Texas Food and Fuel Association Quarterly-October/November/December 2013

Q U A R T E R L Y October November December 2013

E-Cigarettes — Vaping Views Differ, But Numbers Pointing in One Direction ▲

p. 14 Odorless, smokeless, and rechargeable, E-Cigarettes are growing in popularity.

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Q U A R T E R L Y October November December 2013

E-Cigarettes — Vaping Views Differ, But Numbers Pointing in One Direction ▲

p. 14 Odorless, smokeless, and rechargeable, E-Cigarettes are growing in popularity.

Q U A R T E R L Y October November December 2013

Texas Food & Fuel Association Quarterly is published for: Texas Food & Fuel Association 401 West 15th Street, Suite 510 Austin, TX 78701 Phone: 512-476-9547 Fax: 512-477-4239 www.txfoodandfuel.org

Departments

TEXAS FOOD & FUEL ASSOCIATION STAFF

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Calendar of Events

Jesus Azanza, Director of Communications and Marketing

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Welcome New Members

Rick Bolner, CPA, Vice President of Accounting

13

Association News

Doug DuBois, Jr., Director of Member Services & Governmental Affairs

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Featured Advertisers Marketplace

Scott B. Fisher, Vice President of Policy & Public Affairs

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Index of Advertisers

6

Texas Food & Fuel Association Board of Directors

9

Chairman’s Message

By Eddie Bates

Chris Newton, President

Dana Fuller, CEM, Expo Manager Annette Hicks, CMP, Director of Meetings & Expositions Kris Wallace, Assistant Director of Accounting & Assistant Expo Manager

Features 14

E-Cigarettes — Vaping Views Differ, But Numbers Pointing in One Direction

By TFFA Staff, Reynolds American, FIN Brands

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Looking for a Boost?

Sales of Energy Products Continue to Stack Up

By Sandy Smith

Published by: Naylor, LLC 5950 NW 1st Place Gainesville, FL 32607 Phone: 800-369-6220 Fax: 352-331-3525 www.naylor.com Publisher: Drew Jasinski Editor: Shani Calvo Marketing: Kaydee Currie Project Manager: Heather McMillen

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Sales Director: Eric Singer Advertising Sales: Cherie Dubay, Jason Hughes, Bill Lovett, Warren Marcoux, Shannon O’Brien, Leron Owens, Beth Palmer, Jason Ruppert, Chris Shuemake, Paul Walley, Jamie Williams, William Worley, Matthew Yates Layout & Design: Deb Churchill Basso, Print 2.0H! Cover Design: Jesus Azanza ©2013 Naylor, LLC. All rights reserved.

The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher.

PUBLISHED NOVEMBER 2013/TPM-Q0413/8858

October November December 2013

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Texas Food & Fuel Association

2013-14 Board of Directors OFFICERS

DISTRICT DIRECTORS

Eddie Bates, Beaumont Chairman Gary Johnson, Odessa Vice Chairman Rick Golman, Dallas Secretary Madalyne Lange, Sherman Treasurer Jim Kolkhorst, Navasota Immediate Past Chairman Chris Newton, Austin President

Clay Wallace, Hereford District I Matthew Kendrick, Lubbock District II Steve Fryar, Brownwood District III Dean Howerton, Midland District IV Michael Burniston, Kerrville District V Aaron Nilsson, Daingerfield District VI Kyle Kirby, Ft. Worth District VII Mike Kitrell, Plano District VIII Justin Reeves, Longview District IX Matt Judson, Corsicana District X Don Broach, Bryan District XI Ed Morgan, Nacogdoches District XII Doug Staton, Austin District XIII

REGIONAL DIRECTORS Dan Baker, San Angelo Region A Lance Davis, Bonham Region B Cary Rabb, Round Rock Region C Brian Williams, San Antonio Region D

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Imad Sarkis, Beaumont District XIV To Be Announced District XV Sean Nooner, Hondo District XVI Carlton LaBeff, Victoria District XVII Jake Marsico, Dickinson District XVIII

DIRECTORS AT LARGE — MARKETERS Sultan Poonawala, Dallas John Prickette, Sulphur Springs Michael Reynolds, Mt. Pleasant Jeff Scarbrough, Clovis, NM Wes Scott, Houston Mark Wright, Houston

