BUTTS ARE DRAGGING

RICHARD TURCSIK

Many supermarkets are getting burned these days when it comes to selling cigarettes.

Sales nationally are declining this year at a faster rate than before, and while the incidence of declines varies from region to region, some chains are seeing double-digit drops in their cigarette revenue.

The smoldering fallout of months of resurgent anti-smoking activity, from both the public and private sector, is partly to blame for the drag on supermarket volume.

But retailers and industry observers told SN that the trade is probably smarting more from a major competitive thrust by convenience store chains to become the dominant purveyors of cigarettes.

The convenience store trade is also benefiting from shifting consumer preferences for packs over cartons. While convenience stores do a bang-up job of merchandising the former, supermarkets traditionally have concentrated mainly on providing the latter.

Cigarette sales in supermarkets declined 6% nationally from July 1993 to July 1994, according to Nielsen North America, Chicago. Some supermarket operators have reported double-digit sales decreases. Overall tobacco consumption has been steadily declining at between 2% and 3% annually.

"Year over year, supermarket cigarette sales are off something like 10% to 12%, while the actual rate of consumption decline has been at about 2.5% for the last 15 years," said Gary Black, an industry analyst at Sanford C. Bernstein & Co., New York.

Black noted supermarkets seem particularly stung. "Actually, in the last two years we've seen an uptick in the prevalence of people who smoke, and the number of smokers has begun to inch back up."

Supermarkets, it seems, are especially vulnerable to cigarette theft. The high retails on cigarettes has put them first on many a shoplifter's list, resulting in many chains being forced to keep cigarettes under lock and key, discouraging all but the most die-hard smoker from waiting on a separate line.

Supermarkets also are being hurt by the anti-smoking movement that once again is sweeping across the United States. Numerous cities have banned smoking in restaurants, office buildings and lobbies. The federal government has charged that the tobacco industry is targeting children with its advertising campaigns.

Several New Jersey communities have outlawed cigarette vending machines in an effort to snuff out teen smoking, while scores of municipalities have set up sting operations to ensnare retailers selling to minors.

In Massachusetts, for example, Stop & Shop Cos., Shaw's Supermarkets and Purity Supermarkets were fined a total of $77,500 for selling cigarettes to minors during an April sting campaign conducted by that state's attorney general's office.

To the ire of local retailers, the Detroit Urban League is conducting an ongoing sting campaign using junior police cadets to see if retailers are selling cigarettes to minors there.

While no one has conducted cigarette bonfires in the parking lot of the neighborhood supermarket -- yet -- pressures on retailers to stop selling and promoting cigarettes are mounting.

"There are now so many restrictions when it comes to selling cigarettes. There is even some legislation where they have banned the displaying of cigarettes, and they can only be purchased at a service counter," said William Vitulli, vice president of government and community relations at A&P, Montvale, N.J. "However, unless it was legislated, we would not take a drastic move like stopping the sale of cigarettes," he added.

Marketing tobacco, however, is becoming an increasingly touchy enterprise. "One major New Jersey-based chain told me that the last few times they tried to run an in-ad coupon on cigarettes in their in-store circular, they received over 200 letters of complaint from consumers, setting an all-time record," said Burt Flickinger 3rd, an industry consultant with A.T. Kearney, New York. "Other supermarket executives have told me the same thing.

"Cigarettes are their highest net profit contributor on a year-end basis to the entire store. But they are frustrated in trying to merchandise the category because so many consumer groups, and some consumers, have complained, even when they try to market to the tobacco consumer with no intention of attracting new or younger users to the category," Flickinger said.

"Anti-smoking and anti-tobacco groups see stings as a way to embarrass the retail community, and their hope is that retailers will simply throw up their hands and say, 'It is too much trouble to carry the product; we'll just simply discontinue it,' " said Walker Merryman, vice president of The Tobacco Institute, Washington.

"In some communities in Minnesota we are seeing local legislation to eliminate point-of-purchase advertising for cigarettes. No store signs, window signs, lane dividers on the conveyer belt or baskets are allowed."

On top of everything else, the Clinton administration has proposed steep cigarette tax hikes to pay for its proposed health care reform. Industry watchers say if the tax hikes go through, it could have a serious negative impact on sales of cigarettes in supermarkets.

In Michigan, retailers already have been hard hit, in part by rising taxes. "Our cigarette sales have dipped by approximately 15%," said Mary Dechow, government and community relations spokeswoman for Spartan Stores, Grand Rapids, Mich. "We just had the $5-per-carton tax increase in Michigan.

