David Kepler got into the tobacco outlet business by way of c-stores. He was running three c-store locations in the ’90s when his contacts at tobacco companies let him in on a channel with enormous opportunity: the tobacco outlet.
Jumping on the concept, Kepler opened his first Smoker’s Choice store in a building he owned and convinced his sister to run it. Back then, of course, the profit picture was very different for outlet merchants. Between manufacturer buybacks and promotional programs, making money on cigarettes was a relatively straightforward matter of managing your inventory and cash flow well and raking in the resulting revenues. Sure, there were challenges, but nothing like the competition and razor-thin margins retailers face today, says Kepler, who now has six Indiana-based stores.
“When the tobacco manufacturers started treating us, let’s say, not so well three years ago, it became a challenging business,” he says. “Contract payments almost don’t exist anymore. And we’re constantly fighting legal issues like smoking bans and tax increases.”
An Innovative Approach
But Kepler isn’t discouraged by the evolving industry. Instead, he sees the changes as a call to action for outlet retailers. Diversification of assortment and taking a proactive stance with the legal landscape are the two principle components of his battle plan.
In the tobacco arena, Smoker’s Choice believes in offering variety. Kepler keeps a wide range of cigarettes in his non-self service stores, as well as a wide assortment of RYO, little cigars, and every other category of tobacco. He’s also branched out into more nontobacco areas.
“We try everything; some things work and some don’t,” he says, noting that success with ancillary categories can vary greatly by location. Novelty items and candles did well in one location, but only fair in his other stores. “You can’t just do the same thing in all your stores,” he says. “Every area is different.”
But one category that has been working well across the board is premium cigars. Kepler installed walk-in humidors in two stores and 12-foot reach-in humidors in another three stores and spent a lot of time building a strong selection. The stores also reach out to cigar smokers with a Cigar Club and Cigar Night events held every other month where smokers can sample cigars and enjoy a selection of beverages and finger foods. Customers and cigar club members are invited by e-mail, phone, or notices posted in stores.
Smoker’s Choice had tried to build a premium cigar customer base years ago and met with only minimal success, but this recent, more concentrated effort has been winning raves from cigar smokers—and bringing in margins of 30 to 40 percent.
“I’ve had cigar customers tell me it’s the best selection they’ve ever seen,” says the veteran retailer, noting that with both cigarettes and cigars he follows the old adage, “If you don’t have it, you can’t sell it.” In fact, when customers ask for a brand or product Smoker’s Choice doesn’t have, the store will order it for them.
“Sometimes I overinventory,” shrugs Kepler. “But you don’t know whether something will sell or not until you try it. A lot of outlet merchants haven’t gotten into specialty cigarettes, for example. But you can sell 10 cartons and make $8 to $10 a carton, plus you don’t have competition in that sector because other stores don’t carry it.”
Ditto with candy, snacks, and other nontobacco categories, he says, pointing out that small sales add up. After all, $20 a week in snack sales is $1,000 a year.
Service and Selection
As a retailer who believes strongly in selection, R.J. Reynolds’ recent supply issues have hit Kepler hard. The manufacturer has been unable to meet retail orders for more than a month [as of press time] and stores like Kepler’s are struggling as a result. “They keep sending us letters saying the supply problem will get better next week, but that’s been going on for a while,” he reports. “Since 60 to 70 percent of my sales are of RJR brands, it’s really hurt.
At first, customers were disappointed, but understanding. But when the supply situation continued, they began to complain more vociferously. While some customers philosophically go for the next cheapest brand or ask what other label most resembles their favorite brand, others walk out disgruntled.
The one saving grace, says Kepler, is that the supply problem is widespread. “They can’t get their brands here, but they can’t get them anywhere else either,” he says. “And I know that I’ll be able to get them as soon as they’re available because I have a great relationship with my supplier, who I’ve been working with since 1972.”
In addition to selection, Kepler sees friendly, helpful service as a distinguishing factor for his stores. While area supermarkets, drug stores, and even c-stores often have lines and wait time, Smokers Choice customers can almost always be in and out of the store in 30 seconds, he says. A staff that can answer questions about RYO or describe the taste of a particular cigar to a cigar smoker is something that can’t be found in his competitors’ stores.
“But one problem we all face is being able to educate workers, particularly now that we’re into premium cigars,” he notes. “There are so many different brands that customers ask about.”
Kepler addresses the issue by inviting manufacturers in to speak with employees and providing a list of the top cigar brands that people ask about that employees can refer to.
Taxing Matters
Standing up for smokers’ rights is another way that the store services its customers, he adds. As secretary of NATO, Keplar makes use of all the many tools the association provides its members in fighting anti-tobacco merchant and anti-smoker legislation and helps its customers to stay informed and take part in a proactive stance.
“NATO is an invaluable resource when it comes to grassroots lobbying for our rights,” he asserts. “And with membership just $100 for a single store—far less than you save participating in their credit card program—it’s well worth it.”
With a state tax of $5.55 a carton, Indiana is squarely in the middle-range from a tobacco tax standpoint—but maybe not for long. “We successfully beat a state smoking ban last year,” he reports. “And now the governor wants a $2.50 per carton tax this year. So we need all the help we can get to fight.”
And the problem is pervasive; across the country states, counties and even cities are instituting smoking bans. As Kepler sees it, smokers need to join retailers in the fight to protect their rights. “The legislators don’t smoke and don’t think about the constitutionality of what they’re doing,” he notes, pointing out that, ironically, the states rarely gain the revenues they seek by taxing smokers.
“I have handed customers our phone to call their Congressman,” adds Kepler. “This is our livelihood so we get involved and encourage customers to get involved as well. In fact, the single most important thing retailers can do to compete is to join NATO in its fight to support our rights.”
To Kepler the ever more onerous legislative landscape is a disturbing sign. “The government is slowly taking away my rights,” he says, pointing out that fast food makers seem to be in the crosshairs of legislators now. “Soon we won’t be a democracy any more.” •