DIRECTORS AT LARGE — SUPPLIERS Therese Baer, Austin Buster Cage, Whitney Beau Harris, Arlington Russ Hamilton, Boyd Michael Lawshe, Fort Worth Bryan Noonen, San Antonio

PAST CHAIRMEN SERVING ON THE BOARD Rodney Fischer** Gary Garrison** Andy Olmstead ** Tom Masters** Terry Maxey** Randy Parrott* Carl Ray Polk, Jr.* Allen Smith** Brooks Smith** John Weitzel ** *serves on Executive Committee **serves on Board Board Term: July 1, 2013-June 30, 2014

View this issue and past issues of The Quarterly at www.naylornetwork.com/tffa/ 6/20/13 12:26 PM

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Chairman’s

Message

By Eddie Bates

Defining ‘Creative Sustainability’

Education sessions, networking with peers and sharing a chuckle over a common experience enable our members to run smarter, operate more efficiently and enjoy a better return on their capital.

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elcome to the latest edition of the Texas Food & Fuel Association Quarterly Journal.

I’ve spoken a lot about my theme for this year, “Creative Survivability,” and the need for the association to be an added value partner for its members. No matter the customer we are trying to serve, we share the same concerns about regulatory burdens, economic conditions and changing technology. These and other factors sometimes chase us from our comfort zones and force us to face new challenges, but in the end the experience makes us wiser and hopefully we have a healthier bottom line to show for the process.

The rise of electronic cigarettes is an example of creative survivability. The public health focus and regulatory requirements related to the sale of traditional tobacco products are well known.

New technology has created a new product to meet our customers’ needs for these products.

By being a member of the association, attending its events and reading this magazine, you’re enhancing your market intelligence and growing your profits.

This year’s Fall Conference and District Meetings have helped showcase the benefits of membership in the association and its role in helping its members not only survive, but thrive, in changing markets. Education sessions, networking

with peers and sharing a chuckle over a common experience enable our members to run smarter, operate more efficiently and enjoy a better return on their capital.

Our upcoming Winter Conference (February 4-5, 2014) promises to provide even more benefits for attendees. Not only will you hear from some of the most insightful minds in the industry, you’ll also have the opportunity to broaden your network and have fun. While I’m talking about fun, let me emphasize that having fun at these conferences is important. We learn more and are able to think most creatively when we’re relaxed, having fun and have access to the right information. This is where your association shines as an added value partner.

I hope you will also take the time to explore the Members Area of the association’s website, www.txfoodandfuel.org. Like I said above, having access to the right stream of information is critical.

This new part of the website puts all of the most important regulatory and industry information in one place tailored to reflect your company’s profile and interests and keep you up to date. It’s simple to access and you’ll be smarter for taking a few minutes to check it out.

Thank you again for your continued membership and participation in the Texas Food & Fuel Association.

I look forward to seeing you soon.

■

Members Working with Members Thank you for supporting the advertisers and members who make this publication possible. Their involvement with the association allows us to have a strong front on legislative issues that affect all involved in the industry and related fields. Their support of this magazine allows Texas Food & Fuel Association to continue to inform its members about updates in the industry and how Texas Food & Fuel Association is directly involved in making a difference. Texas Food & Fuel Association encourages all of its members to consider working with companies who actively support the industry through their involvement with the association.

October November December 2013

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Programs that Improve your bottom line

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Calendar

of Events

2014

jan

Texas Food & Fuel Association Winter Conference February 4-5, 2014 La Torretta Lake Resort & Spa, Montgomery, TX

feb

Indicates an association event

mar apr

may

jun

jul

aug sept

oct

nov

dec

4-5

2014 Southwest Fuel & Convenience Expo

13-15

May 13-15, 2014 Gaylord Texan Resort, Grapevine, TX

Texas Food & Fuel Association Summer Meeting

16-20

June 16-20, 2014 Bodega Bay Lodge & Spa, Bodega Bay, CA

2015 2015 Southwest Fuel & Convenience Expo

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May 6-8, 2015 Omni Fort Worth Hotel & Convention Center, Fort Worth, TX

W e l c o m e New Members INDEPENDENT OPERATOR MEMBERS Clarendon Outpost Company Clarendon, TX Paul Bivens 816-874-5202 pbivens55@gmail.com

Don’s Barefoot Bay Marina Longview, TX Don Talley 903-328-6194 don@barefootbaymarina.com www.barefootbaymarina.com

11,000 Sq. Ft. Destination Location

SUPPLIER MEMBERS Daktronics, Inc. Brookings, SD Vic Wenner 888-325-7446 commercial@daktronics.com www.daktronics.com The industry leader in designing and manufacturing digital LED displays, programmable display systems and large screen video displays.

