August 1998
Volume 25
Number 4

As Boom Matures,
Profit Margins Soften

The cigar boom, after years of breakneck growth, showed significant signs of change in 1997, changes spawned both by drastic shifts in merchandise availability from major cigar manufacturers and by shifting consumer demands for merchandise. Above all, though, was the continuing expansion of new smoke shops, which began to outpace the growth of new smoke shop customers, fueled primarily by cigar enthusiasts.

By year's end, tremors were being felt in the heretofore golden performance of retail sales, with the holiday season failing to duplicate the stellar results of 1996 at the register. Widespread availability of many previously unobtainable cigar brands by year's end set the stage for a new challenge in many markets, that of growing retail competition amid a customer base that has not expanded nearly as quickly as the number of new retail tobacco stores arriving to serve it. This year, many cities will become battlegrounds for smoke shop dominance and survival.

Few retailers were anywhere close to singing the blues, but for an industry that has grown accustomed to selling nearly every decent - or not so decent - cigar it could stock, with related accessory merchandise moving nearly as quickly, the realities of a post-boom slowdown were nonetheless a bitter pill to swallow.

Cigar imports continued to defy logic at first, with huge year-to-date increases still visible well after signs that retail demand for massive backorders were quickly retreating. Smoke shops also had to contend with wildly shifting prices and availability of many second- and third-tier cigars that had become staples in humidors nationwide. Forced to ditch discontinued stock in the bargain bins as prices plunged on many struggling brands, profits in some cases evaporated before one's eyes. And large shipments of unexpected merchandise from major manufacturers surprised many retailers while creating unplanned financial burdens to meet payment on unexpectedly large invoices.

Most of these issues will continue to be significant factors in smoke shop performance this year. But despite the surprises and occasional disappointments, 1997 clocked in with overall year-to-year sales growth and record sales industry-wide.

Smokeshop has published an industry study each year since 1975, the only such undertaking that analyzes the relatively small industry segment known as "specialty tobacco," or the traditional tobacco merchant.

Without the efforts and invaluable information contributed by each retailer who participated in the 1998 Industry Survey by completing detailed questionnaires about their store's operations during the past year, this research could not have been possible. Smokeshop expresses its sincere thanks to each retailer that participated in this year's survey

The Smoke Shop Community: More Growth
The expansion of retail tobacco locations as tracked by Smokeshop nearly matched last year's jump, with almost 1,800 new tobacco retailers identified for a 36% gain, versus 37% in 1996. The Western states continued to outpace all other regions by nearly 2-to-1 in the number of new store locations, posting an overall 63% gain in 1997. This was followed by the Midwest with a jump of 30%; the South with a gain of 29%; and the Northeast with a rise of 28%. Arizona led the nation as the fastest-growing state for new retail locations, with 129% more shops in 1997. The remaining top-five growth states were Nevada (106%), North Dakota (100%), Idaho (93%), and California (72%).

States showing the least amount of new tobacco shops last year were West Virginia (3%), Wisconsin (3%), Oklahoma (5%), Kansas (5%), and Missouri (7%), with the District of Columbia and Montana showing no net gains in retail outlets. Only South Dakota posted a net loss (11% fewer stores).

Of the sample surveyed, a solid majority of tobacco retailers were single-location businesses (78%), with 14% having two or three locations, and a mere 8% totalling four or more total sites.

Respondents reported that 76% were members of the RTDA; 24% were not. The average RTDA member joined the trade association 10 years ago; 60% joined since 1990; 2% have been members since the RTDA was formed, 66 years ago.

About 63% of responding retail stores have been in business 10 years or less; another 35% between 11 and 100 years; and a 2% have been retailers for more than 100 years.

More Competitors
In line with the 36% increase in smoke shops nationwide, retailers continued to feel the competitive pressure. With many new tobacco and cigar shops opening in higher population areas, the likelihood of a store's customer base overlapping with that of a competing store continued to grow. Although 66% reported no direct competitor within a mile, down from 70% in 1996, only 27% reported having no competitor within five miles, an even larger decrease from 40% in 1996. Competition continued to heat up: 55% of the stores reported two or more competitors within a five mile range by the end of 1997, up from 41% the year before. On the average, stores reported 2.3 competitors within a five mile range, up 23% over 1996, and a full 95% higher than two years earlier.

Much of the new stores that opened in 1997 appeared in suburban locations. A majority of the randomly-surveyed stores were located in suburban areas (56%), a noticeable shift from previous years when urban locations had dominated the survey. As a percentage of the overall total of retail stores, rural stores held essentially even at 12% of the sample, compared to 13% in 1996.

The larger percentage of suburban locations was further supported by last years store breakdown by location type, with shifts again seen towards shopping strips, which dominated all other categories with a 48% share of all stores, compared to 42% in 1996. Free-standing sites accounted for the next-largest group at 30%, compared to 40% in 1996. Having lost ground in the overall standings over the past several years, mall locations gained a slightly larger share, 20% of all locations, compared to 18% in 1996.

Cigars as a dominant portion of retail sales pushed the percentage of stores that sold only tobacco and related items even higher last year to nearly 51%, a marked increase from 41% in 1996. The number of tobacco stores selling non-tobacco items dipped slightly, from 44% in 1996 to 42% last year, while general merchandise stores also selling cigars continued to loose representation in the overall number of stores, down to 6% last year from 14% in 1996.