Cigarette Companies and Corner Stores Help Each Other Survive

In just about every convenience store, it's the guilty pleasures - chips, candy bars, copies of the National Enquirer - that get pride of place, right up by the cashier's counter. But these days, the cigarettes are missing.

Cigarette Companies and Corner Stores Help Each Other Survive

In just about every convenience store, it's the guilty pleasures - chips, candy bars, copies of the National Enquirer - that get pride of place, right up by the cashier's counter. But these days, the cigarettes are missing. So-called "powerwalls," the TOBACCO displays that were once front-and-centre, are now banned in almost every province and territory, hidden from view with blank flaps, cupboard doors or even shower curtains.

Governments have been restricting point-of-sale cigarette advertising to the point that, today, almost all of it is illegal. Yet in its reports to Health Canada, the tobacco industry totals up the "amount paid to retailers to display product or sign," and that number has gone up, growing by nearly 46 per cent from 2001 to 2007. What could companies be paying for?

All sorts of things, it turns out. The TOBACCO INDUSTRY and convenience store operators are endlessly resourceful when it comes to finding ways to market their products. Store owners receive money from tobacco companies for everything from sharing information on customer purchases to stocking certain cigarette brands on prime shelf space, even when it's behind those blank barriers. Industry insiders now refer to tobacco as operating in a "dark market" due to the tight restrictions on traditional advertising. It seems the convenience store has an increasingly important role to play.

In most provinces, tobacco display bans are relatively new. Alberta's came into effect on July 1; Ontario, Quebec and British Columbia introduced similar laws earlier this year. With New Brunswick and the Yukon Territory planning to introduce bans in 2009, Newfoundland and Labrador will soon be the only Canadian jurisdiction where cigarettes are still visible at point-of-sale.

Prior to the display ban, manufacturers paid retailers a handsome fee to ensure their brands got a prime spot on the back wall. The various bans will mean "millions lost to small business," says Dave Bryans, president of the Canadian Convenience Stores Association. He predicts 30 per cent of convenience stores will go under within three years just because of the bans.

And yet, according to those numbers provided to Health Canada, even in provinces where display bans have been in place for a while, tobacco companies' payments to retailers have gone up. Saskatchewan banned cigarette displays in 2002; that year, tobacco manufacturers paid $879,176 to the province's retailers. By 2007, payments had grown to $1.85 million. The increase in Manitoba - where powerwalls were banned in 2004 - is even more dramatic, jumping from $2.2 million that year to $4.9 million in 2007. Last year, across the country, tobacco companies paid out $108 million to retailers - an average of about $3,500 to each of Canada's 31,000 convenience stores.

A 2007 Supreme Court of Canada decision gave the tobacco industry what it perceived as a green light to advertise in limited ways. Print ads can now appear in publications with an 85 per cent adult readership, for example, yet many publishers still decline to take the ads (including Rogers Publishing, publisher of Maclean's), and the companies themselves shy away from traditional advertising. Rothmans, Benson & Hedges Inc., Canada's only publicly traded tobacco company, currently has no print ads, says vice-president of corporate affairs Ron Funk. Because the content allowed in such ads is so restricted, "the risks of being wrong are just too high," he says, adding that some provisions of the federal Tobacco Act include a prison sentence. "You don't have an executive in a public company that's prepared to go to prison on some guess," he says. When it comes to making their brands stand out, then, cigarette manufacturers "have so few options, and lots of money," says Richard Pollay, professor emeritus at the University of British Columbia's Sauder School of Business. "They see the retail industry as not just part of the total mix, but the most important part."

For convenience stores - where cigarettes can make up as much as 75 per cent of sales - tobacco is equally important. The two industries' close ties are demonstrated by the fact that, prior to becoming president of the Canadian Convenience Stores Association, Dave Bryans was employed by tobacco company RJR-Macdonald Inc. (acquired by Japan Tobacco in 1999, now known as JTI-Macdonald Corp.). "Nobody better to teach people how to handle these products than me," he says.

Retailers have gone from being simple counter clerks to an essential part of the tobacco industry's marketing strategy, experts say. "The retailer is [no longer] someone who just visually sells the product behind the counter," Liel Miranda, Imperial Tobacco Canada's vice-president of marketing, is quoted as saying in the July-August 2008 edition of Convenience Central. "He is someone who can provide information."

Reached at the Brazier Convenience Store in Winnipeg, owner Bob Whittle praises Manitoba's ban on tobacco displays. "We're able to keep cigarettes out of the hands of children," he says. It hasn't hurt his business either. "One company in particular does pay me to have a certain allotment of space on the shelf," he says. "Their reasoning is that, if you should open the doors to fill it, somebody in the store will see the brand." It seems a bit silly to him, he admits: "There's not a lot of logic in it."