Brady, Chapman, Holland & Assoc., Inc. Houston, TX Wayne Johnson 713-979-9758 wayne.johnson@ bch-insurance.com www.bch-insurance.com

Texas Snowman, LLC Arlington, TX Gary Herman 682-209-5666 gary.herman@txsnowman.com www.txsnowman.com Manufacturer of Ice Vending Units

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Dear Texas Food & Fuel Association Member: The Texas Food & Fuel Association Board of Directors has recommended Federated Insurance for a number of insurance and financial protection products: Property & Liability – Federated’s excellent coverage and commitment to risk management support are a powerful combination. In addition, you have the potential for a dividend if loss experience in our recommended program is warranted.

Group Health – Rising medical costs are challenging, but Federated plans offer cost containment features that can help hold down premiums while maintaining quality care.

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TEXAS FOOD & FUEL ASSOCIATION 401 West 15th Street, Suite 510 t Austin, Texas 78701 t (512) 476-9547 t fax (512) 477-4239

A s s o c i a t i o n News Members Area – Register Now!

The PAC Needs Your Support!

T

s of October 2013 the Texas Food & Fuel Association Political Action Committee has raised $55,158 and is only $29,842 away from reaching its 2014 goal of $85,000. Help protect the petroleum and convenience/grocery industry in Texas by contributing today!

Although the Texas Legislature is not in session, agendas are being formed and interests being shaped, both of which can have a positive or negative impact on your business.

The Texas Food & Fuel Association Political Action Committee relies on your contribution to make an impact and help guide the future of petroleum marketing, grocery and convenience retailing industries in Texas.

Contribute to the PAC today by calling 800-460-8662 or visiting www.txfoodandfuel.org. ■

he Texas Food & Fuel Association is excited to announce the launch of a newly designed Members Area developed exclusively for members of the Association. The new site is a result of member requests to offer unique and user friendly ways to gather knowledge, receive up-to-date industry information, and manage personal, as well as company, information. By moving to a more member-centric layout, tailored information will be available and based on each member’s profile.

For more information regarding the Members Area contact Kris Wallace at 512-617-4303.

October November December 2013 642027_Editorial.indd 1

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VAPING NEWS

E-Cigarettes Vaping Views Differ, But Numbers Pointing in One Direction What Is an E-Cigarette?

An electronic cigarette (or e-cigarette), personal vaporizer (PV), or electronic nicotine delivery system (ENDS) is an electronic inhaler meant to simulate and substitute for tobacco smoking. It generally utilizes a heating element that vaporizes a liquid solution. Some release nicotine, while some merely release flavored vapor. They are often designed to mimic traditional smoking implements, such as cigarettes or cigars, in their use and/or appearance.

Source: Wikipedia

Regulating E-Cigarettes E-cigarettes have experienced exponential growth, moving from less than $500 million in global sales in 2010 to more than $1.8 billion (projected)1 in 2013. In the absence of federal regulation of these products, the growth of this market has outpaced the ability of states to respond effectively. Many of their statutes underpinning current excise tax and public health policy assumed the presence of physical tobacco in a product in uniform packaging. In the U.S., only Minnesota has adjusted its statutes to tax this product type, treating it as an OTP sku. In 2013, initiatives were introduced in 35 states to tax or regulate the sale of e-cigarettes ranging from defining minimum age requirements to Utah attempting to tax them at the same rate as cigarettes and Oklahoma where the nicotine liquid would have been taxed at $0.05 per ounce. As e-cigarettes continue to gain market share (now approaching 2% of the total U.S. cigarette market) states are likely to continue to initiate attempts to include them in excise tax regimes.

