CSD: The Impact of Tobacco Federal Excise Taxes
Commentary by Tony Miller, SVP of sales and marketing for Thorntons
Through a special arrangement, presented here for discussion
is a summary of an article from Convenience Store Decisions magazine.
The increase of federal and state cigarette excise taxes will have a far-reaching,
negative impact on the convenience store industry. With the exception of petroleum
products, no other category is more vital to the industry’s success than tobacco
products. Given that cigarettes represent 30-45 percent of c-store inside sales,
the deterioration of this category will have devastating consequences.
The Federal Excise Tax (FET) will dramatically increase the cost of doing
business. Inventory cost will increase by an average of $6,000 per store–$1
million for a chain of 166 stores–resulting in higher interest expenses.
Credit card transaction fees will increase due to soaring cigarette retails.
Internal shrink dollars will escalate due to the higher cost per carton. External
theft will rise due to the value of cigarettes and the amount of inventory
dollars carried. In addition to the FET, Kentucky Legislators are proposing
an incremental 30- to 45-cents-per-pack State Excise Tax (SET), compounding
The FET is a direct tax on the middle-class, as 80 percent of cigarette smokers
are in lower-income brackets, and in Kentucky the average annual household
income for cigarette smokers is less than $32,000. During these difficult economic
times, it is impossible for the average cigarette smoker to assume a higher
tax burden. As a result, increased cigarette taxes will significantly alter
the purchase behaviors of our core consumers.
The cigarette industry is ratably declining at three-four percent annually.
Excise taxes at these levels are unprecedented, and it is difficult to project
the potential sales loss. Nonetheless, many industry experts are predicting
additional six-10 percent declines on top of the current three-four percent
trends. In addition to the reduction in cigarette sales and gross profit dollars,
retailers will also lose sales and gross profit dollars associated with affinity
purchases — other products purchased with cigarettes.
With chains facing reduced gross profit dollars, reduced affinity sales, increased
interest expense and increased cigarettes shrink dollars, storeowners will
be forced to look to this category and others to make up the loss in net income.
It is unfortunate that consumers will most likely absorb additional increases
above and beyond the excise taxes.
This daunting economy has already made it difficult for most retailers to
maintain shareholder value, and the impending FET and SET will place an additional
burden on the convenience industry. This burden will challenge the industry
to evaluate its cigarette categories and possibly re-engineer its overall strategies.
In time, prudent retailers will overcome this adversity and prevail with a
much stronger business model.
Discussion Questions: How should c-stores respond to the likely steep drop
in sales in its core cigarette category as well as the impact of higher cigarette
prices on its core customer? How does the c-store business model change with
a smaller cigarette business?