TOBACCO Stepping up to the contraband challenge

BY CHRIS DANIELS

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.

Advocating for fairness

The Convenience Industry Council of Canada (CICC) hears stories like George’s all the time these days.

“During a board meeting in November, our members were calling contraband a 911 issue,“ says Jeff Brownlee, vice-president, communications and stakeholder relations for the CICC, which is advocating for more funds toward police investigations into the illegal market, which has worked well in Quebec.

“We are hearing of year-over-year tobacco sale losses of at least 10% regardless of where the store is in Canada,” adds Brownlee. “That figure is much higher in contraband hotspots like B.C. and Newfoundland, where taxation on cig- arettes is very high.”

In a recent pre-budget submission to the Standing Committee on Finance & Economic Affairs, Ontario Convenience Stores Association CEO, Dave Bryans, addressed the issue on behalf of his members: “Illegal untaxed tobacco continues to infiltrate every community in Ontario through an elaborate distribution and production network that is well known to all levels of government.”

The Ontario Korean Businessmen’s Association (OKBA), which represents more than 900 c-stores, recently relaunched its “Save Our Stores” campaign to bring political awareness to the issue. During the last 10 years, the OKBA estimates that it has lost close to 1,000 members “many of whom have closed their businesses permanently due to unfair competition from organized crime groups selling contraband.”

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, who is 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.

Strength in partnership

If there is a silver lining to the fight on contraband—which also funds other illegal activity and robs government of bil-