Challenging tobacco distribution models, many e-cigarette manufacturers are

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As mentioned above, there are a number of government initiatives currently being pursued at both the federal and state levels. These initiatives could be strengthened through the consolidation of the market as a result of the entrance of major tobacco companies. The parallels between the current e-cigarette environment and the traditional cigarette market from 60 years ago should not be overlooked. Taxes on traditional cigarettes were able to be efficiently collected through the introduction of regulations that required uniform packaging for cigarette packs. Using this as a benchmark for the e-cigarette market, states could achieve the same results as they have in the traditional cigarette market while causing little to no disruptions in existing distributor operations and ensuring the flow of these products through their operation.

selling directly to consumers, establishing a B-to-C (Business to Consumer) environment, where a consumer of any age can purchase e-cigarettes from an online vendor without paying taxes or going through existing wholesaler and retailer channels. With no current federal restriction on e-cigarette Internet sales, the B-to-C channel is estimated to make up nearly $800 million of the expected $1.8 billion in e-cigarette revenues in 2013. With the recent explosion of ‘vapor lounges’ directly servicing consumers with ‘mix your own’ liquids for reusable devices, there is likely to continue to be a dramatic negative impact on wholesaler revenues. However, in the longer term, the entry of Lorillard, Reynolds, Altria and BAT in the e-cigarette marketplace is likely to direct more demand through traditional tobacco supply chains. Furthermore, the FDA has stated it intends to begin regulatory oversight of e-cigarettes, which could include restrictions on Internet sales. It is still unclear to what extent the FDA intends to regulate or restrict these devices and as shown by the continued extension of comment period for the FDA’s treatment on menthol cigarettes, timeframes can be difficult to accurately assess.

1

Linarch Reports and Citibank Research

Some Deem Rush to Regulate As Reckless2 While anti-smoking groups – the Campaign for Tobacco-Free Kids, the American Lung Association, the American Heart Association, the American Cancer Society Cancer Action Network – have been pressing the Food and Drug Administration (FDA) to regulate all tobacco related products not currently 2

CSPnet.com, 9.25.13

View this issue and past issues of The Quarterly at www.naylornetwork.com/tffa/

Some analysts have estimated that e-cigarette sales will be as high as $1 billion this year, which would nearly double 2012 sales, and have said it is a very important category in growth terms.

Are You Ready for Double Digit Growth?

By Reynolds American

E under their jurisdiction, another group is calling too much regulation a threat to public health.

The Consumer Advocates for smokefree Alternatives Association (CASAA) claim these organizations are “proposing a solution for a problem that does not exist.” They say “enacting regulations without sufficient scientific evidence has the potential to do a great deal of harm to public health. CASAA is a non-profit organization working to ensure the availability of low-risk alternatives to smoking.

Their claim is the majority of e-cigarette users are former smokers who are looking for means to wean themselves off the tar and nicotine addiction of cigarettes. Rather than being a gateway to smoking for youth, as the anti-smoking organizations assert, CASAA claims e-cigarettes provide a low-risk, yet satisfying substitute product for smoke, making a smoke-free lifestyle possible.

October November December 2013

lectronic cigarettes have generated enormous attention and are a growing segment within the tobacco category. There is strong awareness and trial of the category among adult smokers.

Research shows that a majority of current cigarette smokers are interested in innovative types of tobacco products.

In terms of the category, about 65% of the e-cigarette volume is rechargeable, while 35% is disposable, with classic tobacco fl avor and menthol accounting for about 90% of the e-cigarette volume.

The remaining volume is accounted for by the sales of a wide variety of fl avored tobacco products.

Some analysts have estimated that e-cigarette sales will be as high as $1 billion this year, which would nearly double 2012 sales, and have said it is a very important category in growth terms.

While a large number of adult smokers have tried some form of e-cigarettes, the segment currently only accounts for about a half-point share of the total tobacco industry. In other words, adult smokers are trying electronic cigarettes, but few are actually converting to them entirely. To date, adult smokers who have

tried e-cigarettes haven’t found a product that performs consistently.

Seizing on the business opportunity of the fast-growing e-cigarette category, R.J. Reynolds Vapor Company, a subsidiary of Reynolds American, Inc., brought its VUSE Digital Vapor Cigarette to retail outlets throughout Colorado.

Designed in-house by R.J. Reynolds R&D experts, VUSE is designed using innovative digital technology, ensuring it delivers consistent flavor and a satisfying vapor experience.

VUSE is powered by Smart Technology, which is designed to monitor and regulate the power, heat and cartridge performance to ensure a perfect puff first time, every time. With its digital technology, VUSE gives adult smokers considering e-cigarettes an innovative, high-quality product from a leading tobacco company.