Imperial Tobacco pays retailers a fee as part of a program that ensures its products are on the shelf and in stock, according to manager of corporate communications Catherine Doyle. Rothmans, Benson & Hedges Inc. (or RBH) is no longer compensating retailers for any display space, Funk says. JTI-MacDonald, meanwhile, has "a number of distinct programs in place" that vary depending on the retailer, notes André Benoît, vice-president of corporate affairs and communications for the Americas region, but he declined to comment on the nature of these programs, calling them "commercially confidential."

Meanwhile, another shopkeeper (who asked to remain anonymous) says a company installed his tobacco storage unit in accordance with the ban - in exchange for a designated spot. "There's an agreement between us and them, that if they want to be on [a certain] shelf, they'll do this and that for us," the shopkeeper says. While RBH has not paid for any display devices post-ban, Doyle says Imperial provided some retailers with flaps to cover their product. (Imperial Tobacco drew fire this spring after offering retailers a program that would see third parties buy ad space on their flaps. The promotion was abruptly cancelled around the same time it went public, although Doyle says the timing was coincidental.)

Tim Coutts is the owner of Coutts' Convenience Centre in Creighton, Sask. Cigarettes are an important part of business, he says: "They keep your regular customers coming in every day." Like most stores, Coutts gets visited by tobacco company representatives fairly often; they'll check his stock, and exchange any old packs for new ones. "They like to know what's going on, and what are the trends," Coutts says. While he isn't being paid for shelf space, he says a tobacco company has offered to pay him to take a survey of what customers are buying. "They said, 'Do you need a little extra money?' " he says. "I said, 'Sure.' "

Financial incentives are also available. According to Convenience Central, RBH's Funk told retailers at a recent trade show: "You can expect our company to not be paying for retail display space. But that is not meant to imply that we are taking trade spending off the table, not at all. In fact, we will migrate that trade spending into pay-for-performance kinds of programs." When questioned about these programs, Funk told Maclean's: "You set an objective with a store, and should that store meet the objective, they're compensated with a payment." Imperial Tobacco also offers what Doyle calls a "per-carton payout" to retailers, as part of a larger program. (The federal Tobacco Act doesn't regulate intra-industry promotional practices.)

But given that smokers tend to be intensely loyal to their chosen brand, why bother spending so heavily on marketing? Well, in the era of high taxes, more smokers are simply looking for the cheapest pack. And that's when a store clerk can be extremely important. "Typically the only movement you'll get now is around the cheaper brands," says Chris Wilcox, general manager of the Ottawa-based chain Quickie Convenience Stores. "That may move customers from brand to brand."

"It's almost like a restaurant," Coutts says. "You're the person that recommends what's on the menu."

Perhaps unsurprisingly, tobacco companies are investing to ensure clerks understand their products - Doyle confirmed that Imperial Tobacco has been sending out more product catalogues and flyers to retailers since the bans came into force. At LJ's Hillside Store in Weyburn, Sask., owner Jeff Richards leaves supplier information in the staff room and "encourage[s] employees to read it." Richards believes tobacco companies are putting more money into trade magazines, many of which are available to store owners for free and come packed with tobacco ads.

Health advocates find the shopkeeper's expanded role troubling. Indeed, many are concerned that tobacco companies might start paying clerks to push their brands, in this way "getting around traditional restrictions on advertisement by simply passing on verbal messages of which there's no record," says Michael Perley, director of the Ontario Campaign for Action on Tobacco. According to lawyer Rob Cunningham, senior policy analyst for the Canadian Cancer Society, this would be illegal under the federal Tobacco Act. (JTI-MacDonald, RBH and Imperial Tobacco all deny directly paying clerks to verbally promote their brands.)

But even if tobacco companies aren't paying for it, it's happening anyway, mainly because there are no products on display. The Quickie chain isn't receiving a fee to recommend particular products, Wilcox says, "but maybe I should be asking them to compensate us for it, because it's happening now regardless."

In the face of declining SMOKING rates, convenience stores are quickly diversifying into other lines of business - such as fast food. But for the time being, the tobacco and convenience store industries still need each other. As the rules governing tobacco sales in Canada grow more and more restrictive, cigarette companies will seek out new ways to thrive - as they always have. "We don't see this as a sunset industry; we see this as an industry in transition," Imperial Tobacco's Miranda is quoted as saying in Convenience Central. "Probably in 10 years we're not going to see the tobacco industry as we see it today, but we will be here."

Maclean's August 4, 2008