It’s no longer a question of if tobacco retailers should diversify their product mixes; it’s a question of how—and to what extent. All of the players contacted in this top-50 count mentioned it by name—diversification—as the first order of business for survival.
It is the single most important piece of advice they say they can give to the trade during these trying times of extinguishing cigarette consumption, tax increases that continue to spread like wildfire, smoking bans that seem to contradict democracy, and the threat of federal government (FDA) regulation. Indeed, this minority industry has been battered and bruised, but diversity, both in tobacco and non-tobacco items, is raising it up with hope and profits.
Refusing to be solely at the mercy of tough legislation and change, the leading players have mapped out re-energized business plans. Here are some of their top discoveries, lessons, and advice as they take on these transitioning times:
Terry Gallagher, president Mickey Falconburg, vice president, sales and marketing
Smoker Friendly International,
Boulder, CO. - #1 in the top 50 chains
At press time, Smoker Friendly operated 466 stores, of which about 90 are company-owned. The rest are “authorized dealers” of Smoker Friendly tobacco products, which continue to expand, both in breadth and distribution. Currently, the line includes 13 styles of cigarettes, four styles of raw tobacco, cigarette tubes, six flavors of pipe tobacco, six flavors of little cigars, machine-made cigars, and premium cigars made in Honduras and the Dominican Republic; SF is also “very close” to having its own brand of moist snuff. By year-end, the leading tobacco retailer expects to have close to 600 total stores waving the Smoker Friendly banner.
Here are some thoughts on strategy and future plans from Mickey Falconburg and Terry Gallagher. Falconburg: [Smoker Friendly Tobacco Products are] for the betterment of all of us selling tobacco, to keep the business alive. We found a unique way to bring a lot of retailers together; there’s power in numbers. We don’t have big egos here.
Gallagher: Here’s the first thing diversification means to us: If we had stayed with our cigarette model of the ’90s, 95-plus percent of our stores would be out of business today. We’ve made a concerted effort to be good merchants in selling RYO, and to teach our associates how to sell it; we made a concerted effort to be very good merchants in premium cigars, and we’re aggressive in taking on all the other tobacco products and their new offerings, whether its RYO or MYO, or flavored cigars, and snuff.
And we continually train our employees to learn the ins and outs of all of it; we spend a lot of time and money on this. We have classes called MYO 101, Premium Cigars 101. We want to get our store managers and associates comfortable with the products so they have an understanding of how to use them, so they’re more comfortable showing consumers.
Falconburg: We also offer dealer sales rallies, too; when we bring people together for this, we’ll meet them halfway on the cost.
Gallagher: Our interest lies not only in enjoying and providing synergies, but sharing best practices with retailers around the country. The thing we find most attractive in our program is we can provide operators with their own house brand in an exclusive territory. Our authorized dealer program is geared toward existing operators; they may not have the economies of scale in their own company to create their own brands. It goes along with the rise of co-branding, such as a Subway in a c-store. Our program is designed for retailers, so many manufacturers push products to their distributors. We stay in close contact with retailers and we can talk retail with them because we’re retailers.
Your image, as a retailer, is very important. Our stores, almost on an annual basis, get a real good housecleaning, re-merchandising, updating of our sets. Some of that is driven by manufacturer contracts, but it gives us a chance to clean up our store and show ourselves well to our customers. We really go in and roll up our sleeves once a year.
But as I go around and visit other stores in the country, so many look really old and worn, people aren’t reinventing their stores as they go along.
Gallagher: You have to care about the image that you’re making as a retailer; otherwise, you’ll get left behind with just a core group of customers wondering where everybody went.
Falconburg: And tobacco stores should dare to be good—there are a lot of things we can do that a c-store, drugstore, can’t, such as having sampling events and just spending time with customers. We’re starting to do some events, not just cigars, but with MYO/RYO, too. We don’t get the turnout as with cigars, but a ton of people don’t know how to do that, and showing them will bring more to the category. Manufacturers love it, they jump at the chance to be with you and provide free product; it makes for an entertaining night.
Gallagher: The real bad news for our industry is the potential of the FDA on the horizon. Every store operator needs to be involved, whether they have one store or a thousand, actively calling their representatives and legislators. We all need to work together; this is bad legislation for our industry. As small business people, representatives are more apt to listen to us with a stake in our own business than from a lobbyist or large manufacturer or conglomeration. We are in their district, their backyard.
