C-stores adjusting to SCHIP tobacco price increases..

March 9, 2009 - Convenience Store / Petroleum (CSP) Special Report: Part 1 of a four-part series on how retailers are reacting to the federal excise tax on tobacco that begins in April.

For all retailers, the tax, which cuts into every established segment of tobacco including steep levies on roll-your-own and little cigars as well as a 62-cent increase on a pack of cigarettes, is bad news. For someone lacking a serious foodservice program or alternative in-store driver, it's even worse.

Ray Johnson, operations manager at Speedy Mart, a 21-store chain based in Las Vegas Valley, told CSP Daily News. "What's going to happen, I assume, is that people are going to buy down to the lower brands as they adjust to the impact." Carton [sales are] going to drop 5%-7%."

For Johnson, the tax threatens a category that pumps about 40% of his inside sales and more than 40% of store profit. He is also shrinking inventory to reduce the burdens of a one-time floor-stock tax (requires collection and payment by August 1, 2009) that is expected to cost retailers between $2,000 and $3,000 per store. "The idea is to get rid of the slow sellers; we're going to mark them down and sell them now so we don't have to pay the floor tax on them. (TW - The floor tax provision meaning that all tobacco products except cigars in inventory at manufacturer, distribution, c-store, etc. will immediately be subject to the new tax rate on April 1st when the law takes effect.)

Johnson expect his new set to look like? First, expect all packs of cigarettes to go up 75 cents, much in line with what analysts predict. Also, while Marlboro will remain his featured brand, Johnson expects customers to sample with lower-tier products to save a dollar or two. "Nearly 70% of my sales are Marlboro, so I am on the max level with them," he said. "And we take surveys every week on Marlboro prices, so that's where the competitiveness is. Beyond that is whatever is the cheapest brand. And that's another 10% more." The remaining brands make up 20%.

"The tax increase is going to really impact the little cigars the most because right now they're going to be taxed the same as cigarettes," he said. "The original version, it was going to go up 25 cents every two years." The final version jumps little cigars from 4 cents a pack to more than $1.

Such news should perhaps cause anxiety. But Johnson is taking it in stride. "I'm going to just let cigarettes fall where they may. It doesn't scare me, because it's going to happen to everyone," he said. "We're going to spend the last month doing nothing but educating consumers on what's to come."

Reference: Tobacco on Fire (Finding rays of light behind the SCHIP/FET tax) by Abbey Lewis and Mitch Morrison, CSP Special Report, 3/9/2009.