Inventories Need the Right Mix of Premium And Low-Cost Cigarettes

Source from:  By Maura Keller  09/18/2007

Like many retail industries, tobacco retailers continually struggle with offering the right mix of products in their stores. Sure, you can invest in effective displays and unique sales techniques to translate your product selection into one that appeals to the masses and is quickly sold. But other inventory techniques can also result in an improved bottom line. In fact, more and more retailers are mixing their cigarette inventory offering both low-cost and premium cigarettes to enhance their sales. A unique mix How does the industry define the differences between premium and low-cost cigarettes? According to Andrew Kerstein, president of the National Association of Tobacco Outlets and owner of several New Jersey-based tobacco stores, cigarettes are typically categorized by price. These include: Super-premium cigarettes such as the Nat Sherman and Dunhill brands. Premium cigarettes such as Marlboro, Camel and Newport. Generic cigarettes such as Basic and Doral. A class of cigarettes that used to be known as sub-generic such as USA Gold, Pall Mall filtered and Maverick. A class of cigarettes that used to be known as fourth-tier, which was made up of mostly very inexpensive regional brands. "Today, mostly due to the negative connotations of the names of the last two categories, the industry has reclassified the generics, sub-generics and fourth-tier into a category known as 'low-cost,'" Kerstein says. "Although not always the case, there is typically a relationship between the quality of the cigarette tobacco and the price of the cigarette. A retailer that is fully committed to the category will typically need to carry at least some of the brands in each of the categories. This is to be able to serve a wide range of consumers." According to Dianek Pereira, director of sales planning at General Tobacco, generally premium cigarettes also are supported by larger marketing and promotional budgets than lower-cost cigarettes. "However, at General Tobacco we offer the same premium quality as the higher-priced cigarettes but at a lower cost," Pereira says. "We also offer a full line of cigarettes including GT One, Bronco, Silver and our full menthol line, 32 Degrees. We also offer Vaquero Little Cigars in six popular flavors." National Tobacco Company manufactures and distributes Zig-Zag premium cigarettes to consumers. Priced close to other premium brands, Zig-Zag is differentiated from other premium brands in that it is a traditional American whole-leaf blended product, made with selected leaf blends from around the world. "The main difference between discount cigarettes and a premium product such as Zig-Zag, is the quality of the blend used," says Ron Tully, vice president of National Tobacco. "Zig-Zag relies on traditional hand-blended selections of tobacco. Our product is carefully crafted to impart a unique taste and aroma. It is not a copy-cat blend and in fact is crafted to give adult consumers a sense that they are smoking something very special." David Redmond of Carolina Tobacco Company says that today the central difference between the two categories is merely the cost. "The U.S. market demand for price-value cigarettes has required very significant quality upgrading in the general category, compared to the 1999 entry period," Redmond says. "Advances in technology and acquired expertise allow price-value producers to create products with the quality and taste that only the premium brands used to be able to match. This is a likely explanation for the continued growth of the price-value category throughout the U.S." Since its entry into the U.S. market, Carolina Tobacco Company has offered its high-quality brands, Roger and Kingsboro, which compete in the price-value category and provide an alternative to other cigarettes sold in higher-priced tiers. "Today, a large number of smokers prefer low-cost brands over the premium brands not only because of price, but the quality and value may exceed the premium brands," says Tim Chang of Premium Tobacco Distributing, a distributor of top-selling, fourth-tier cigarette brands from General Tobacco, International Tobacco Partners and K Imports. "It was only a mere 50 or so years ago that Winston and Marlboro were the low-cost brand as they competed with the premium brands of Chesterfield and Lucky Strike. Over time, these low-cost (brands) eventually evolve into premiums. History seems to repeat itself." Working to your advantage Industry experts agree that it can be advantageous for a retailer to carry a mix of cigarette products within their inventory. Retailers, focused on their return-on-investment, typically adjust their inventory mix based on many factors, including consumer preference, turnover, quality, price and the total cost of carrying inventory. "Retailers need to accommodate the wide variety of smoking needs of adults and that requires diversity of choice on their shelves," Tully says. "Additionally, maintaining an open-shelf policy helps maintain diversity in clientele who visit the store to make both regular and incidental purchases of other products." Increasing state taxes and proposed federal taxes on cigarette products also play a role in product diversification. "As taxation increases, so does the cost of carrying inventory and the appeal of expanding the price-value cigarette portion of their mix," Redmond says. "Many are turning to brands like Roger to enhance return-on-investment and reduce inventory costs-approximately half that of the leading premium brands. Couple the financial benefits with the improve quality, taste and variety now offered by price-value producers, and it's a winning combination for both consumers and retailers." Pereira adds that retailers often carry a mix of products in order to accommodate the many kinds of consumer preferences. "One way to obtain a good mix can simply be by carrying a lower-priced brand that offers a full line of styles and flavors," Pereira says. Often a retail tobacco business' main supplier will not carry low-cost brands due to contractual agreements with the premium manufacturers. "In this case, the retailer can purchase from another distributor, often termed a 'fourth-tier' distributor," Chang says. "Often, the low-end distributor also carries other tobacco products such as snuff, chewing tobacco and cigars. With typically lower overhead, the low-end distributor can also save retailers in these related items as well." Merchandising that works As with all aspects of running a business, retailers make mistakes when it comes to merchandising products, particularly when offering a mixed inventory. "The majority of independent retailers follow the advice of the premium brand representatives," Chang says. "They often include displaying only the premium brands and hiding