David Cohn, president
Tobacco Superstores, Inc.,
Forrest City, AR - #4 in the top 50 chains
Our sales growth is moderate; 3-5 percent is good for us right now. Our customer accounts are up, but so many smokers are trading down.
Previously though, we took a dive along with the whole industry, our growth stopped and sales eased up some. We battled back and now our business is actually up again; we surpassed where we were.
Roll-your-own, canned snuff, cigars are all just booming, but you’ve got to price that stuff right. We want to try to come up with the same profit or more on RYO as selling a carton of cigarettes. And in snuff, we want to make the same per can profit on a premium brand as a cheapie. That’s what we try to do in every category, that’s the way you keep your profits strong.
We were diversifying in ’95 when the rest of the world just watched. I’ve always preached: Diversify. We still carry every SKU available on all tobacco products and accessories. If a customer can dip, chew or smoker it, we’ve got it. We just redid all of our stores with 8- to 12-foot sections of six shelves of RYO. We call it: Tobacco Superstore’s RYO Center. We also have a massive OTP section, we’ll carry 32-36 feet with six to eight shelves of OTP. We have a great wine selection. We’ve always carried 8- and 12-foot section of adult bagged candies, it’s a big item for us. We haven’t worried so much about the cost of inventory or the turns, we think it’s all just part of our success.
I have never been a big proponent of drive-throughs but we’re re-thinking that. We are now installing drive-through windows where we can. It’s still not my preference. I like getting the in-store sales, but it does seem to enhance sales another 8-10 percent where we put them in. There are those customers that just want that convenience.
The biggest thing in this business is: don’t let any manufacturer persuade or dictate to you the best way for you to do your business. Don’t let them box you in. Make your own decisions, and if they don’t work for you, you change them.
I’ve always done my business by the consumer, what the consumer wanted. We do have contracts with Philip Morris and RJR; we just take a little less than the highest contract level. We won’t give up selection in our stores. I just got a proposal on my desk from RJR trying to get me on their EDLP program. We’ll take a serious look at it. It might even make me a little more money, but I have to consider how many customers I’m going to run off. And as I said, I’m in the customer business. If my customers want fourth tier, I’m going to have it for them.
We’re concerned about where we’re going on these taxes. The federal government is talking about raising tobacco taxes 156 percent across the board. My concern is that if the Fed raises it, the states are going to go wild on it—every session in every state of the country. When is it going to stop, when is enough, enough?
I don’t think you can do anything except lobby your points. We defeated it in Arkansas. I testified singlehandedly and did it this year, I don’t know that I will be successful next year. What we tell them is that they’re taxing a minority, those that are less educated with a lower income. Smoking is a luxury to these people, and they’re hurting those that can least afford it. That’s opening up more Internet sales more black market; we tell them they’re not going to stop smoking, just drive it out of our local businesses.
New store growth will be modest; we’ll probably open two to three a year. Beyond that, I distribute to over 2,000 stores in five states. I have a very big interest in tobacco; we try to be innovators and leaders.
George Frichter, president
TBM Management, Inc.,
Pearl River, LA - #11 in the top 50 chains
This is an extremely competitive market; if you don’t adjust your business, you’ll get left behind. I retired and went into this as a sideline business 16 years ago. I’ve seen a lot come and go; nothing about it is the same. You have to stay on top of it.
The survival of a tobacco store is based on having a little bit of everything, so we have not cut back on tobacco products at all. If you start limiting your tobacco products, if you don’t carry this style or that brand, you’ll have brand loyal smokers go look elsewhere. We try to have high inventory in our stores and we try and carry all the cigarettes, although no fourth tier.
I’ve seen a bunch of tobacco stores go fourth tier and they go out of business. They completely lose the promos and the buydown monies from Philip Morris and RJR and it’s impossible to survive on fourth tier in my estimation. At one time, fourth tier was taking away a share of my market, but now that’s passed, and it’s really not our competition anymore. Prices have stabilized and there’s not as big of a price gap anymore between fourth tier and brands.
We can’t rely on tobacco and tobacco products anymore. There are plenty of other things you can merchandise in this business. Candles are real popular; fragrance oil lamps are real popular with the ladies. It all depends on your clientele. We sell shoes, purses in some stores, flip flops; we sell the devil out of them in some stores. In two of my bigger stores I’m putting delis in, all the equipment’s been ordered. And for next year, I haven’t made the final decision yet, but I’m thinking about putting in a real dramatic item. Check back on that.
