Generic & value-brand cigarettes turning heads at warehouse clubs

Discount Store News, May 23, 1988

Generic & Value-Brand Cigarettes Turning Heads at Warehouse Clubs

NEW YORK--While sales of cigarettes in the United States have been declining slightly over the past few years, tobacco sales at warehouse clubs are (if you'll pardon the expression) smoking.

Tobacco products are perhaps the perfect embodiment of the membership warehouse club low-margin, high-turn credo, and increasing attention to low-price, value-added brands and generic products seems to be speeding up the turn rate.

Tobacco may be the one area in wholesale clubs exempt from the unspoken membership code of brand names at any cost. Here, generic and value brand (generally unadvertised) products account for a significant portion of sales, with "black and white" generic sales particularly strong.

According to warehouse club buyers, the growing anti-smoking sentiment in the United States has had little if any effect on wholesale club cigarette sales. "They're [sales] at least as strong as ever," said buyer/merchandiser for Price Savers, Matt Bennett, of the Salt Lake City, Utah-based wholesaler. "Sales are increasing all the time."

The reasons for that growth are three-fold. First, wholesale clubs are members of a still-young industry that is increasing its customer base, and therefore sales, in a broad range of departments, including tobacco.

Second, one of the larger customer segments at wholesale clubs is small variety stores, which in turn are probably the largest outlet for tobacco in the country; membership clubs seem to have gained a good deal of business from traditional distributors in this category.

And third, other small business owners tend to buy their personal tobacco at clubs, where the savings over other retail outlets regularly approach $2 a carton.

The bulk of sales are made up of name brands, those heavily promoted and long-popular names like Marlboro and Winston that have been category leaders for decades. However, those brands are mainly sold on the basis of brand loyalty and, in this era of rapidly rising tobacco and alcohol taxation, ability to pay. When the tobacco industry refers to itself as "a mature market" it is primarily referring to those brands.

The tobacco war is really being fought for the uncommitted and/or price-conscious smoker. Tobacco companies, in an effort to increase their share of what seems to be a stable pie, have introduced both generic and quasi-generic (value added) brands. The basic thrust of both is price, with generics offering rock-bottom cost and value-added offering a brand image at considerable savings.

The result has been a restrained price war in the value-added category. Brands such as Lucky Strike Filter, which takes advantage of one of the best-known brand names in the field, and Malibu seem to have risen above the pack, establishing themselves as viable brands, at least at the present price point.

Most of these brands include $2 and $3 rebate coupons with every carton, which are redeemable at the point of purchase. "The tobacco companies are really going after market share in the generic area," said Thomas Daniel, vice president, merchandising at Denver-based PACE Warehouse Clubs. "That's where the growth is."

Other value-added approaches evidently aren't working as well. The "50 extra cigarettes per carton" appeal of Richlands, for instance, doesn't seem to have a lot of appeal in the warehouse environment. "They don't fit in your pocket and they don't fit in vending machines," one buyer said.

The couponed value-added brands have a significant drawback as well-membership clubs generally don't take coupons at all. Some, like Indianapolis-based Wholesale Club, have made an exception in the case of cigarettes while others, like Club Wholesale, PACE and Price Savers, have simply added new sku numbers for couponed products, then received the manufacturer rebates by showing a record of those sku sales and prices.

"When we first experimented with it, company reps would give us cash for each carton sold, and we'd put the cash directly into the till," said Jim Fuller, tobacco buyer for Meridian, Idaho-based Club Wholesale. "Now we've set up separate sku's for each couponed product, and we get the check directly from the company rep."

One manufacturer added that while warehouse clubs are bypassing the coupons, they are also missing out on the handling fee companies pay to retailers. Evidently warehousers have found that not having to change their checkout methods is worth the loss of a few cents per carton.

One blight on the generally bright sales picture has been state regulation of cigarettes as it affects the status of wholesale clubs. As combination retailers/wholesalers, many clubs have run awry of regulations in states like Ohio and Montana. "We have to do backflips to sell at wholesale," one club operator said.

Several clubs, like some units of The Wholesale Club, have added separate entrances and addresses for their wholesale tobacco departments to comply with regulations in those states. PACE has set up a separate wholesale-only company in some (mainly Southern) states.