In July 1996, CSP delved into what is now the bane of the industry's number one category: cigarette/tobacco stores (CTS). They've gone from zero to 13--percent share of market, that is--in just five short years. So, we're back! And we've interviewed industry expert Dick Meyer, Meyer & Associates, on the growing presence of CTS, and what retailers can do to make the most of their share of the market.
Of first and foremost importance is category management. A positive result of the constant threat of CTS is that it has forced retailer focus on what category management is all about. "In my opinion, many c-store operators continue to have a lot to learn about being a c-store merchant in the true sense of retailing," says Meyer. "However, there are many operators very motivated now to give this, and other important categories, the attention they deserve."
Learning how to be better category managers will take a learning curve not dissimilar to past dynamics in the convenience store industry, such as learning about being a gas retailer instead of just being a commissioned outlet.
Are we managing inventory to our best advantage?
No, we are not, but we can fix this with some short-term focus on our opportunities. As an example, I believe the industry could increase inventory turns by as much as one-third, from the 15-turn average reported by NACS, to about 20 turns. For retailers that translates to reducing their cash investment in cigarette inventory by 25 percent (about $2,400 per store) without reducing SKUs! For a 40-store chain that's about $100,000!
There are no rules that say we should be a mini-warehouse for our wholesaler, or for our manufacturer. So, we ought to re-look at our reorder points. We don't want to be out of stock, and we don't want to limit our SKUs because we can't afford to lose important traffic.
What kind of research can retailers do on their own?
Obviously, the first step is to examine consumers' buying habits. Your store managers can tell you. Talk to them. I don't think it's rocket science. It starts with listening to the customers, to your front line employees. Plus, there is probably a tremendous untapped pool of data in some of the more sophisticated POS registers out there now; customer mix reports telling you what other products cigarette customers buy would be one of the first reports I'd want to interpret.
Can retailers trust the manufacturers to give them good information?
Absolutely, but the caveat emptor (buyer beware) rules apply. I absolutely think there are tremendously good manufacturers and suppliers. For instance, Proctor & Gamble, who have been forerunners in category advising.
What you should do is ask them, and count on them to provide you with meaningful, complete information about the products they're selling. And challenge them. And get really upset if they prejudice their products because they are not giving you the full story. And, if you find out they did that to you, tell all your friends. This industry is still small in its responsiveness and information sharing, from a wisdom viewpoint. When you've got a good supplier, tell your friends. When you've got a dishonest supplier, tell your friends.
What can we do to protect or grow our share of market?
* It ain't about increasing a supplier's share of market, it's about increasing a c-store's share of gross profit dollars. Share of market is all about units. Be cautious that a single manufacturer doesn't focus solely on increasing their brands' number of units in your stores. You want category management, not 'category manipulation.'
Insist that your supplier provide genuine concern as a category adviser, meaning how do you dominate the category, not just their products. I suggest to retailers, you ought to resent, and you ought to make your concerns known to any supplier, manufacturer, or wholesaler that gives you only half the information, and is trying to catch you off guard. Look for suppliers who really want to find a win-win solution for the category they serve.
* It ain't solely about retail display allowances, it's about the growth in total cigarettes and total merchandise gross profit dollars for the retailer. When I was executive vice president of PDQ, I remember the size of those quarterly RDA checks appearing attractive. However, we disciplined ourselves not to forget the 85 percent of cigarette gross profit dollars that came in pack by pack, carton by carton every day in the store. Bottom line, we never let RDA dominate our main interest in giving the tobacco consumer promotions on most of the brands they expected us to promote!
* It ain't about choosing one brand to promote over another, it's about giving consumers a reason to shop your location and to assure the retailer's growth in customer counts and total gross profit dollars.
Just because you don't sell a lot of one brand, it does not mean you should remove that brand from your inventory. So do not get fooled into saving inventory dollars by limiting your SKUs. You will alienate customers; they will take their loyalty elsewhere. Think about this: If you sell one carton a month of a brand, let's say you have an $18 inventory investment. Are you going to forfeit one or two or three customers because of an $18 investment on a product that NACS says turns 15 times a year, but which more aggressive operators will get more than 20 turns a year?
Do you have some warnings for retailers related to cigarette CM?
