The price/value tobacco equation has rooted itself as a mainstsay for many tobacco outlet retailers and for the industry. Indeed, the fourth-tier cigarette segment has matured in a number of ways, as highlighted by David Redmond, president of the Carolina Tobacco Company (CTC):
• Because price remains such a strong focus in the overall category, distributors and retailers are carrying a larger variety of fourth-tier cigarettes than they did five years ago.
• Marketing and sales techniques in the category are more savvy and clever thanks to industry-widespread education.
• Despite the fact that RJR’s Every Day Low Price (EDLP) program is being administered much more aggressively, many retailers are considering abandoning the program in order to satisfy “the needs of their customers.”
• Distributors are much more interested in promoting low-priced brands than Big Tobacco brands.
But despite this firm foothold with retailers, distributors, and consumers, the fourth-tier segment faces a number of challenges today. The two most-mentioned by manufacturers are:
1) The grandfather exemption given to select companies in business when the MSA was created in 1998. “This anti-competitive advantage, which was provided by NAAG and the states to these companies, rewards them with a several hundred million dollar advantage each year,” maintains J. Ronald Denman, executive vice president of General Tobacco.
2) The lack of enforcement by some of the states against the renegade fourth-tier companies that “skirt the laws and regulations of the states by paying little or nothing for the harm their cigarettes cause,” according to Denman.
Regarding these challenges, “the pressure from the majors on shelf space and the discounts given by the companies with grandfathered MSA discounts has made it difficult for companies with no such advantae,” maintains Alex De La Cruz, president and CEO of New Century Tobacco Group. “It is so difficult that even companies with MSA payment advantages were not able to grow their market share.”
“Sales of fourth-tier cigarette products overall are not growing significantly due to the efforts of the states and big cigarette companies to constrain growth,” agrees Bill Greiwe, CEO of Cheyenne International, LLC. “However, some individual companies are experiencing growth.”
Being partnered with tobacco outlet retailers is the industry’s best chance for future growth—and it could be a tobacco outlet retailer’s best chance for cigarette survival. “Tobacco outlets are in the best position to take advantage of fourth-tier products,” states Greiwe. “Tobacco outlets not wed to contracts with major tobacco companies can distinguish themselves from other purveyors of tobacco products by offering choices that others do not. Choices will make your outlet the preferred place for discerning smokers. We are also experiencing success in contracted outlets. The key is to display products so the customer clearly understands the choices that are available. Our professional sales team with years of experience will work with retailers to achieve success and deliver fresh quality product that will sell—their main concern in the category.”
Redmond challenges tobacco outlets to do the math. “Determine if EDLP (from RJR) best serves your consumer and your store,” he says. “The total gross profit generated from limited sales of EDLP brands must be compared to the total gross profit from all fourth-tier brands sold at a lower price than EDLP, the deduction of EDLP promotion value, plus the gross profit from companion, ancillary, and impulse buying while the consumer is in the tobacco outlet. Most outlets conclude correctly that carrying fourth tier at prices competitive to other retail stores is most profitable, and most satisfies the consumer’s needs.”
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The outlets also need to stand up to the “bullying tactics” of the larger manufacturers, especially when they “try to convince the outlets that their contracts prevent them from selling fourth-tier products,” says Denman. “If the consumer wants a less-expensive product, they should be able to buy one from any retailer. Free market is about consumer demands, not manufacturer demands.”
Despite the efforts of the large manufacturers to keep fourth tier buried under shelves or out of the stores completely, fourth-tier cigarette brands need to be marketed to be successful. “Marketing provides the customer with the ability to make the choice as to what they want to smoke and how much they want to pay,” suggests Denman. “Fourth-tier products and POS should take equal space on shelves, in store-front windows, and on outdoor POS, just like the premium products.” More signage will raise more awareness and result in more sales—providing the quality is there.
Quality is definitely an issue in the category, but the more retailers become savvy to reputable brands with staying-power, the more they can satisfy smokers looking for low price and value. The potential, therefore, for growth and sustenance with these brands is good, despite that the overall category may remain flat, especially during these years of weeding out “bad” brands and industry consolidation.
“The outlook for fourth tier is positive because customers demand alternatives to high-priced cigarettes that offer nothing but brand image,” says Denman. “Whether the market grows will depend upon the retailers’ ability to stand up to the pressure placed upon them by the larger companies to only buy from one of their ‘select’ distributors. It will also depend on the retailers’ ability to keep the fourth-tier cigarettes in open sight so that the customers can make the choice as to what they want to smoke.”
Redmond believes the fourth-tier market has a good chance to grow in terms of market share, “and perhaps in terms of cigarette quantities sold.” He also adds, “As state taxes and possibly federal taxes continue to increase, consumers will continue to move to lower-priced brands.”
Interestingly, the industry can learn from recent global happenings. “There are many examples of countries and regions that have followed this same pattern as in the U.S., whereby taxing the smoking consumer is politically correct because they are a minority that cannot stop or overturn the regressive and unfair tax,” observes Redmond. “In the UK, for example, the equivalent of the fourth-tier segment is more than 62 percent of the market, up from about 15 percent—less than six years ago!” •
A Few Packs to Trust
You can’t blame doubting tobacco retailers—“they have been burned so many times before by fly-by-nights, they want to make sure they are buying from a secured company that guarantees product and is here to stay,” says a sympathetic Alex De La Cruz, president and CEO of New Century Tobacco Group. A few trustworthy brands from our story participants include:
• New Century’s newest brands in the market are Traffic and Creston. Passport is coming soon.
• Cheyenne International’s Cheyenne Cigarettes is its flagship brand available in 11 SKUs, all packaged in an attractive hard box featuring “the famous” Monument Valley Western design, according to the company. Cayman is its new all-natural cigarette product, currently available in four packings—Full Flavor, Light, Ultra Light, and Menthol Light King Box. “Our products are made in America at our factory in North Carolina,” states a proud Bill Greiwe, CEO. “We run high-speed manufacturing machines like the major tobacco companies and submit our products to a rigorous quality control process. We believe our products are better than the major cigarette brands.”
• Carolina Tobacco Company’s Kingsboro brand boasts “excellent, high-quality packaging, with a smooth taste similar to RJR brands,” according to David Redmond, president.
• General Tobacco has a new menthol cigarette—32 Degrees. The latest addition to the GT catalog will offer menthol cigarette smokers four varieties to choose from including: Full, Mild, Light, and Max flavor. This menthol product “will also mark the first time GT present an innovative and perfectly blended cigarette that offers smokers more menthol than full-flavor brands,” states J. Ronald Denman, executive vice president. “Focus group studies have yielded positive responses and promising results,” he adds. “When compared with the leading mentholated cigarette brands, respondents agreed that 32 Degrees was a better-tasting cigarette than the leading premium varieties.” • |
