Sales of cigars are climbing by 9 percent per year, which means that a well-merchandised cigar department should see sales increases of at least that much, says David Bishop, a partner at Willard Bishop, a Chicago-based retail consulting firm that recently completed in-depth market research on cigar sales. With more and more tobacco outlets expanding their cigar sales the report comes at an ideal time, offering information on both purchasing trends and merchandising strategies.
While Willard Bishop’s research was based on convenience stores’ sales of popularly priced cigars, Bishop sees the findings as applicable for tobacco outlets. C-stores, for example, are mining the profit potential of cigars—a growth category with higher margins—to compensate for declining cigarette sales—a strategy well-suited to outlet retail. “The c-stores we surveyed this summer reported an 11.6 percent increase in unit volume—which is higher than the average sales increase across channels,” says Bishop, who notes that outlets are well positioned to realize strong cigar sales growth as well. “Tobacco outlets have a competitive advantage in terms of the amount of space they can devote to cigars. C-stores typically limit display space for cigars to a ‘back bar’ space behind the counter, which means that cigars are a non-self-serve category. Being able to place cigars out on the sales floor and carry a wider assortment is a competitive advantage for outlets.”
Pressing that advantage can help outlets compensate for flagging cigarette sales, he adds. “Cigars represent only 3 percent of the tobacco industry, while cigarettes represent 90 percent,” says Bishop, conceding that cigars remain a relatively small component of the total tobacco market. “But cigarettes are a declining category, while U.S. cigar sale volume is growing rapidly—even faster than smokeless tobacco products.”
To make the most of that promising growth potential, however, outlets will need both a better understanding of cigar smokers and a strategy for reaching that growing market segment. One key factor, notes Bishop, is that cigar purchases, like cigarette purchases, are highly planned, meaning that consumers tend to make the decision to purchase the product in the category before they enter or arrive at a store.
Price Potential
“That suggests price can play a significant role in where the customer goes to make a purchase,” says Bishop, whose company set out to research that hypothesis. Their findings? Retailers who priced below the competition by 5 percent or more experienced dramatically stronger growth rates than the market average.
But that doesn’t mean that pricing low across the board is a good bet, cautions Bishop, who recommends that retailers take a more aggressive competitive price position on packs rather than single cigars—a price-for-volume strategy. “We learned that cigars parallel cigarettes in many ways,” he says. “Consumers buying packs tend to be more aware of the price because they’re deciding about the purchase well before arriving at the store.”
In that respect, packs of mass market cigars are akin to cartons of cigarettes. What’s more, as with cigarettes, a small number of SKUs drive the majority of cigar sales, suggesting that pricing for volume be confined to those top selling brands on which retailers enjoy high margins.
In general, there are two ways to pursue a price-for-volume strategy:
1.“Lower everyday low price,” or consistently pricing lower than everyone else in your market.
2.“Hot deals,” or price promotions that trigger people to come in when a particular brand is on sale.
“If you look at adjacent tobacco segments like cigarettes, they illustrate the pricing tactics that are more effective at driving profits than either of these two strategies,” points out Bishop, who cites multipack pricing as an example. “Instead of reducing the $2.99 price of a pack of five Black & Mild cigars, for example, you would encourage people to buy more by offering a 10 percent discount for buying two packs or 15 percent for buying three or more. You can take that up to 10 packs, incenting customers to buy more at your store. This isn’t new; it’s new to cigars.”
Communication, Communication, Communication
What else can retailers do to promote cigar sales? An integrated communication program that emphasizes price promotions in store signage, advertising, and direct mail can help boost sales. “The location of the display is important, as is the use of backlit signage and the presentation of products,” says Bishop, who urges retailers to take advantage of splashy fixtures provided by manufacturers. “These all help to make a statement to consumers that you sell cigars.”
Store associates who are familiar with cigar products and where the various brands are displayed can also help spur sales. Ideally, your store associates should know which brands you carry, where they’re located, and what deals you offer, as well as any new products that a customer might be interested in trying.
Retailers may also want to consider a SPIF program, or a bonus program that rewards store associates to sell specific high-margin products, such as a 25-count pack of cigars. Often, c-store retailers purchase large-count boxes, open them, and place the box on the counter to sell single cigars on an impulse basis. But an incentive program that gets consumers to buy the whole box rather than a single cigar would turn a 65-cent purchase into a $13.99 purchase, says Bishop.
“Consumers who are frequent smokers would have the opportunity to buy a whole box at a significant savings similar to those available in cigarettes,” said Bishop. The savings translates to the equivalent of a 19 percent discount, and offers benefits to both the consumer and retailer. The strategy would also net retailers sales that might easily be made the next time a customer shops—which could be at a different store.
“You could use a mystery shopper and reward associates who try to upsell a customer, or you might offer a prize to the associate who sells the most of that particular product on promotion during a give time period,” notes Bishop. “You’re motivating customers to buy what you want them to buy and offering them value and the employee a potential bonus. It’s a three-way win.” •