The saying may have started as a joke, but counting on death and taxes has become a serious business reality in the tobacco outlet world. 2006 saw the death of many single stores and some larger chains, as well as the wildfire spread of state cigarette taxes, which are expected to be joined by higher OTP taxes. What’s more, the burdens that still-standing retailers face hardly end there.
The good news? Tobacco merchants who’ve made it thus far—especially surviving the last year or two—have developed a tougher skin, and a history of making it in trying times. They are the true Survivors, more so than those on any television reality show. On the pages to follow, four of them share their 2006 high points/low points and at least one good idea for pushing forward in 2007.
Survivor John Kinsey, Owner,
Smoker’s Club Inc., Akron, OH
One store (after “cutting loose” other franchise stores)
The first sign of the times—his move from franchisor to single-store owner: “The franchise owners all manage their own stores now. We’re still in contact to help everyone as best we can, but once the major tobacco companies cut their contracts, there wasn’t much a franchise owner could do for them. Before, we had some clout in sticking together. Now, I’m not going to take money from them when I can’t provide that service. So we cut them loose and they’re on their own. Of course, we still have conversations about the business and we try to encourage and help them where we can.”
A lowdown on taxes: “For us, and other tobacco retailers in Ohio, it’s been a little more difficult lately because of the state taxes, especially considering the fact that we’re bordered by Kentucky and West Virginia and even Virginia—where taxes are lower.
“They increased our taxes last year to the point that now the difference between us and Kentucky is $9 per carton—just in state taxes.”
And speaking of Kentucky. . . “I used to work with RJR and my territory was in Kentucky, so occasionally, I will go to my old haunts there and see some folks. The stores there still have cigarettes stacked to the ceiling; there are so many people dropping down there and taking cigarettes back for their personal consumption—they’re stocking up because the prices are so good. It’s kind of like it used to be for us 10 years ago; cigarettes wall-to-wall. It’s so ‘wow’ down there, it’s like déjà vu back to the early ’80s when we had stores doing 1,000 to 1,500 cartons a week.”
A shift to ‘higher’ ground? “But with the higher taxes now, I’ve seen a shift, a percentage of my personal business went from carton cigarettes to RYO and accessories. It’ll be interesting to see how it plays out in the future; I think there will be growth but whether the profit margins will be enough to survive on remains to be seen.
“It’s true, I’ll make more on a 16-ounce bag of tobacco (for RYO) than on a carton of cigarettes, but the consumer will probably get about two and a half cartons out of that. He may not need to come back as often.
“We sell a lot of accessories now, too. Tobacco injectors, cigarettes cases, snuffers, and filters that go on the cigarettes to cut out some tar and nicotine, all lighter accessories—it’s quite a long list. Customers do need accessories and that stuff pretty much sells itself.
“There was an old adage for years that if customers have cigarettes at their disposal, they’ll smoke more—and faster. The problem with RYO is in order to do that, they’ll have to make them faster. So I don’t know if that adage holds true anymore.”
And where can they smoke? “What let a lot of air out of folks in Ohio here was that in November they passed a statewide smoking ban. Some of the people seem disheartened. They’re only allowed to smoke in some private clubs and outlet stores where more than 80 percent of the business is driven by tobacco products. As of December 8, all bars, bowling alleys, hospitals, and public places are banned.
“A lot has crossed our minds about putting in a smoking lounge here. Right now, they’re allowed to smoke when they come in our store, but how long they want to hang out in here, I don’t know. A lot of this is going to have to be a ‘wait and see.’ We want to see how it will all play out, what the fallout will be, will there be more quitters.
“Now we’re going down roads we’ve never been before with all the restrictions and the shift in the mix. There have even been words that the government is looking to raise taxes on RYO next. I don’t know if it’s ever going to end.”
Cigar sales are a plus. “Cigar sales have picked up somewhat. I carry more than I did before; there is good profit margin on those. My former franchise stores always did well with them, and they’ve picked up too. My sales in this store are more by individual stick. To me, a good cigar store is a good mix of that and box sales. Right now, mine are still customers buying four or five at a time. But it’s picked up and I have more selection, so that is nice. We’re trying to push it a bit more; if it’s going to grow, I’d like to see some box sales.”
One big wish: “Let me be governor for a day; I’d take back the taxes. We would become the lowest tax state. You laugh, and it’s funny to talk about. But there’s got to be a reason why South Carolina only has 7 cents tax. They have to be selling a lot more cigarettes than we are. They know it gives their state more money that way.
“I would never argue that the bad side effects of smoking aren’t there. But if it’s that bad, let’s just make it illegal and not collect tax dollars on it. The states shouldn’t get rich off of something they think is so harmful.”
