UP IN SMOKE

JULIE GALLAGHER

After the last of Dorothy Lane Market's three locations to extinguish cigarette sales kicked the habit three months ago, customers took the news in stride.

“There were no angry shoppers who said ‘I'll never shop here again,’” said Kathy Neufarth, spokeswoman at the Dayton, Ohio-based independent. “We did have a few disappointed shoppers that said, ‘Now I'm going to have to make an extra stop somewhere else,’ but they understood.”

Shopper tolerance comes as no surprise to George Rosenbaum, co-founder of Leo J. Shapiro & Associates.

In fact, a poll conducted by his market research firm revealed that nearly three in 10 consumers (29%) said that if a food store where they shop discontinued the sale of tobacco products, they would be more likely to shop there; meanwhile, just 3% said the store would be likely to lose their business if it no longer sold tobacco products.

The study's findings also reveal that 40% of consumers are opposed to food and drug stores selling tobacco products, 19% favor tobacco sales, and more than two-fifths (41%) say that whether or not food and drug stores sell tobacco products makes no difference to them.

Rosenbaum suggests that the handful of retailers who've recently abandoned the tobacco category are kicking off the next phase of a cultural evolution.

“We've seen smoking first become restricted in the workplace, and then it was restricted everywhere else,” he said. “Now we're also seeing suppliers become more restricted, and this provides an opportunity for retailers to distinguish themselves.”

Those chains that decide to stop selling cigarettes now stand to reap the most publicity and therefore the greatest benefits, he added.

After all, it's possible that some stores could be forced to do so in the future.

Earlier this year, N.Y. Assemblymember Sam Hoyt, D-Buffalo, Grand Island, introduced a bill that would ban sales of tobacco products at supermarkets containing pharmacies.

“In light of the overwhelming evidence of the harmful nature of cigarette smoking on one's health and the astronomical public health costs posed by tobacco products, it is contradictory and counterintuitive to sell such products in an establishment whose purpose it to provide remedies to health problems,” Hoyt said in a statement.

In letters addressed to the chief executive officers of Wal-Mart Stores, Bentonville, Ark., and Tops Markets, Buffalo, Hoyt urged the retailers to “set an example for the rest of the retail market by ending the sale of tobacco products.”

Rosenbaum agreed that many chains take cues from the retail giant.

“Continuation by Wal-Mart of tobacco product sales may discourage some food and drug chains from doing so for fear of losing trips to Wal-Mart,” said Rosenbaum. “This means that those chains which discontinue tobacco products will enjoy an advantage by the distinctiveness of their commitment to health and healthy living.”

Wal-Mart has no plans to stop selling cigarettes or other tobacco products, said Tara Raddohl, spokeswoman for the chain.

“I'd imagine that, like any product we offer, it's because there is consumer demand for them,” she said.

While Whole Foods Market, Trader Joe's and Publix's GreenWise Market have always quietly held to tobacco-free policies, DLM, as well as Wegmans, Rochester, N.Y.; Andronico's Markets, Albany, Calif.; DeCicco's Markets, Pelham, N.Y.; and six ShopRite stores in New Jersey, gained media attention during the first quarter of 2008 when they announced plans to phase out items in the category.

Most of them cited a desire to improve the integrity of their health and wellness positioning, but industry observers note that higher inventory costs, rising excise taxes and a loss of category share may have added to the ease with which these decisions were made.

Jason Ravitz, owner of ShopRite Supermarkets of Cherry Hill, decided to stop selling cigarettes in his six ShopRite locations in March because of falling sales.

“His stores are near the [New Jersey] border, and the excise taxes in bordering states are lower, so selling cigarettes wasn't profitable for him anymore,” Karen Meleta, spokeswoman for Wake-fern Food Corp., told SN. Instead of frequenting his locations when it came time to purchase smokes, shoppers would make the trip to Delaware or Pennsylvania to save money. High inventory costs may have also contributed to Ravitz's decision to abandon the tobacco category.

“Supermarket [chains] may be handling thousands of cartons of cigarettes at $70 a carton,” noted Nick Lake, vice president of client services for the Nielsen Co. “Higher handling costs are also attached to these items, since many times they're merchandised behind glass.”

Although Ravitz's situation involves geographical circumstances, supermarkets' loss of share in the category is nothing new.

During the 52 weeks ending April 19, unit sales of cigarettes in the food channel were down 5.1% to 727.7 million, according to the Nielsen Co.

It's unlikely that a reduction in the number of smokers contributed significantly to the decline.

The American Cancer Society reports that during the past two years, the number of U.S. smokers remained virtually unchanged at 45 million. About 23.9% of men and 18% of women smoke, and an estimated 80.1% of smokers smoke cigarettes daily.

These consumers are more frequently relying on convenience stores. “The migration [of smokers] to c-stores has been happening for quite some time now,” noted Lake. “Close to 70% of all volume is done there.”

Meanwhile, supermarkets contribute about 7% of the cigarette industry's volume, said Greg Mathe, spokesman for Altria, the parent company of Philip Morris USA.

Lake said there are several reasons for the shift in sales, among them the fact that buying packs at a time has become more affordable for smokers than purchasing cartons.

“Excise taxes and the price of cigarettes continue to drive the price of a carton to the point where smokers are buying packs,” he said. “Very few supermarkets sell individual packs, and even if they do, most of the time their promotions center on cartons.”

Lake also noted that smokers more closely match the typical convenience-store shopper profile.

“The average c-store consumer is typically rural and lower-income, so when you look at that consumer and the cigarette consumer, they're a pretty close match,” he said.

Convenience stores also often have an edge over supermarkets when it comes to the generosity of promotions, said Lake. That's because cigarette manufacturers base promotional allowances on factors such as volume.

Philip Morris also takes in-stock guarantees and commitments to participate in pricing promotions into consideration.

Ted Taft, managing director of Meridian Consulting Group, Wilton, Conn., pointed out that since convenience stores count cigarettes among their second-best-selling item behind gas, they're more willing to promote the category than a supermarket, which doesn't count the category's items among its bread and butter.

Still, the decision to phase out the category is by no means an easy one.

“Despite rising inventory costs and declining category volume, cigarettes remain a very profitable category that can help increase store foot traffic,” Mathe said.

Taft acknowledged that many rely on the category's margins, which are five times higher than those of the average supermarket category. He said that grocers bring in about $150 in tobacco profit per square foot per year, compared with an average of $30 elsewhere in the store.

Despite the lucrative opportunities the category presents, Rosenbaum predicts that Wal-Mart's health and wellness positioning will some day extinguish its tobacco category.

“Wal-Mart launched its $4 generics program two years ago, and it's aggressively opening retail clinics in its stores, so it's increasingly dicey for them to continue to sell cigarettes,” he said. “My prediction is that the days Wal-Mart sells cigarettes are numbered.”

It seems that the retailer's consumers might welcome such a decision. Of the poll participants who shopped at Wal-Mart within the previous four-week period, 44% said they are opposed to the sale of tobacco products by food and drug stores, compared with 43% of overall participants who agreed with those sales.

In the meantime, Philip Morris is working to create cigarettes that have less harmful effects.

“There is no safe cigarette, and all cigarettes are addictive and cause serious diseases,” said Mathe. “For those adults who continue to smoke cigarettes, however, we are searching for ways to reduce the health risks of smoking.”