer above industry standard margins, and a significant point of difference.

TIC marketing manager Georgia Kollaras said: “We have stayed consistent with our pricing strategy – ‘everyday value offering’ – and our King Street/Brooklyn and Cleveland brands have continued to grow and do very well in the convenience channel.”

“Convenience store operators have been historically frustrated in their inability to compete and maintain margins and we as a ‘low cost operator’ saw an opportunity to jump in and assist to ensure everyone remains on a level playing field.”

Despite the inroads being made by some less established companies, the AACS State of the Industry report reveals that most tobacco users are still highly brand loyal, with research showing 85% of all tobacco smokers purchase their usual brand when visiting a petrol and convenience store. According to Imperial Tobacco, the top five tailor-made cigarette brands – JPS, Winfield, Rothmans, Bond Street and Peter Jackson – still account for 80% of volume sales in convenience.

ITA Profiler Tracker data (July to September 2017) revealed that 31% of convenience shoppers said they would leave the store if their products were not available. Tobacco out of stock can then be extremely costly as customers who can’t find their favourite product may never return to that store again.

To prevent this, it is critical that stores regularly review their turn rates and stock on hand to ensure adequate stock weight. The tobacco unit should be restocked during quieter periods throughout the day to guarantee stock is on shelf during busy times. Holding additional stock during peak periods such as weekends and local events can also help avoid out of stocks.

Understanding the customer in a rapidly changing tobacco environment is absolutely vital for stores seeking to maximise the category’s ongoing potential. According to ITA Consumer Profiler Database (Oct 16 – Sep 17), 60% of tobacco shoppers in convenience are male with an average age of 32 years. They are more likely to be employed full time and smoke at least several days per week. On average they will make over 100 tobacco purchases in a convenience outlet per year. Some 49% of these smokers visiting convenience stores do so primarily to make a tobacco purchase. However, only 79% of their average spend of $42 per visit is on tobacco, they spend an average of $9 per visit spent on other items.

While tailor made cigarettes still account for 90.3% of dollar sales in the tobacco category, customers’ continued quest for greater value has also seen demand for roll your own (RYO) tobacco rise sharply. Champion continues to be the leader in RYO attracting nearly 30% of consumers. Winfield and JPS RYO also continue to perform strongly, with other niche brands such as White Ox and Port Royal capturing 11% collectively. As RYO grows, so too do complementary products such as papers and accessories like filters and machines.

While it is important for retailers to operate within legislation regarding tobacco displays, it is also important that they maximise any opportunity to communicate their offer to consumers. They should be sure to implement and maintain a price board or price tickets (where permitted) to communicate their offer and to inform consumers who were previously unaware that they sold tobacco products.

Many shoppers utilise the price board, but others prefer to ask the retailer for a price comparison. It is vital then that all staff are educated on the category to ensure these footsteps translate into transactions. Customers who may be frustrated with wait times, lack of category knowledge and general service in grocery may prefer the convenience option.

While no one would pretend that the next three years of tobacco tax rises won’t continue to put pressure on the category through convenience, it is certainly not all doom and gloom. Convenience stores have been successful in adapting to the changing needs of consumers by adopting the right range and competitive offer, and more of the same will likely be required as down-trading is set to continue. There is every reason to suspect though that – with continued good management – the category will continue to be a resilient and profitable one.

* Convenience and Impulse Retailing would like to thank Imperial Tobacco Australia, British American Tobacco Australia, Philip Morris Australia, and the Kollaras Group for supplying information for this article.


  • The proportion of convenience shoppers who compared prices with their last purchase has been steadily growing.
  • Operators should avoid sporadic tobacco discounts in favour of a constant, competitive price that will encourage repeat purchases from shoppers as they become accustomed to the store’s offer.
  • Convenience store staff should exceed shopper expectations through category knowledge and customer service.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top