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August/Sept.
1999

Change
of Pace

shake out - n (1895): the failure or retrenchment of a significant number of firms in the economy or a sector or an industry that usually results in a depressed market.

Tracking the Trends? Click Here to view last year's Industry Report.

Likely to be remembered as the first of two shakeout years, 1998 was largely a period of adjustment, destined to "correct," in economic parlance, the breakneak expansion of an industry that had been thrust, ready or not, into feverish overdrive.

But just because most saw that it was coming didn't mean the pill was any easier to swallow.

Methodology
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.

Sales growth stalled. Barn sales of doomed cigar brands at the wholesale level forced once pricey frontmarks out of retailer's humidors and onto the discount racks, where profits evaporated. Shrinking margins amplified the effect of increased retail competition in many markets. And even as the media delighted in declaring the cigar fad over, legislators turned their caustic toungues victoriously away from the Tobacco Settlement and onto the stogie, decrying the antics of the next evil tobacco empire. Morale seemed to slump along with the profits...

But the truth is that although profits dipped last year, the industry remains much stronger than only a few years prior. Among stores surveyed in this year's Industry Report, average sales declined in 1998, totalling $460,757 or a about a 14% drop from 1997. Only 39% of surveyed stores reported sales in excess of $500,000, compared to 50% in 1995, while those reporting less than $200,000 jumped to 26% from 22% last year.

Somewhat surprisingly, no major shift between tobacco and non-tobacco sales was reported among the responding sample, with tobacco merchandise accounting for 88.1% of all store sales, compared to 87.7% last year.

Among tobacco merchandise, however, cigars slid from 51% of all tobacco products sold in 1997 to 43% last year, while sales of domestic and imported cigarettes and pipe tobaccos accounted for large portions of tobacco sales. Small shifts were seen among non-tobacco merchandise, with lottery tickets and magazines losing ground to themed clothing. Overall, non-tobacco merchandise held steady at about 12% of total store sales.

Nationwide, a net loss in the number of smoke shops was tracked, with 23% fewer stores detected than 1997. The western region, including California, showed the largest drop, at 35%, while the south had the smallest decrease, at 18%. States tracking net gains in the number of smoke shops were led by Montana (+292%), followed by South Dakota (+13%), District of Columbia (+9%), Wisconsin (+4%), and Oklahoma (+1%). States showing a net loss of stores outnumbered gainers by a margin of nearly 8 to 1. Leading states in net losses of tracked stores in 1998 were Nevada (-65%), Vermont (-53%), Arizona (51%), Utah (-44%), and California (-41%).

Merchandise trends were largely in keeping with expectations. Price points of boxed-cigar sales drifted from the higher ranges in 1997 to lower ones in 1998. Boxes over $75 accounted for 61% of all boxed-cigar sales in 1998 compared to 66% in 1997, while those under $75 grew by 7%, accounting for 41% of all boxed-cigar sales compared to 34% in 1997.

Single stick sales showed similar movement, with cigars under $2 growing from 9% in 1997 to 16% of all single stick sales last year. Single cigar sales over $10 fell from 8% of category sales in 1997 to 6% in 1998. Single sticks retailing between $2 and $7 accounted for 65% of all single stick sales in 1997, but only 52% in 1998. Those priced $7 - $10, however, jumped from 18% of single stick sales in 1997 to 26% last year.

Pipe sales showed a definitive shift towards higher priced models, with low-end pipes under $15 accounting for only 4% of overall pipe sales in 1998, compared to 14% in 1997. Last year, 95% of all new pipe sales were over $15; with 56% between $25 and $99. In 1997, only 86% of new pipe sales were over $15, and 50% were sold in the $25 to $99 range.

Stores selling estate pipe sales continued to slide in this year's survey, with 21% reporting they handled reconditioned pipes in 1998, compared to 26% in 1997 and 35% in 1995.

Saturation in the humidor market was evident, as was a notable slide in price points. In 1998, 82% of all humidors sold retailed at under $249, compared to 72% in 1997. Units selling for under $100 accounting for 36% of all humidor purchases in 1998, compared to 28% in 1997.

Smoke shops classifying themselves as "tobacco-only" retailers continued to climb last year, following a solid six year trend, and accounting for 67% of participating retailers in 1998, up from 51% in 1997. The remaining stores were distributed by about a margin of 2 to 1 among tobacco shops handling a significant portion of non-tobacco merchandise (22%) and gift or general merchandise stores selling tobacco and related accessories (12%).


Continued...