Tobacco: The Competitive Crunch

What happens when drug and dollar channels shift their tobacco strategy

Let’s begin with the potentially good news. National drug-store chain CVS announced recently that it’s exiting tobacco merchandising to concentrate on a holistic health-care strategy.

And now for the less-than-good news. The ambitious dollar-store channel is ramping up several once-non-existent selling opportunities--tobacco being one of them. According to a Wall Street Journal report in early June, dollar stores have been “taking a scalpel to prices,” providing consumers with an even more compelling reason to frequent these stores.

Don’t sleep on dollar-store power. Worthington, Ohio-based consulting firm Prosper Insights & Analytics states that 47% of consumers earning $25,000 or less depend most on dollar stores. They make up 37% of Dollar General’s customer base, whereas the figure for Wal-Mart Stores is just 22%. If the economy stumbles, the value proposition intensifies.

Adding to the shifts in the category are tobacco outlets, which are losing some of their mojo as the once-firm price advantage this channel enjoyed has eroded. The average price gap between c-stores and tobacco outlets from January 2012 through December 2013 shrunk from 72 cents to 63 cents, according to research furnished by Pittsburgh-based consulting firm Management Science Associates Inc. (MSA), which bases its research on distributor shipment data.

The mixed bag of opportunities and challenges in front of c-stores leads to a case-by-case strategy that blends how they approach the competing channels within each separate tobacco subcategory.

Woonsocket, R.I.-based CVS’ exit from tobacco bodes well for all channels—some more than others. MSA revealed that a c-store with a CVS within 1 mile of it could potentially realize an increase of 43 carton sales per week, while tobacco outlets would rake in only five additional cartons a week.

How do retailers size up the development?

“With CVS’ exit from tobacco, I’m not anticipating sales windfalls,” says Anne Flint, tobacco category manager for Framingham, Mass.-based Cumberland Farms, which owns and operates 550 stores. “I’m looking at this conservatively and thinking that this void [when CVS pulls out] will be spread across all retail channels.”

Meanwhile industry consultants believe that despite the dollar store threat, c-stores are still regarded as the go-to place for tobacco products. “The dollar shopper buys tobacco products there because it presents an opportunity,” says Don Burke, senior vice president of MSA. “I doubt dollar customers regard it as a destination for tobacco, whereas c-stores are. Dollar stores are capitalizing on increasing the basket with that opportunity.”