The major pitfall I've seen a few retailers make is when they, typically suffocating from all the other priorities of our business, make big decisions on the category based upon some fancy graphs on SOM from one manufacturer's study. They see increases in SOM from a touted program and totally forget that at the same time they changed their displays or prejudiced different brands to promote, they also became more aggressive on their pricing. Hello, McFly! It's a natural thing--it isn't the result of a new program. It's a result of being aggressive in the market place. In summary, then, we need to challenge the suppliers as to whether their new program has done anything to help you make more gross profit dollars (for tobacco and total inside sales) or have they just got you to change your pricing strategy?
Why is increasing gross profit dollars more important than increasing share of market?
SOI 10-Year Highlights
per store dollars
XX 1986 1996 Increase GP$ gasoline $52,400 $129,000 146% GP$ cigarettes $27,900 $42,300 52% GP$ other merch $172,300 $192,000 11% Total GP$/store $252,600 $363,300 44% Pre-tax profit/store $21,900 $26,100 19% Source: Meyer and Associates
Because the only dollars we have to pay our bills with are gross profit dollars! Especially in view of Gary Black's [of Sanford C. Bernstein] prediction that GP dollars will decrease, and we know that we just had two minimum wage increases.
Now you're telling me that our number one category GP dollars are headed down, and Ted Kennedy wants another minimum wage increase. Further, it's likely that real estate will continue to increase and utilities and everything else will increase. It isn't about making it up in volume if we're forfeiting margin on every sale. Share of market is important, but I have to measure its impact as carefully as the strategies I use for being lowest, or 2 cents higher, on the street for gasoline.
What should we be measuring and interpreting?
At minimum, cigarette category management decisions ought to evaluate: units growth (equivalent number of cartons sold per week); margin dollars plus/minus, for cigarettes and total inside sales; pricing changes; and other traffic-related barometers.
Can you break these components down for us?
* Units. This is the easiest data to obtain, and every manufacturer and most wholesalers should be able to, and typically do, give operators this data in every variation to Sunday. Some of the most meaningful analyses I've seen tell me: how many cartons (equivalent) per week I sell vs. other c-stores in my area, and what my SOM is for each brand vs. competitors. When you see that you're trailing the market with popular premium or discount brands, it's a signal that maybe your lack of promotions on those brands is losing you traffic.
* Margin-dollar impact of the category plus all inside sales. How you approach cigarette pricing is a market to market decision. In some cases you can afford to forfeit GP dollars on cigarettes if it has a peripheral benefit to all other merchandise sales--if it is perceived as a loss leader, or a partial loss leader and it increases your overall grocery GP dollars. Just make sure that you validate your strategies by measuring all components impacted by your change in strategies.
XX 1993 1997 Convenience 45.2% 50.7% All others 54.8% 36.0% CTS 0% 13.3% Source: Gary Black, Sanford C. Bernstein & Co.
* Monitor your pricing issues. Prior to the test, if you look at doing an exclusive or a non-exclusive program, document your starting point! What were you trending, how did you come out after you did the test, and more importantly, what was your pricing? If you were at 23 percent margin before, and then someone talks you into an exclusive or non-exclusive program and says go down [on your pricing] about 10 percent, don't get fooled by the results.
* Traffic volume measurements. Average sale per merchandise customer may increase by lower pricing for cigarettes. But, if total customer counts and non-cigarette merchandise sales and aggregate GP dollars on inside sales don't improve, this would validate concerns about not promoting all major brands, not carrying adequate brands and turning away loyal customers, and forfeiting the peripheral sales or GP-dollar benefit of all cigarette customers. Watch all these statistics religiously and constantly assess their meaning.
Who are some smart retailers that are doing it right and what are they doing?
Racetrac appears to be. Sheetz appears to be. And Kwik Trip initiated a bold low-price strategy about 18 months ago and seems to have prevailed.
When you talk about smart retailers, I think of any operator who is not doing anything to frustrate customer traffic and probably practices many of the suggestions we're looking at now. They educated themselves to begin with. They are the category manager pioneers. Remember that what we're talking about in the tobacco category applies to a lot of things. Can you imagine a retailer saying I am just going to Coke in here and no Pepsi? You would lose some serious traffic.
What are pitfalls retailers should be wary of?
What I would call 'category manipulation.' Allowing yourself to be manipulated by a supplier's convenient (to them) analysis, or not fully educated on the alternatives. Once again, I have to add that this also isn't reserved only to the cigarette category. These days it's becoming increasingly critical to make decisions based upon timely and complete information.