Unlike other e-cigarettes currently on the market, VUSE is completely designed and assembled in the U.S., and, as an additional quality step, VUSE incorporates automated manufacturing to ensure a consistently reliable cartridge every time.

VUSE is another innovative product in our continued effort to transform the

15

tobacco industry. Leading the transformation of tobacco not only provides the RAI operating companies a greater chance for success — now and in the future — but also includes our retail partners in that success as well.

On the Regulatory Front On the regulatory front, the Family Smoking Prevention and Tobacco Control Act was signed into law on June 22, 2009, which granted the Food and Drug Administration (FDA) authority to regulate the manufacture, marketing and distribution of tobacco products.

Currently, FDA regulates cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. The Act allows FDA to issue regulations asserting jurisdiction over other tobacco products, such as e-cigarettes, cigars and cigarillos, among others. And, it is expected that FDA will issue a deeming regulation to cover e-cigarettes.

A deeming regulation is a proposed regulation that would include products meeting the definition of a “tobacco product” under the Tobacco Control Act to be subject to FDA’s jurisdiction. The Tobacco Control Act defines a “tobacco product” as meaning “any product made or derived from

tobacco that is intended for human consumption, including any component, part, or accessory of a tobacco product (except for raw materials other than tobacco used in manufacturing a component, part, or accessory of a tobacco product).”

As the preferences of adult tobacco consumers change, we are leading the transformation of the tobacco industry, providing high-quality products for them to consider. With our VUSE Digital Vapor Cigarette, we intend to be a market leader in the category.

For more information, contact Steve Kottak with R.J. Reynolds Tobacco Company, KottakS@rjrt.com.

©ISTOCK/THINKSTOCK

States Urge FDA to Regulate E-Cigarettes Attorneys General of 40 States Say Advertisements, Flavors Appeal to Children Source: The Wall Street Journal

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ttorneys general from 40 states urged the Food and Drug Administration on Tuesday to restrict the advertising, ingredients and sale of electronic cigarettes to youths.

The call for action comes less than three weeks after a government survey showed the percentage of high-school students who have tried e-cigarettes —which turn nicotine-laced liquid into vapor— rose to 10% last year from 4.7% in 2011.

The battery-powered devices aren’t regulated by federal authorities, but the FDA is aiming to propose regulations

by Oct. 31 for the small but fast-growing alternative to traditional cigarettes.

Federal rules prohibit the sale of cigarettes to anyone under 18 and more than

16

two dozen states already have moved to ban the sale of e-cigarettes to minors.

Most researchers say e-cigarettes are less harmful than traditional smokes, which release tar and other toxins through combustion. Proponents say e-cigarettes are an effective way to wean smokers off of traditional cigarettes. But public health officials say e-cigarettes could get more people hooked on nicotine and serve as a new gateway to smoking. E-cigarette retail sales are expected to top $1 billion this year, a bit more than 1% of the overall U.S. tobacco market.

Unlike regular smokes, e-cigarettes are sold on the Internet and marketed on television. They also come in a dizzying array of flavors, including chocolate

and cherry. The FDA banned the sale of flavored cigarettes, with the exception of menthol, in 2009.

In a letter to FDA Commissioner Margaret Hamburg, attorneys general from New York, California, Ohio and 37 other states asked the federal agency “to take all possible measures’’ to meet its stated Oct. 31 deadline for proposing regulations.

The attorneys general expressed concern that e-cigarettes are marketed on prime-time TV, “making it easier for those advertisements to reach children.’’

It noted some manufacturers pitch e-cigarettes with the help of cartoon characters such as monkeys, years after makers of traditional cigarettes were banned from using cartoons in advertising.

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They said e-cigarette flavors such as gummy bear and bubble gum appeal to youth. The cost of e-cigarettes also has fallen, making them more affordable and attractive to teenagers, they added.

Minnesota is currently the only state with a special e-cigarette tax, in contrast to traditional cigarettes, which are taxed heavily at the state and federal level.

Rechargeable e-cigarette kits require a larger initial investment than a pack of regular cigarettes but typically are cheaper over time. Disposable e-cigarettes are often priced similarly to traditional cigarettes.

Several leading e-cigarette manufacturers including Lorillard Inc., maker of blu ecigs, and NJOY, Inc., maker of NJOY King ecigs, have come out in support of age limits and say they don’t market their products to youth but advertise on television. Lorillard has defended the use of flavors and says it requires age verification for online sales.