But let’s get serious. “I do have direct connections with people in politics and a lot were surprised that Issue Five (statewide smoking bans) passed. They thought it would be left to local jurisdictions. So now maybe they’ll listen to us more. With our smoker’s clout we put together a ‘Right to Light’ organization. We got it kicked off too late for Issue Five, but now we’re pushing for other issues.
“We’re still in a membership situation right now. We have a cool logo and smokers relate to it and what it stands for, but we’re taking it beyond my store and the former franchise stores—we’re going to offer it up to other independents, too. We’re heading in that direction. We probably have about 600 members already, but that’s just from three stores; we’re taking on more here every day and we’ll take it up to Columbus next.”
Survivor Shon Ross, Vice President,
Nothin’ Butt Smokes, Lubbock, TX
13 stores
Yes, it can be done—from stress to strategy. “Because of taxes and tax increases we’ll be seeing in 2007 we spent the last six months strategizing and planning how the industry will look for the next year. The past year has been a lot more stressful than in years past, but it’s opened some doors and opened our eyes to some avenues we’re going to try and walk down.
“We’re expanding various lines—products we’ve seen but never really gave a second look to business-wise. We’re making each of our stores less of a cigarette outlet and more of a tobacco outlet. Here in Texas, it was always cigarettes and moist snuff. Now there are a lot of other opportunities with RYO and premium cigars. They’ve continually increased, albeit gradually, but we’ve been really happy with them, adding lines as the volume has increased. There are a lot of products our customers haven’t necessarily seen before but will now be exposed to. We’re trying to be more creative with various programs and multi-pack-type situations.”
Self-made programs will make this tobacco outlet. “We like what we see in c-stores with multi-pack sales—for example, buying three for a discounted price. So we are going to do the same and put together everything ourselves; it is solely on us to devise and implement the programs. We’re debating various types of discounting programs to encourage customers to come back and buy more products. It will help with customer loyalty in our customer base.
“We’re putting together things like buy a carton, get a lighter. But it doesn’t have to be just about cigarettes or even tobacco; it can also be tied to our fountain drink sales. We haven’t finalized it yet, but our soda sales are so high—and the majority of our customers buy soda—that it makes sense to give them a heck of a deal there. They’re likely to come back and more often. We’re coming up with alternatives for our customers.”
No need to trust the manufacturers. “When the axes hit on taxes, manufacturers like to say that business will go from cartons to packs, but then resume back in six months time. But I’m not really sold on what they tell me. It’s been very stressful because of the manufacturers lately. They’re putting together programs that are really restricting our buying ability. We want to be in business to sell sticks, we’re not here to promote any companies except our own. We take it personally when a manufacturer isn’t willing to work with us.”
To top of column 2 |
|
Preparation is everything. “We’ve been preparing for the tax increases since the day after the vote came through and was passed. That was late summer—it came through in July. So it’s been more than six months we’ve been brainstorming, talking with manufacturers, customers, coming up with plans and product extensions, looking at states that have already gone through it or are currently dealing with higher taxes, and looking at areas like cigars, where there were no tax increases.
“We’re still one of the most favorable tax states when it comes to cigars. So we’ve been diligent in looking at every aspect of this and trying to foresee as much as possible. We want to buy properly to meet our customer demand and get product lines where they need to be, while at the same time, educating our consumer base on how to use these other products and showing them flavor extensions and things of that nature.
“Complaints will never go away, so we try to continually come up with solutions. It starts with our managers, most of our programs revolve around the manager—they’re at the store level two-thirds of the day. They then trickle that knowledge down to part-time employees and to the customers.
“Since the taxes passed, we’ve been telling customers that prices are going to go up and roughly what they will be. We’re getting everybody ready so they can try some different products now and see what they like and don’t like if the time comes when they want to make a switch for budgetary reasons. They can sample some now and determine whether they want to buy more later.”
Operating an honorable business in a wild year. “It’s going to be an interesting year; the first three months will be like a roller coaster. In the second quarter we’ll have a better idea of what our industry will be like in our state. Fewer people are trying to get into this business, which is nice—having those barriers to entry. There also may be a few of our competitors that will go out of business because of the cost of business going up.
“The one thing that concerns me is that some individuals, the one- and two-store operators, will do everything they can to avoid taxes—buying from other retailers and stocking up their stores in illegal ways. That makes it even harder, for those of us who do everything as prescribed by legislation, to do our business. But at least we can go to sleep at night knowing the government is not coming after us. Also, our customers know the difference between a quality business and one that’s not. And we’ll still be in business in two years. It’s a challenge, but something we’re ready for.”
