Pinantan General Store in Pinantan Lake, B.C. used to sell 45 packages of cigarettes a day. Now the convenience store is lucky to sell five or six on some days, says owner Cory George. It has come up against widely available, ridiculously cheap contraband tobacco.
“Between my store and the city of Vernon [about 90 minutes away], there are as many as 10 illegal shops along the road selling contraband,” says George.
He went into one of the shops. Four cartons of cigarettes were going for $200. His shop charges about $180 a carton, or about $700 for four.
He could slightly lower his price per carton, “but really, our profit on tobacco is very small and is almost at a break-even point,” says George. “We use the category to drive foot traffic, because when people come in for a pack of cigarettes, they also pick up other things, like a jug of milk or a bag of potato chips.”
Based on his conversations, many independent c-store owners are yielding profit margins of just 2% to 3% on tobacco, particularly as demand has risen for less-expensive cigarettes. Only a small few are taking 10%. “Nobody is taking more than 10% by the time they put insurance on their tobacco,” he says.
Size doesn’t matter
Both national and regional chains are feeling the squeeze. That includes MacEwen Petroleum, which has 103 corporate-owned gas/convenience stores (MacEwen/Quickie) in Ontario and Quebec.
“Illicit tobacco has been a significant concern in Ontario and, post-COVID restrictions, it has had a significant impact on the retail segment,” says Muhammad Zeeshan, category manager – tobacco, MacEwen Petroleum.
“As a result, we have seen pressure on sales in the cigarette category.”
“It is impacting the entire industry regardless of store count or size,” says Marc Goodman, VP and general manager of 7-Eleven Canada. “It is a particularly big ordeal in Western Canada, where almost every year there is another increase in taxes on cigarettes and illicit trade has become rampant.”
Filling the gap
How is a c-store supposed to compete with the illicit market?
“You can’t – it’s virtually impossible,” says Goodman. “The environment is nowhere near competitive in terms of pricing.”
Eli Mail, a retail consultant and convenience store expert and Parkland’s former VP, merchandising, agrees c-stores can’t compete on price, and shouldn’t try.
“C-stores need to maintain their position as retailers that follow the laws and regulations,” says Mail. “But what I would say to independent operators: come up with other ways to bring people in that are not strictly related to cigarettes. Because if a customer is no longer coming in for cigarettes because they have found the illicit market, you want to make sure they have another reason to keep coming in.”
He says that could be foodservice, dry cleaning, passport photo service and auto products. (The Q3 2022 Global Convenience Store Industry Report found the latter grew by 16.9% in sales in Canadian c-stores versus Q3 2021.)
The goal, Mail says, is to retain the customer and some of their purchase basket. If you can do that, you may even be able to hold on to some of their tobacco purchases, if not in the near-term than the long-term.
The story behind why Canada is an outlier isn’t that smokers here suddenly quit or cut back in droves, say industry leaders. It’s the rise of contraband.
“Government may see these figures and think, ‘We’ve increased taxes on cigarettes, made it cost-prohibitive to smoke, and therefore sales are down,’” says Marc Goodman, VP and general manager of 7-Eleven Canada. “While there is probably a bit of truth to that, the numbers also reflect that illicit tobacco has ramped up. In Western Canada, where cigarettes are very heavily taxed, we have seen very substantial declines in cigarette sales.”
Advocacy group Convenience Retailers Alliance 4 Safe Communities estimates at least 30% of tobacco sales in B.C. are now contraband.
Industry leaders agree that a decline in tobacco sales isn’t necessarily a win for public health.
“It is misleading to think that this is cause for celebration,” says Goodman. The real story? “In a recessionary climate, smokers have looked for other means to get their nicotine fix.”
Across the board, the industry is calling on governments to freeze tax increases or risk driving more people to purchase illicit tobacco.