Vitulli of A&P also said his chain has "noticed a slight decline" in sales, though not as pronounced as that reported by Spartan. "I guess people who smoke are still smoking," he said.

Dechow said there are so many factors with the potential to hurt the business that "it has been real difficult for us to tell if our dip in sales has been because of that, or a combination of the bad publicity that smoking has been getting. In addition, market share might be going someplace else," she said.

Many industry watchers agree with Dechow. They told SN the decline in supermarket cigarette volume may be due in large part to aggressive new moves by the convenience store industry to increase its market share, primarily by offering cigarettes at the lowest prices possible.

"There hasn't been any increase in the decline of total sales that has been evident for the last several years. So if supermarkets are seeing a [greater] decline in their sales, those sales are moving to someplace else, probably to convenience stores," said The Tobacco Institute's Merryman.

"Given the loss-leader-type pricing on cigarettes, smokers can now buy cigarettes by the pack in convenience stores at the same price charged by the carton in supermarkets," said analyst Black. "Convenience stores then make money by selling these customers something else at full markup, like gas, Snapple or a hot dog," he added.

Rob Huberman, vice president and general manager at Starkman Distributors, an Atlantic City, N.J.-based candy and cigarette distributor, said WaWa Inc., a convenience store chain based in Wawa, Pa., is one operator making a concerted effort at building cigarette sales.

"WaWa has changed their pricing structure of cigarettes in the last couple of years. They have dropped their profit margin on cigarettes tremendously in order to give those stores an obvious cigarette identity with the claim that it would help to generate additional sales of milk and bread.

"They got an exclusive private label from R.J. Reynolds called Jack's, which is also used by some chains in the West. Jack's got unprecedented publicity," Huberman said, adding that convenience store competitor Cumberland Farms also has introduced a private-label cigarette from RJR called Mustang.

"Cigarette manufacturers aren't emphasizing the supermarkets as much as they are other channels, particularly convenience stores," said Paul Kelly, president of Silvermine Consulting Group, Westport, Conn. "Cigarette companies have said they will get better treatment in the convenience stores and smaller outlets where they can get signage and small displays," he said.

An official at New York-based Philip Morris Cos., the world's leading cigarette producer, said the decline in supermarket cigarette volume is consumer-driven, because consumers are moving from cartons to packs. However, Philip Morris has devised several programs to help supermarkets stop the sales slide, especially its Retailer Rewards program, the official said.

"We're committed with specifically working with supermarkets to help them better manage the category. In Retailer Rewards, they have to do certain things and fulfill certain requirements. Then they are given certain rewards in terms of product.

"We have also been working with supermarket operators to experiment with alternative merchandising methods that can make the product more customer-friendly and improve sales," the official said.

Supermarkets are likely to resist pressure for more "customer-friendly" merchandising, however, because that can also mean "shoplifter-friendly." Several retailers noted cigarettes are a favorite target because of their high retails and easy resale. Many supermarkets have taken to selling cigarettes from behind the service counter. The trade-off, retailers admit, is that stashing cigarettes behind the service counter does not encourage movement.

"In the last year we made a fairly concerted effort to move our cigarettes to a new service center at the front of our stores. That has had a negative impact on sales," said Ed Cook, director of public relations at Harris Teeter, Charlotte, N.C. "We moved the cigarettes to the service center because of security and because we have been developing these customer service centers to sell items like cigarettes, film and batteries to customers. These service centers are located at the front of the store," he said.

One bright spot in the cigarette industry turmoil is that the market may have begun to switch away from generics to the higher margin premium cigarettes, said retailers. The shift is largely as a result of Philip Morris slashing the price of Marlboro by the equivalent of 40 cents a pack on April 2, 1993, which has become known as Marlboro Friday.

For some chains, that phenomenon has helped save their overall volume and profits. "There has been a definite movement back to the premium brands," said Phil Scaduto, a buyer at Food Circus Supermarkets, Middletown, N.J. "Our sales are steady, haven't gone up or down either way. With the reduction in the price of the cartons, it moved [sales] a little bit and moved the national brands more than before."

"We haven't seen any decrease in cigarette sales," said John Caperton, a buyer at Minyard Food Stores, Coppell, Texas. "Maybe more people have started smoking." The only unusual activity at Minyard units is that sales of cigarettes have become very erratic, starting about three months ago, he said. "The sales would drop, and we thought the adverse publicity must be having an effect; but then all of a sudden it would be up higher than it was before. That has made it difficult to order."

Caperton said the leading brands remain strong, but others are dropping off.