Those were the days, but the times they are a-changing. “I still remember with fondness all the contract payments we used to get. But I have to change the way we do business—it is part of evolution. If we don’t change with the times, we would have to leave, and we’re not planning on going anywhere.”
Survivor Jay Dawson,
President and Co-Partner,
Smoker’s Value Inc., Columbus, OH
3 stores
More lows than highs. “We were down last year from the previous year, no question. One store is down due to road construction for the last seven months. But overall, our dollar volume is down because cartons are not selling like they used to.
“Taxes killed us in July of ’05 to the tune of $7.50 extra a carton. We also just passed a smoke-free ban in the general election. Now the total number of cigarette outlets is down in the whole state. We don’t see nearly as many around here.”
But business is rolling along. “RYO has taken over a lot of the cigarette business and has a good footing here. We’re selling more RYO than I ever thought possible. We’ve increased the brands, the selections, the sizes. We increased that whole section, making more room, a lot more. We have 10-foot glass counters devoted to the category; we also have tubes in the back that are three feet wide and three feet high. We have cut inventories in cigarette cartons due to roll-your-own.
“Still, RYO won’t make up for the lost cigarette business. A customer will buy a pound-bag of RYO tobacco and then we may not see him for two, two-and-a-half weeks. They come back faithfully, but we just don’t have the dollar volume we were used to.”
And other avenues will be explored. “We are thinking of adding other lines—like cell phone cards and money orders—just to draw people into the stores. We already do lottery and make 5.5 percent off that. Probably this first quarter we’ll put in cell phone cards and then evaluate that for a whole year. I’ve never been in it before, and I hear it takes awhile for customers to catch on.”
No new start-ups, but status quo is still a go. “I wouldn’t start a new business or open a new tobacco store right now, but the existing stores that are built up are still viable because of the repeat business. You can legislate like hell, but I don’t think it will get smokers to stop smoking entirely. They will probably cut down, mostly because of smoking bans. But we plan on staying in business. We’ve been in business 11 years already; people know we’re here, and right now, we’re hanging in there.”
Survivor Andy Whitaker,
Part-Owner/VP of Operations,
Tobacco Road Outlet, TRO of North Carolina, Inc., Lakeview, NC
21 company stores and 3 franchise stores
Those darn taxes again. “For the past year, the lowest point has been the tax increases we faced here in this state. They went into effect last September (2005) and those numbers have gone up since then. They had another 50-cent carton increase this past July. So that’s a $3.50 increase in the last year-and-a-half a carton.
“I’ve heard on the news that the cigarette consumption in North Carolina has dropped about 12 percent. We’re seeing that same number in our stores—about 8-12 percent.
“I don’t know if it’s as much that the consumption dropped in-state as it is that the sales we used to get [from customers coming in from] outside the state went down. A few of our stores are surrounded by golf courses so lots of people come here to play golf and travel here on vacation. But now we’re losing a lot of those sales. With the Interstate nearby, people can just drive north or south for a better deal. We’re not that good of a deal anymore. And South Carolina hasn’t increased taxes yet. The other problem is we’re getting smoking bans all over the state so that’s affecting sales also.”
Operating woes are also on the rise. “Another thing we struggle with right now is in operations—trying to keep costs down. We have medical insurance for employees, and they’re going to have to share some of those costs with us. We’ve had an increase of 17 percent in the last three years in health insurance; each year it goes up 12-17 percent. Yet, to keep good employees we need some good benefits.”
But there’s good news in numbers. “We got the lottery in North Carolina in March. We hesitated putting it in our stores at first because of concerns about having the manpower to run it. But we added it in the summer and it’s helped a lot as far as keeping our customer count. We had customers who wanted to buy lottery tickets who might have gone somewhere else to buy them and bought their cigarettes there also. Instead, we’ve seen our customer numbers increase since we put it the lottery. It has definitely helped.”
Moist is a must, too. “One tobacco category that is growing—and has been for the last year-and-a-half—is moist snuff. Existing manufacturers are always coming out with new flavors; and the bigger guys are test-marketing it now—it’s a hot category. So we always have a good display of moist snuff. We run promotions on it; every time a manufacturer offers a deal on moist snuff, we take it. We have great supply and selection on moist snuff. It has helped us with increases in our stores.”
It’s a rough road, but we’re ready. “From what I understand the group that pushes for higher taxes on cigarettes is trying to push an additional 75 cents a pack here again. So it looks like we’ll be up for another fight this year, although I haven’t heard anything official yet. Of course we’ll try to fight it and get our customers behind it. Hopefully, they’ll get more involved now because they saw what happened last time. NATO helps us with that.
“Regardless of what happens this year, I still think this is a viable business for at least the next 15 to 20 years. I don’t know beyond that. But I do know that people will never stop smoking altogether.” •
|
