U.S. - Effect of April 1st FET increase on tobacco retailing..

July 13, 2009 - This is the first story in a three-part series analyzing the effect this spring's federal-excise-tax (FET) hike has had on tobacco retailing thus far.

In an exclusive report by Convenience Store / Petroleum (CSP) Daily News and UBS Tobacco Analyst Nik Modi—the first significant survey to study the Federal Excise Tax's (FET) effect on the c-store channel—several critical findings are emerging: 90% of survey respondents say cigarette trends have performed in line or better than expected. There have been certain shifts: Premium and fourth-tier brands (Definitions vary, but basically a fourth-tier cigarette is a low-end, subgeneric brand whose greatest attraction is price) continue to hold their stakes, while the mid-tier segment has lost important market share; Retailers are scaling back inventory due to the higher costs; More than one-third of those retailers surveyed said they have reduced shelf space for cigarettes.

What we're seeing is that the traditional price-to-volume relationship has held up," Modi said. "Over the past few decades, the price-to-volume relationship has been about -0.3x for cigarettes. That means for every 10% increase in price, volumes fall by only 3%. Based on feedback from the industry and a look at recent scanner data, it seems that nothing has really changed."

Looking at who's gaining and hurting from the FET, Modi said the answers are clear: "Lorillard is by and far the clearest winner among the Big Three (via share gains).

"The segment really taking a hit is the middle tier, where Reynolds American has a big chunk of its cigarette portfolio" Modi continued. "With that being said, they are seeing some good growth on their Pall Mall brand due to a 'pulse promotion' that ran for much of the June quarter."

The survey included 10 questions examining how the convenience channel specifically is responding to the FET increase and what effect the tax has levied on the channel.

Responding were more than 50 chains, operating upwards of 20,000 convenience stores and representing a cross-section in size and demographic and featuring many of the industry's biggest outfits.

Remarkably, while volume appears to be down between 5% and 10%, retailers remain optimistic about the short- and long-term prospects of their No. 1 in-store category. Underscoring this spirit is the natural resilience of the c-store channel and also the run-up time that enabled retailers to eliminate slow-selling SKUs and recalibrate inventory to avoid the one-time floor tax.

Weeks before the FET increase of April 1, retailers told CSP Daily News of plans to scale back cartons, push promotions and drive discount brands, as well as othe r tobacco products (OTP).

Cigarettes are divided into four price categories or tiers. The most expensive, first-tier or premium, cigarettes are manufactured by defendant RJR (Camel and Winston cigarettes), as well as Philip Morris USA, Inc., Lorillard Tobacco Company, Liggett-Vector Brands, and Commonwealth Brands. Second-tier and third-tier cigarettes are also produced by the major manufacturers, but their prices are substantially lower than first-tier cigarettes. Fourth-tier brands are produced by smaller manufacturers (including Liggett and Commonwealth) and sell at prices somewhat lower than third-tier brands. (Smith Wholesale Co., et al. v. R.J. Reynolds Tobacco Co., UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT, April 21, 2006)

Reference: Exclusive Tobacco Analysis, Part 1: Three Months into SCHIP CSP-UBS convenience store survey unveils category's winners, losers by Mitch Morrison, CSP Daily News, 7/13/2009.

Some related news briefs: Tobacco Update CyberConference: more spending money for low income consumers/worry entry of big tobacco in OTP..; Fitch Ratings - U.S. cigarette sales volume declines..; U.S. - with increase in taxes will reduce smoking rates /prevent people from starting...