the low-cost brands. Their reasoning is that you make a higher profit from the premium brands. While this reasoning may be true, to some extent, the low-cost brand has grown tremendously over the past six to eight years, depending on regions." Kerstein often sees that retailers overlook the super-premium part of the category because the price of these cigarettes are higher than premium. "Consumers in this category are extremely loyal, typically having more disposable income, and because cigarettes in this category are not always readily available, they are not as price sensitive," he says. Kerstein says that manufacturers talk retailers into carrying almost every SKU in a brand. "Carefully review the market share by SKU, not by brand," Kerstein says. "Compare the regional or state data to other data unique to your store and make an intelligent decision." He suggests retailers ask themselves: Is my store a big, full-flavor menthol store? Do I sell more 100mm cigarettes as opposed to king-size cigarettes? Do I sell slim cigarettes? Do I sell 120mm cigarettes? Do I sell wide cigarettes? Do I sell more box styles or soft-pack? Also, when looking into the low-cost part of the category, retailers forget a few important things. "For example, as the price of the cigarette goes down so typically does the loyalty to the brand," Kerstein says. "Also, as the price of the cigarette goes down you tend to see more sales of 100mm size." Pereira recommends that retailers incorporating a mixed cigarette inventory provide enough product visibility. "Many times, consumers do not know that a retailer is carrying a particular brand due to the lack of point-of-sale material," Pereira says. "Stores often offer a limited assortment of styles and therefore do not attract consumers to different brands." Redmond suggests that, in order to avoid a cluttered appearance, retailers take advantage of the point-of-sale materials that each brand offers. "They should communicate their needs to their sales contacts," Redmond says. "Most brands have a variety of support collateral that retailers can draw on to help promote a mixed inventory thereby maximizing profits from a controlled inventory budget." Industry experts also see retailers neglecting to educate consumers about alternative brands within a category. "After examining their return-on-investment (margins) and carrying costs for each of their brands, they should provide information to their employees that helps promote the products that provide the greatest return for their business," Redmond says. "Employees that make a comment to tobacco customers that the store has some new alternatively priced products in the category have helped to educate the store customer in a personalized way, and one of the easiest to remember-verbal communication." Shelf space location is important for alternatively price tobacco products. They should be displayed with the same care as popular premium-priced items. Also find the right blend of point-of-sale material. "With the right mix of point-of-sale material, a retailer can market cigarette brands and prices to consumers quite successfully and easily," Pereira says. "Retailers should be sure the product is visible in the store and offer alternatives to consumers in search of a lower-cost brand. Similarly, retailers should understand the needs and preferences of consumers in order to keep a loyal customer base." Redmond also recommends that retailers carry cigarette brands that have a reputation for quality, consistent taste, professional services with consistent and predictable supply, and have attractive packaging and point-of-sale displays. "Whether purchasing premium or price-value products, retailers need to ensure that their customers are satisfied with their purchases and therefore are repeat customers," Redmond says. It's also important to know the qualities of the products being sold. "For instance, if a customer typically purchases Marlboro brands but is commenting about the high cost, retailers can suggest a brand like Roger that has a very comparable taste and quality at a much lower price point," Redmond says. "Other brands may have taste and quality characteristics similar to premium brands. It's important to know how they compare. While customers may stick with their traditional brands, some may purchase a lower-cost alternative and appreciate the recommendation. The retailer's suggestions to customers have several positive consequences, including responding to the customer's complaint about high prices, showing that the retailer has a reasonable reply to the customer, having an alternative in stock to satisfy the customer." Working together Unsure of what cigarette brands should make up your mixed inventory? Manufacturers and distributors can help you determine what specific brands and packaging have the greatest market share in your state or region. "I have found that even with the manufacturer's definition of region, stores in different areas sell different brands and/or packings," Kerstein says. "I have found that it typically takes about two years to refine the specific SKUs that you should carry in a particular store." That being said, a retailer looking to expand what they are currently carrying should get together with their representatives from the manufacturers and their distributors and review the market share of various brands that they might now be carrying. "A store should first determine how much space they are willing to allocate to the cigarette category," Kerstein says. "They also need to determine which manufacturers they want to enter into merchandising contracts with." These contracts, in addition to possibly paying the retailer an amount per carton sold, also provide for marketing allowances that are passed on to the customer in terms of a price reduction. After determining the space to be allocated and which contracts to enter into a retailer will be able to determine how many SKUs they will be able to carry. What's more, Chang stresses that when the independent retailer follows the "plan" of the premium brand representative, their store is no longer different than that of the chain stores. "My advice-and I have seen it done successfully-is to forgo the premium brand plan and be truly independent," Chang says. "Yes, there will be a slight disadvantage due to the loss of additional buy-down dollars. I firmly believe it gives the retailer the freedom they deserve to display whatever brand is popular and actually sell it, rather than it just sit on the shelf because it must be there as part of the plan. The additional sale of the low-cost brands often make up and exceed the difference in the buy-down funds." The store would also look different than the chain stores and allow the retailer the flexibility to display "specials of the week" and styles that sell well in the area or region. Enditem