Once upon a time, tobacco outlets and c-stores were fierce competitors, duking it out over manufacturer contract terms, store locations, and, above all, customers. And let’s not pretend that those days are entirely gone. When it comes to customers and store locations, the two retail channels continue to wage war on a daily basis. The battle lines are clearly drawn—c-stores compete on convenience by offering a host of other products along with low prices, while outlets trumpet a far wider selection and far friendlier service.
But on at least one front, the battlefield is quieting. Finger pointing about display restrictions and age verification has quieted and cooler minds are prevailing, minds that suggest the two channels come together to fight a common enemy—legal woes.
As Andy Kerstein, NATO vice president and owner of Smoker’s Haven in Sea Bright, New Jersey, puts it, “Our interests and the interests of c-stores are pretty much aligned in the sense that our objective when we look at legislation is to take a position against any bill that will impede our ability to do business.” That’s why Kerstein attended the National Association of Convenience Stores annual trade show, NACS Show 2006, to man a booth on behalf of NATO in October.
“At our annual meeting earlier this year, we created a class of membership, the associate retail member, so that we could reach out to other industries and invite them to join our grassroots lobbying efforts,” explains Kerstein, who notes that convenience store owners are a natural fit for that membership. “Associate members have access to all the information and alerts we put together on pending legislation. They are entitled to everything a regular member is entitled to except for the right to vote.”
Convenience stores are a natural first step for such an alliance. NACS has a strong presence in Washington, while NATO has been extremely successful in influencing state legislation. “This is an ideal opportunity to fill a void for NACS,” notes Kerstein. “And from NATO’s perspective, it’s an opportunity to significantly increase our membership so that we become an even more powerful grassroots lobby.”
Fence Mending
Even outside of the lobbying efforts, tobacco outlets and c-stores seem less fiercely competitive than they once were. Why the relative peace? A number of factors contribute, according to retailers who spoke with TOB on the topic. First and foremost is the decline of manufacturer incentive programs. As contract payments and promotional programs dwindled, so did the bad feeling between these two archrivals.
A decade ago, c-stores and tobacco outlets were competing for lucrative payouts from manufacturers. To talk to a merchant in either channel about tobacco manufacturer retail programs was to hear that the competing c-store/outlet was being treated more favorably by x, y, z manufacturer. As such programs became less a factor in a store’s success, this rivalry dissipated. “Those dollars are barely there any more,” says one c-store merchant. “So there’s no point griping about who’s getting them.”
“If c-stores are getting a better deal, that’s an advantage that is so insignificant it doesn’t even factor into the competitive landscape any more,” says David Kepler of Brownsburg, Indiana-based Smokers Choice.
In fact, in a sense today’s harsher environment may be uniting the two channels, as each struggles to
survive in a difficult retail landscape. Kevin Paige of Danbury, Connecticut-based Butthead’s Tobacco Emporium, who owns both convenience stores and outlets, reports that c-stores—like their outlet counterparts—are struggling to find new sources of profit now that the buyback funds have dried up. “Everyone is getting into some sort of quick-serve restaurant, whether it be breakfast sandwiches, six-foot deli counter, pizzas, tortilla wraps,” he says. “A decade ago that $25,000 rack payment used to pay the rent. But the cigarette money is going away so that’s the only thing left.”
Divided We Come Together
Sales for the two channels have polarized, with c-stores reaping a strong share of pack sales—at least those of top selling brands—and outlets stronger in carton sales, says Kepler. “C-stores have a different clientele,” he shrugs. “Their customers are buying a pack or two of a mainstream brand. In fact, in terms of competition, we have more competition from drug stores than c-stores now.”
But that isn’t necessarily the case in every market. In New Jersey, for example, the majority of cigarette sales are by the pack, whether through outlets or c-stores, reports Kerstein, who sees outlets as having the advantage of expertise. “Anyone can sell a pack of Marlboros,” he says. “But we can offer customers more, whether it’s a cigar, a case for their cigarettes, or a lighter. And since we’re experts in the category, we can introduce new products more effectively and explain them to consumers better. We can also offer the option of trying a product in our stores. In most states c-stores can’t do that.”
The service and selection edge that outlets clearly carry is also a differentiator, adds Paige. “C-stores don’t compete with outlets,” he asserts. “We’re all about pricing and selection. Do you want to drive all over town and maybe find what you want or come here and know that I’ll have it?”
In fact, Paige sees c-stores gradually shifting away from cigarette sales entirely. “In 10 years I don’t think you’ll see tobacco in c-stores the way you do today. The low return on a high investment, the diminishing number of smokers, the loss of the manufacturer payments… it just won’t be worth it anymore.”
Already, many c-stores have cut back on assortment. In some case the pare-down had to do with a no-returns policy issued by manufacturers. In others, c-store merchants simply began preferring to stock only the best-selling brands in order to offset the slim margins and high inventory carrying cost by selling volume. “The SKU offerings in c-stores have gone way down,” concurs Kerstein. “In RYO, for example, they carry only the big name brands—if they carry it at all.”
The Service Story
But perhaps the biggest competitive edge that outlets enjoy is the service aspect of retail. Even the best convenience stores can’t match the level of service a well-run outlet operation can offer. And as anti-smoking sentiments have spread in recent years, that’s an aspect of the purchasing process that more and more smokers appreciate.
“The successful outlets outperform on service, says Paige. “But most c-stores just put a body behind the counter.”
“The most successful outlets are the ones who can see the relative advantages they have and utilize them to their advantage in the best way possible,” agrees Kerstein. “We have c-stores all around us. But I don’t know of any that will take the time to show customers how to use a rolling machine. I don’t know of any that will let them make their own blend and then try a few different rolling papers to find the most satisfying combination. Those are areas where we can and do compete very effectively.” •