Convenience Store News faTobacco Roundtable

what Have We Learned?lessons learned from the Balvor/CSNews 2010 Tobacco Retailing Survey

40 CONVENIENCE STORE NEWS APRIL 12,2010

By David Bishop. Balvor LLC

dramatic if you realize thatthe average is 25 percentlower than just two years agowhen it was approximately19 days.

The point is that lower in-ventory levels are good if thebenefits (e.g., less productshrink, lower working capitalrequirements) are greater thanthe costs (e.g., lost sales, un-happy customers).

2010 Unit Volume Forecast(Annual Average Growth Rate vs. Previous Year)

SOurce: 8aIvorlCOnvenience Store Ne'Ns Tobacco Retaillng~, February 2010

• Increased• Decreased

hese are truly interesting times for conven-ience retailers. Not only are convenience re-tailers feeling the economic downturn likeeveryone else, but they're challenged withdecreasing fuel margins that for some are

below what they need to run the business profitability,and increasing uncertainty about what tomorrow willbring for tobacco retailing.

From the perspective of the last point, theBalvorlCSNews 2010 Tobacco Retailing Survey is in-tended to help inform retailers about changing retailpractices and perspectives about the business. The fol-lowing Ie ons learned are based on digging furtherinto survey findings and reinforce very fundamentalprinciples that retailers need to remember.LESSON #1You can't sell what youdon't have.While having a good price isimportant, we've heard overthe year about the cost relatedto out of stocks, both in termsof lost sales and customer de-fections. Unfortunately, as in-ventory costs increase, moreand more retailers are poten-tially exposing their stores tohigher out-of-stock rates. Infact, the survey highlightedthat nearly one-third of theretailers perceive that theyha ve h ig h ervwo rse out ofstocks in cigarettes today thana year ago.

Why is that happening? Ac-cording to the survey, retailersare now averaging around 14days-of-supply for cigaretteswith many indicating they're LESSON #2even lower. This finding is There's more than one

Shelf SpaceAllocations Trends

(Percent of Companies Responding)

Cigarettes Other Tobacco ProductsNote: Percentages don't equal 100% as difference relates to those responding that space "remained the same" in 2010

SOurce: BaMJr!Convenience Store NeWs TobaCCO Retailing survey, FebruaIy 2010

Shelf Space Allocations Trends OTP*(Percent of Companies Responding)

• Increased• Decreased

Smokeless Cigars Papers Pipe/Cigarette Tobacco All OTPNote: PercentageS don't equal 100% as difference relates to those responding that space "retnafned the same" in 2010

•Ranking in C1escendingorder based on Shareof dollar sharesSource: Ba/vor/COn\.e1ienceStore NevIS TObaCco RetafllngSUf\'E'y, February 2010

WWW.CSNEWS.

way to skin a cat.This proverb teaches us thata problem typically has morethan one potential solution.In tobacco's case, the prob-lem is the increasing costsassociated with carrying to-bacco inventory and the sim-ple solution is inventoryreduction, which we learnedunder lesson No.1, can cre-ate other problems if doneincorrectly.

What are some other, moreeffective solutions? Digginginto the survey results re-vealed that retailers who fo-cused mainly on reducingSKU counts were the leastlikely to report that out ofstocks are worse"than lastyear. On the other hand,those who focused primarilyon lowering product supplyacross the board were 29 per-cent more likely to indicatethat out-of-stocks are highertoday vs. last year.

The point is that an effec-tive approach to lowering in-ventory should alwaysensure that a stable supply isavailable in the store. There-fore, be careful about howthe stra tegy is executedwith top-selling SKUs,while also using the op-portunity to identify low-value SKUs.

L1:SS0N #3Inventory reductionopens up otherpossibilities.Retailers understand theyneed to find space in orderto add a new SKU. Con-versely, when a retailer re-moves an existing SKU

Convenience Store News fit Tobacco Roundtable

The Balvor/Convenience Store News 2010 Tobacco Retailing survey foundconvenience store retailers are currently averaging around 14 days of supplyfor cigarettes, with many indicating they're even lower.

Percentage Change in InventoryLevels - by Tobacco Segment

(Average Percent Change vs. Last Year)

-1.7% .{).8%

Smokeless Pipe/Cig All OTP papers Smokeless CigarsTobacco

source. aafvorlCOnvenience Store NeWSTObacco Retailing Survey, February 2010

In-Store Cigarette Inventory On-Hand(Percent Responding)

14 to 16 Days

20 to 22 Days

17 to 19 Days

wtd average basedon store count 14.1 days

< 14 Days

SOurce: Ba/vor/COOvenience Store Neo.vs TobaCco Retailing su~, FebtueIY 2010

42 CONVENIENCE STORE NEWS APRIL 12. 2010

he/she needs to determinewhat to do with the freespace. For instance, morethan 70 percent of retailerare rationalizing cigaretteSKUs to some degree, but itdoesn't mean that their carry-ing few SKUs.

What should you do? Insome cases retailers are shift-ing some free space to im-prove the in-stock position oftop-selling cigarette SKUs. Inother cases, many retailerare expanding the assortmentin segments like subgenerid-private label and fourth tierto ensure stores are competi-tively positioned for the ex-tremely price-sensitive shopper..

The point is that inventoryreduction can help you broad-en assortment where it makesense while culling it backwhere it doesn't. And, at thesame time, it can help youstrengthen the everyday avail-ability of the core SKUs thatmake up the base business.

Ultimately the process ofreducing inventory on-hancreates both opportunitieand challenges that retailerneed to be aware of in order

to build their tobaccobusiness for tomorrowand beyond regardless ofthe economic or politicalenvironment.

David Bishop spe-cializes in conven-ience retail and is

t the managing part-ner at Baluoi: LLC, a salesand marketing firm locat-ed in Barrington, Ill., andcan be reached at davidbishop@balvor.com. -

WWW.CSNEWS.CO