Are bad c-stores candidates to become CTS?
I disagree with, I think it was Gary Black, who said you can take a bad convenience store and make it into a CTS. I think that is something you have to be very cautious about. I don't think it is that easy. It is a natural temptation, but is it the best use of that property? I remembered one independent marketer saying, "I'll put a 60-story building on that site in a New York minute if it makes me more than that c-store!"
When I think about the cost of a typical, traditional convenience store, and my store is losing money and I think let's just make it a CTS, I might be better off taking the tanks out and selling that property, or putting in something else. Best use and return on investment must be measured before making that kind of a decision. Most CTS are
dramatically lower investment facilities, albeit even strip malls, so how can
you justify their $2,000/month leased facility against your $500,000 facility?
What other products can we expect c-stores to move into?
When I toured some Cigarettes Cheaper stores (they're the largest CTS outlet with purportedly over 400 stores), they had candies, even some private label or generic soda. Whether or not these other products generate meaningful dollars, I doubt it. Of course they, like other CTS outlets, seemed to be selling the manufacturer jackets and umbrellas and other promotional merchandise. Certainly there is no reason they can't get into other adult-type things. Maybe they will have a magazine rack with sophisticates. Maybe there will be a lottery center. Anything that is adult-restricted are the natural adds. Maybe they will start selling beer. But if you sell beer, you have to sell it cold so you are talking about more expense and more permits. I am not saying that is not possible, but those are the natural potentials. And then you become a blur as to what is what.
Is there an expectation that we will see boutique cigarette stores?
I think so. My good friend Tom Coleman, president of E-Z Mart in Texarkana, Texas, wrote me last year reminding how ma and pa stores were the early video rental locations, then something called "Blockbuster" evolved. In retail, I've learned, things will forever change and consumers will forever want more for less.
Is there any possibility that c-stores will be driven out of the tobacco business?
No way, Jose! We've proven our resilience over and over and over. It just happened that tobacco was the most politically convenient product to pick on by the current administration. We'll find out what is the next diversion for subsidizing federal and state largesses, so politicians can consistently defer normal funding accountability. My guess is beer and liquor will be the next goats for avarice-driven lawyers and inhabitants of la-la-land. Why don't you ask me how I really feel?
Who will be the big winners in the battle against CTS stores?
The big winners will be the same top echelon of convenience store marketers who are always out on the edge, and who are always studying the trends five years in advance, and require documentation and research to make intelligent category management decisions.
It's the market strategists, the convenience store merchants of the world (we know who they are) who do their homework, who invest in their people, and listen to their consumer. These operators have a picture of their mission statements and the consumer permanently implanted in their minds. They know the consumer dictates. The consumer tells you what you've got to have. They eventually tell you what you've got to sell it for.
Who will be the big losers?
The losers will be the ones who just let the parade pass them by and do the same old, same old.
Where do you think the next threat to the industry will come from?
Supermarkets and mass marketers getting into gasoline and companies not properly funded. On the latter, it's time to free ourselves from the umbilical cords of traditional banks and take advantage of the plethora of new capital sources available to us.
Do you have any final thoughts?
I love this industry so I'd like to say that while I feel strongly about my comments and feel I do my homework on these issues, I'm only as smart as another retailer or supplier's success story. Everybody is not a Casey's. Everybody is not a Wawa. Everybody is not a Sheetz. But that doesn't mean they're not equally good operators. Those kinds of companies have similar success characteristics like low turnover of management, commitment from the top, low turnover at the store, attention to detail, etc. The beauty of our industry is that I've seen the passion and discipline of these sizable, mature operators in the hearts of one-store to 60-store operators. There will never be a monopoly on imagination and, personally, I'd hate to ever have to compete against that one-store retailer down the corner who has a dream! *
Look Into the Crystal Ball
$550-$600 billion settlement
Consumption will fall by "only" 10-12 percent by 2003
CTS will take 30 percent of market by 2003
C-store gross margins will fall to 12-15 percent by 2003
RDAs will not change much from current levels
Industry discount share will be no higher than 30 percent by 2003
Top seven brand families will be 75 percent of the market by 2003
Source: Gary Black, Sanford C.Bernstein & Co.
For biographical information on Dick Meyer
Article orginally appeared in CSP, vol 9 no. 4, April, 1998
Copyright © 1998 Meyer & Associates All Rights Reserved