The attorneys general noted nicotine is “highly addictive’’ with “immediate biochemical effects on the brain and body,’’ citing a U.S. Surgeon General report.

Public-health authorities say nicotine can affect the neurological development of minors and recommend that pregnant women abstain.

Currently, FDA regulates cigarettes, cigarette tobacco, roll-yourown tobacco, and smokeless tobacco.... And, it is expected that FDA will issue a deeming regulation to cover e-cigarettes.

October November December 2013

E-Cig Market Attracts Hundreds of ‘Players’ The e-cigarette market is unlike the cigarette market in many ways, but one difference that stands out is the market availability. Independent manufacturers and small business owners are trying to secure a foothold and solidify their brands in this fledgling industry, which is seeing exponential growth. Elliot Maisel, Chairman and CEO of FIN Branding Group, shares some insight on what it takes to become a big player in this rapidly growing market.

Q. What are your thoughts on the future of e-cigs?

Currently the market is very fragmented, with over 200 players in the field.

While there is tremendous market potential, I think that over the next few years we will see significant consolidation in the industry. As consumers become more familiar with the product and as regulations are unveiled, we think that the number of established players will come down from the volume that we currently see. There is, however, plenty of room for FIN and other strong independents.

Q. How is FIN preparing for the future of e-cigs?

FIN is an entrepreneurial start-up. We saw the opportunity and grabbed it in a market that had relatively low barriers to entry. In the future, this may change as consolidation in the industry increases and state and federal regulations are enacted. To that end, our plan is to further strengthen our brick and mortar distribution networks and enhance our brand awareness among adult smokers. Given that we are an independent player and small business owners ourselves, we have developed strong partnerships with our distributors and vendors. The strength

In 2013, attendees from over 25 states participated in the Southwest Fuel & Convenience Expo.

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of our brand and our partnerships is evident what we have been able to accomplish as a company in a short period of time; FIN products are currently in over 40,000 stores in all 50 states.

Q. Do you have any recommendations for retail outlets, as far as how to best market the e-cig?

While retailers need to take into account the unique characteristics of their floor plans, we generally believe that the best location to merchandise e-cigarettes is next to traditional tobacco products, as our core consumer demographic consists of existing users of traditional tobacco cigarettes. We approach our retail relationships as longterm partnerships – we work with each retailer to understand their needs and create a program that will ensure success. We have included robust marketing campaigns and effective point-of sale-materials among other merchandising incentives to ensure success for retailers and for our brand.

Q. What concerns do you have related to regulations?

Any that are specific to Texas?

First and foremost, FIN puts safety first.

We believe the more emphasis our company and our industry put on safety and quality, the better the regulatory environment will be for our products. We welcome reasonable regulation that provides for product safety and consistency and prohibits sales to minors. We are a founding member of The Electronic Cigarette Industry Group, Inc. (“ECIG”), a new trade association promoting common sense regulation

that recognizes electronic cigarettes are a viable alternative for adult smokers.

Q. Are you taking any steps to reduce the chances of e-cigs getting into the hands of children?

In addition to welcoming targeted regulation designed to keep electronic cigarettes out of the hands of children, FIN offers its products in only two distinct flavors, traditional tobacco and menthol. This reflects the tastes of our core demographic, existing adult smokers. FIN does not offer other non-traditional flavors that regulators historically have regarded as appealing to children.

Additionally, we have incorporated robust age verification measures on our website to ensure that we are only engaging with adults. Our packaging states clearly that our product is “not for sale to minors,” and all our advertising campaigns and efforts are specifically targeted to adult smokers.

Q. How would you describe your marketing message?

The objective of our marketing efforts are to reach existing adult smokers, educating them on FIN as an alternative to traditional cigarettes, offering the classic flavor and feel of traditional tobacco cigarettes without the smoke, smell and ash. FIN encourages our consumer base to ‘rewrite the rules,’ not break them. In this message, we empower the FIN user to take back some of the freedoms denied to traditional cigarettes smokers. Our marketing campaigns have reinforced this, depicting timeless images that are reminiscent of more carefree times, but with a fresh edge.

Insider Thoughts Elliot Maisel, Chairman and CEO of FIN Branding Group, said, “We believe the more emphasis our company and our industry put on safety and quality, the better the regulatory environment will be for our products.