In my stores I get over 600 people a day, so if I can get them to spend an extra dollar or two each time, it’ll significantly raise my profit margin.
Staying open longer is also a big plus with customers. We’ve extended our hours now. We’re open on Sundays in some stores and it’s worked out well. We also added an hour extra in the morning to get that early commuter traffic, and an hour extra in the evening to catch the later traffic going home. It varies story by store, but we try to be open from at least 7 a.m. until at least 7 p.m. or 8 p.m.
To open up new stores in today’s economy with the restrictive credit terms with wholesalers you have to have a lot of money behind you. I have also been very hesitant to open new stores because of the tax ramifications and smoking restrictions. I don’t have any plans at this point, but you never know. There are a lot of stores coming on the market from previous competition that has folded. Of course, right now our biggest competition is unfortunately service stations and c-stores. And there’s nothing we can do about it except diversify, diversify.
Billy Grantz, owner
Cox’s Smokers Outlet,
Louisville, KY - #27 in the top 50 chains
The business is definitely not getting any easier. Overall, sales have been fair for us lately, although we’re anticipating a pretty good influx of business starting in July because of Indiana’s tax increase. We should get some of that border business.
In this industry, you have to spread your wings a bit and look for some other categories or services or merchandise to sell in your stores. That’s the future of tobacco outlet businesses.
Liquor, wine, and beer are a natural for us. They go hand-in-hand with cigars and tobacco. Hopefully, we’re heading in the right direction with this. You try hard to find some other means to keep the cash registers ringing with items that have decent margins. Cigarettes and tobacco margins aren’t the greatest, and they seem to get thinner every year, but wine margins seem to get larger, and they’re helping to alleviate some of the loss there. I think that will keep the majority of our stores profitable and growing. We’re getting liquor licenses in all our stores that are large enough to do it. And in those stores we have dual signage—Cox’s Spirit Shop and Cox’s Smokers Outlet—even though they are technically one store with two departments.
Cigars and RYO are not doing it for us like they do for some others. We have some stores that do a good job with cigars, half of our stores have walk-in humidors, but in general, it’s not a huge part of our business. We have some select stores in town that do a decent cigar business, but in our rural, more blue-collar neighborhoods, we just don’t have the clientele for that product.
We have expanded RYO a little bit, but we’re not a big RYO state in general because our cigarette tax in Kentucky is one of the lowest in the country.
We’re very concerned about the possibility of FDA restrictions, and we think anybody in this business should be. We don’t need another piece of the federal government controlling our business and telling us what to do. We’ve got petitions from NATO and we’re placing those in our stores and just trying to communicate to our customers that they need to be active in trying to fight this battle along with us. This is all just coming into the limelight as people are starting to believe it could really possibly happen this time. I think it could, too, but I hope it doesn’t. Hopefully, between all of us tobacco store owners, we can fight it off again.
Randy Drott, president
Town Crier Inc.,
Mandeville, LA - #49 in the top 50 chains
After shutting down two stores in the past two years due to Hurricane Katrina, “we’ve hung on to the rest of the ones we have and we’re pretty sure they’re going to make it-as sure as we can be. We’re stabilized now.
Diversification is a part of life in this business. You have to have other stuff to sell; you can’t have cigarettes alone. We brought in jewelry. That stuck; we tried purses and wallets and that stunk; whatever we can get in the door, we’ll try it, some stick and some don’t.
Let me tell you about the teacher’s presents. We have a few customers who come in here now through word of mouth for our jewelry items. They’re not even smokers. So we ended up selling a lot of our $10 necklaces, earrings. and bracelets this year for teacher’s presents. It wasn’t planned, trust me. The school year ended in May, and we had several moms coming in to buy our jewelry. Our strongest sales were in sterling silver Fleur-de-Lis bracelets. That’s really big down here.
One of the highest-margin items we brought in was La-Tee-Da Fragrance Oil Lamps, Lamberge oil lamps. We were one of the first around here to carry them and they still do pretty well. We run them at about 60-70 percent markup.
Of course, we’re still a tobacco store. We’re real big in premium cigars and accessories, including humidors, cases, holders, and lighters. We did more of an emphasis on premiums, we paid attention to inventory management, brand styles—basically, we refined it.
The cigarette category stayed approximately the same, with different manufacturer contracts; there’s nothing we can do about those. We’re just adding lines around that category.
Customers would think of us as a higher-end shop; we’re always leaning in that more upscale direction. Of course our stores are in five different parishes, counties, and we have different clientele in each, so we have to specialize to the store itself, to the clientele of that store.
