RYO Endures Market Pressure

March 15, 2016 CSD Staff

The fortunes of roll-your-own (RYO) tobacco will likely continue to wax and wane in 2016.

Last year was more wane, due mainly to a resurgence in combustible cigarette sales.

Vivien Azer, managing director with the Cowen Group, a diversified financial services firm, explained why RYO’s share dipped in the tobacco category.

“Cigarette industry trends were incredibly robust in 2015, reflecting the healthier lower-income consumer who was benefitting from lower gas prices, lower unemployment and, we have recently argued, higher minimum wages,” Azer said.

What that is doing is causing trade-up in the total tobacco category.

“I don’t know that it’s an accommodative backdrop for RYO given our constructive view for cigarettes in 2016,” Azer said. In other words, what is good for cigarette sales isn’t necessarily good for RYO.

“RYO has historically done well in periods of either economic challenge for the core tobacco user and/or higher tax environment,” Azer said. “We also see further evidence of trade-up with the core tobacco consumer, as we have seen a fair amount of premiumization within the cigarette category itself in 2015.”

A higher tax environment does loom especially as a part of the President’s Budget for Fiscal Year 2017, a new program called Preschool for All has been proposed with funding coming from an increase in both the federal tax on cigarettes and a tax increase on other tobacco products (OTP), including RYO.

Under the proposal, pipe tobacco would increase from $2.83 per pound to $44.23, over a 1,000% increase, and smokeless tobacco would increase over eight times its current rate.

Azer considers it likely there will be a federal excise tax increase on cigarettes. “We have been operating in a very benign excise tax environment since 2010,” Azer said. “But legislative activity does look to be picking up, which would have a bigger affect in 2017, as well.”

RYO in 2016
Tim Greene, category director-tobacco and general manager for Smoker Friendly International LLC in Boulder, Colo., said that his company doesn’t anticipate much change in 2016 from what it has seen over the course of the last two years.

“Our RYO category was flat comparing 2015 to 2014, however we saw a slight increase in margin in 2015, and still consider RYO as a strong and important category,” Green said. “As always the (FDA’s) deeming regulations loom and could dramatically impact this category, but until that happens it’s business as usual for our RYO category.”

Amer Hawatmeh, president of St. George Oil in St. Louis and operator of six Coast to Coast convenience stores, pointed out that rising taxes have hurt RYO sales.

“When they taxed the rolling machine and the paper the same way they taxed tobacco, I said there was no need for it,” Hawatmeh said. “The costs were just too close to (top-brand cigarettes). And my customer base all switched to the sub-generic brands of cigarettes: Decade, Exeter, that kind of fourth-tier tobacco that comes in at $20 a carton, versus $44 like Marlboro, or $48 for others.”

Hawatmeh pointed out that RYO is a category that can help operators build customer loyalty, since they are interfacing individually with buyers and acting on their preferences. Such personal service strategies might go far in alleviating pressure on RYO sales.

Stay tuned to Convenience Store Decisions‘ March issue, where we delve into 38 in-store categories to identify emerging trends and garner retailer analysis to forecast what operators can expect for 2016 and beyond.