STEMMING THE STUB-OUT

CHRISTINE BLANK

Even as cigarette makers face more lawsuits and government legislation, they say they still believe supermarkets can boost their rapidly declining sales of tobacco products.

Poor category management was a contributor to a decline in cigarette sales in supermarkets long before cigarette price hikes went into effect within the last two years, said Kati Otto, spokeswoman for Philip Morris USA. "They first have to have unified category management, rather than cluttered and fragmented. It should be there for them [consumers] at one place and convenient to get to," she said.

However, convenient merchandising is not an option for most supermarkets, as most states require that, at the least, cigarettes are kept behind the customer-service counter or in locked cases in checkout lanes.

Supermarkets are becoming "tobacco-unfriendly" places to shop, said Nick Zaden, director of purchasing at City Wholesale in Birmingham, Ala. "It's a lot easier to shop in convenience stores than going to a different counter in grocery stores," he said, noting an 11% drop in cigarette sales to supermarkets in the past year.

Supermarkets now command only a 21.4% share of the market, according to ACNielsen, compared with convenience stores' whopping 67.5%. More people are buying packs, and are choosing to do so in convenience stores, where they do not have to wait in line.

"Of all the venues that the antismoking campaign have affected, supermarkets have been hit the hardest because they have the greatest breadth of shopping," said Kenneth Harris, partner at Cannondale Associates, Evanston, Ill.

"Sales have definitely gone down -- we took a whole case out in October," said Nancy Falas, cigarette purchaser at Stump's Market, San Diego. Although the locked case at the last checkout lane is "very inconvenient," Stump's moved cigarettes there to prevent theft.

"In some of the states, we've seen regulations that have put supermarkets at a competitive disadvantage," said Ruth Mitchell, assistant vice president of communications at Hy-Vee, Des Moines, Iowa. "We are seeing that sales are down because customers say it is not convenient to pick up a pack of cigarettes anymore," she added.

In addition, supermarkets are worried about offending consumers, and some have cut back on promotions. "There are all kinds of headaches with consumers who consider tobacco sales bad," Harris said.

Also, price hikes from cigarette manufacturers, to pay for lawsuits against the companies, have drilled into sales. Overall, cigarette sales have plunged 16.2% within the last year, according to ACNielsen.

The Clinton administration and state governments are continuing to put pressure on the industry, and manufacturers face additional lawsuits. In mid-February, more than 4,000 growers and others sued major cigarette makers for "conspiring to undermine the U.S. tobacco regulatory system" and abandon growers by buying less tobacco. According to the complaint, "Big Tobacco" encouraged growers to oppose sweeping antitobacco legislation in Congress that would have given them $28 billion in aid. Then, the manufacturers "cheated" growers by moving to expand purchasing of tobacco offshore, according to the suit.

In addition, cigarette wholesalers and distributors filed suit against the major tobacco companies in early February, saying they illegally fixed prices at high levels in the United States and other countries.

In California, where prices jumped from an average $2.55 per pack in early 1998 to about $4 in early 2000, sales dropped 30% during that time frame.

High prices have pushed many smokers toward generic brands and to the Internet, where several companies are hawking discount cigarettes. One cigarette e-tailer, Smokin4less.com, has seen sales jump from $400 in its first month in business, October 1999, to $55,000 in February, 2000. "I believe on-line tobacco sales is taking its share of convenience shoppers away from the traditional marketplace. With a consumable like tobacco, customers usually order a month's supply at a time," said William Baker, Web administrator of Smokin4less.

At the same time, some supermarkets are taking steps to turn the downward trend around.

Jax Markets in Anaheim, Calif., cut about 5% off its profit margin to lower cigarette prices by about 20 cents a pack. "We sacrifice gross, but I hate to lose that $4 sale," said Bill MacAloney, chairman and chief executive officer of Jax. In the long term, MacAloney said, he believes the chain will generate as much profit as before, by selling more product.

The price cut became almost a necessity after MacAloney researched how competing stores were pricing cigarettes. "We were not even competitive in the field of selling cigarettes," he said.

Putting the emphasis on single packs, which constitute 80% of Jax Markets' cigarette sales, is also helping sales, along with a new display case from Philip Morris and increased signage at checkouts. "We put out as many signs as possible regarding our price and that we know it's competitive" in an aim to make the store a destination point for cigarette shoppers, he adds.

Hy-Vee executives are considering adding cigarettes near express lanes "where there is always someone overseeing the area," according to Mitchell. Currently, the chain's cigarette-merchandising varies from store to store, with many stores selling cigarettes behind customer-service counters only.

City Wholesale is encouraging grocers to carry cigarettes in at least two lanes -- one express and one full lane. "We're trying to get them to put [cigarettes] in multilanes to stay competitive with tobacco stores and convenience stores," Zaden said.

Grand Rapids, Mich.-based L& L/Jiroch Distributing, a division of Spartan Stores, is planning an aggressive strategy that will involve stores, the distributor and manufacturers, to win back sales. "We have to take the reins and go out there and push this category," said Craig Diepenhorst, sales director at L&L/Jiroch. The first order of business: convenient display cases. The distributor is looking into overhead fixtures for cash registers that dispense both cartons and single-pack cigarettes quickly.

Philip Morris officials said they believe the decline in supermarkets' share of cigarette sales could be stemmed through better category management and more response to demand. "Cigarettes make up just 2% of overall sales in supermarkets, so the focus tends not to be on managing the category," Otto said. In addition, Philip Morris is working with retailers to put more emphasis on pack sales -- where the demand has shifted -- and on improving merchandising.

Meanwhile, Harris said he believes the only way supermarkets can improve sales is by moving cigarettes off-site. For example, a store with an adjoining gas station could sell cigarettes at the gas station. Kroger tried the strategy at some of its stores in Houston, then abandoned the initiative.

Despite retailers' merchandising efforts, Harris said he doesn't see the situation improving.

"Tobacco has been the biggest cash cow for many of the retailers and they're watching their business go away. There is no other place they can go to improve it," he said.