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For c-stores: where there's smoke there's fire

Independent convenience stores are getting hurt by contraband cigarettes and low-margin tobacco

The last decade has not been kind to convenience stores. Early on, a number of convenience stores in Quebec closed because they were not differentiated enough from one another.

Then came the longer operating hours of supermarkets, which forced even more convenience stores to close across Canada.

More recently, the proliferation of contraband cigarettes, and withering margins imposed on independent c-stores by some tobacco manufacturers, has taken a toll.

READ: Trouble and opportunity with e-cigarettes

Tobacco can account for 50 per cent of the sales at convenience stores, so smaller margins can have a devastating effect.

As for contraband cigarettes, business is booming, says Ken Storey, a former tobacco executive who is now consulting with the c-store industry. Upwards of 25 per cent of cigarettes sold in Canada are contraband, he believes.

“A carton of cigarettes in the legal market sells for $80 to $90. Contraband sells for $10 to $20, making it an attractive alternative for people who would otherwise abide by the law,” he says.

Storey, owner of Storeyboard Consulting, notes that if contraband cigarettes make up 25 per cent of cigarette sales in a c-store’s neighbourhood, that store likely brings in 12.5 per cent less sales than it used to.

Cigarettes are a traffic driver, and if customers are having their demands satisfied elsewhere, c-stores lose traffic as well.

Convenience stores that have survived this illegal competition are selling the lowest-priced cigarettes they can legally acquire, forcing some manufacturers to cut prices to maintain their market share against other legal manufacturers, says Storey.

“Unfortunately, the contraband issue is complicated. It’s no longer simply a ‘First Nations’ issue, but now an organized crime issue,” he says.

READ: Increasing gas station convenience increases sales

Recent activities by Imperial Tobacco have not helped. The Canada Convenience Store Retailers Association has filed a complaint with the commissioner of competition for Canada, claiming that Imperial Tobacco has offered its preferred pricing program to only 30 per cent of Canadian convenience stores.

That has left 70 per cent paying $5 to $9 more per carton, thereby squeezing their margins and forcing more stores to close.

The complaint makes other charges as well, summed up by the c-store association’s claim that “Imperial’s policies illustrate an abuse of market power, an abuse of dominance and contain exclusive dealing, tied selling and market restriction in favour of Imperial’s products.” (I contacted Imperial Tobacco to get its side of the story, but after three phone calls and three e-mail messages, I got no response).

Determined to give c-store operators greater margins on their tobacco products, a new company called Canada Tobacco & Global Inc. was founded a year and a half ago by 38 Korean c-store operators. Their goal? To manufacture and sell cigarettes at a discount.

The company held an unveiling of its three new brands at the end of February at the Korean Cultural Centre in Toronto. They claim their cigarettes, sold under the brands Midas, C38 and Gangnam (yes, as in “Gangnam Style,” the Korean YouTube sensation), are made from top-quality tobacco, paper and filters.

The company says they sell their products to c-stores at lower prices than the major manufacturers. The cigarettes are manufactured in Canada and shipments to retailers started in March.

Making a better margin on some cigarettes will have many independent c-store operators smiling. But will it be enough to prevent future closures?

Well, smokers tend to be brand loyal, so it will take some time to get customers to change their preference, unless the savings are sufficient to get them to switch.

But the last word goes to Ken Storey: “If a competitor can deliver a consistent offering of equal quality, then often, the lowest price wins.”

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