You have to roll with the punches. We have serious smoking restrictions here now. We watch the legislation and speak our peace, but nine times out of 10 it doesn’t do any good. We know that, but we don’t give up.
There will always be a market for cigarettes and tobacco products; how low [consumption is] going to go, I can’t tell you. But as long as there’s a market, you’re basically O.K. in this business-with the other stuff sprinkled in. •
Tobacco Outlet Business’s
2007 Top 50 Tobacco Outlets
(based on store counts at the end of May, 2007)
1. Smoker Friendly International, Boulder, CO, 466 stores (includes Authorized Dealerships)
2. Admiral Discount Tobacco, Coopersville, MI, 166 stores
3. Tobacco Central, Inc. DBA Low Bob's, South Bend, IN, 133 stores
4. Tobacco Superstores, Inc. (Forrest City Grocery), Forrest City, AR, 88 stores
5. Discount Smoke Shops, St. Louis, MO, 60 stores
6. Choice Tobacco Outlets, State College, PA, 60 stores
7. Cigarette Outlet, Inc. Davenport, IA, 48 stores
8. Smokes For Less/Speedway Super America, Enon, OH, 48 stores
9. Smokers Choice, Monticello, NY, 47 stores
10. Cheap Tobacco, Cincinnati, OH, 5 stores
11. TBM Management, Pearl River, LA, 44 stores
12. Brookshire Brothers, Lufkin, TX, 42 stores
13. Tobacco Outlet Plus (Kwik Trip), LaCrosse, WI, 38 stores
14. Smoke Shop, Inc., Dyer, IN, 37 stores
15. Tobacco Shoppe (Houchens), Bowling Green, KY, 35 stores
16. Smokin Joes, Waymart, PA, 28 stores
17. Discount Tobacco Outlets (A&K Wholesale), Murfreesboro, TN, 24 stores
18. TRO of North Carolina Inc. (Tobacco Road Outlets), Lakeview, NC, 24 stores
19. Puff N Snuff, Lock Haven, PA, 23 stores
20. Tobacco Plus Discount Outlet/Shop Rite, Crowley, LA, 22 stores
21. Fast Lane Discount Tobacco, Pikeville, KY, 21 stores
22. Douglas Companies, Texarkana, AR, 21 stores
23. Tobacco Connection (Kebob), Boise, ID, 19 stores
24. Louisiana Discount Tobacco (Discount Tobacco Outlet), Shreveport, LA, 19 stores
25. Cut-Rate Tobacco, Cincinnati, OH, 19 stores
26. Tobacco Depot, Tampa, FL, 18 stores
27. Cox's Smoker's Outlet, Louisville, KY, 17 stores
28. Puffs Discount Cigarettes, Inc., Mill Hall, PA, 16 stores
29. Carolina Discount Tobacco, Somerset, KY, 16 stores
30. Independent Wholesale (Low Ball Louie's), Orlando, FL, 16 stores
31. Smoker's Outlet, Roseville, MI, 15 stores
32. Smokes 4 Less, Trent, MO, 15 stores
33. Smoke-N-Go, LLC, Abbeville, LA, 15 stores
34. Klafters, Inc., New Castle, PA, 15 stores
35. Big Smoke LLC, Boise, ID, 14 stores
36. Bo's Smoke Shop, Elizabethtown, KY, 14 stores
37. Cash Connection, Springfield, OR, 14 stores
38. The Tobacco Hut, Inc., Omaha, NE, 14 stores
39. Jack's Beverage, New Orleans, LA, 13 stores
40. Nothin' Butt Smokes (Ross-LAB Marketing, Inc.), Lubbock, TX, 13 stores
41. Dirt Cheap Cigarettes & Beer, Fenton, MO, 13 stores
42. Tobacco Warehouse, Tonka Bay, MN, 13 stores
43. Smokers Host (Kocolene Marketing, LLC), Seymour, IN, 13 stores
44. Tobacco Discount HQ, Picayune, MS, 12 stores
45. William & Taylor Tobacco, Mullins, SC, 12 stores
46. Smokes For Less, Poughkeepsie, NY, 11 stores
47. JC's Cigarette Outlet, Elizabethtown, KY, 11 stores
48. Tobacco Stop Inc., Glenburnie, MD, 10 stores
49. Town Crier, Mandeville, LA, 10 stores
50. Saver Group Inc., Campbellsville, KY, 10 stores