We welcome reasonable regulation that provides for product safety and consistency and prohibits sales to minors.”

Roy Anise, Executive Vice President at NJOY, said, “Our e-cigs are an easy transition for smokers in that they are as good, if not better, than a cigarette, and they taste and feel like a cigarette.”

Kevin Frija, CEO of e-cig manufacturer Vapor Corporations, predicts the electronic cigarette market will be lucrative. “If only 10% of smokers choose to smoke e-cigs, all you have to do is figure out what 10% of the current $90 billion cigarette market is. That’s great potential for profits.”

According to industry analyst Bonnie Herzog of Wells Fargo, “The many benefits of e-cigarettes are becoming increasingly apparent to consumers, helping to drive trial and repeat purchases.” ■

E-Cig Options These are some of the e-cigs available on the market. The bold listings are members of Texas Food & Fuel Association or support the association via advertising or sponsorships.

British American Tobacco (BAT): Vype (www.bat.com) Cigalectric: Cigalectric (www.cigalectric.com) FIN: FIN Electronic Cigarettes (www.FINcigs.com) Imperial Smoke: Spider (www.imperialcigs.com)

18

International Vapor Group: South Beach Smoke, eversmoke, NutriCigs (www.internationalvaporgroup.com) Lorillard Inc.: blu ecigs (www.lorillard.com) NJOY, Inc.: NJOY King ecigs (www.njoy.com)

Premier Hookah LLC: Premier Hookah Vape (www.premierhookah.com) Swisher: e-Swisher electronic cigarette (www.e-swisher.com) Vapor Corp.: KRAVE, VaporX (www.vapor-corp.com)

R.J. Reynolds Vapor Company: VUSE Digital Vapor Cigarette (www.rjrvapor.com)

View this issue and past issues of The Quarterly at www.naylornetwork.com/tffa/

A&A Pump Company San Antonio, TX 210-226-1191

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D&H /United Pump Supply Amarillo, TX 806-373-4251

A-1 Pump Inc. Bryan, TX 979-778-2418

Petroleum Solutions, Inc. Houston, TX 281-449-4027

D&H /United Pump Supply El Paso, TX 915-859-8150

B&J Equipment Ltd. Longview, TX 903-757-4765

Petroleum Solutions, Inc. McAllen, TX 956-686-9582

D&H /United Pump Supply Lubbock, TX 806-762-2428

B&J Equipment DFW Ltd. Dallas, TX (Parts & Servicing) 214-631-4664

Petroleum Solutions, Inc. San Antonio, TX 210-661-2489

D&H /United Pump Supply Midland/Odessa, TX 432-563-1132

Petroleum Solutions, Inc. Victoria, TX 361-573-7449

D&H /United Pump Supply Arlington, TX 70011 817-530-1917

Petroleum Solutions, Inc. Temple, TX 254-770-0440

D&H /United Pump Supply Schertz, TX 78154 210-651-3882

Petroleum Solutions, Inc. Abilene, TX 325-676-2371 Petroleum Solutions, Inc. Austin, TX 512-278-1000 Petroleum Solutions, Inc. Corpus Christi, TX 361-882-3077

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By Sandy Smith

I

f it seems that the world is moving at a faster pace, maybe it’s that we’re all hyped up on caffeine. And it’s no longer just the coffee. The energy drink market continues to grow rapidly – up 60 percent between 2008 and 2011, according to Reportlinker’s “Energy Drinks and Shots: U.S. Market Trends.”

The publication, released earlier this year, pegged the total market for energy drinks and shots at $12.5 billion in 2012.

Energy drinks, bars, gels and other methods of delivering a boost show no signs of crashing, either.

“I’ve thought for quite a while that there’s going to be a peak with energy,”

20

said Kevin Johnson, operations director and buyer at or with Wag-a-Bag, which has a total of 19 stores, 18 of which carry food products. “But we’ve done nothing but grow, so it’s hard to justify what I just said.”

The market is dominated by a handful of big players—namely Red Bull and Monster Energy—but it’s one in which plenty of competitors are hoping to see a boost.

Move Over, Coffee If energy products continue to expand beyond coffee, it’s for good reason: They sell. “I believe they are outpacing coffee right now, with the amount of dollar rings,” said Dennis Smart, president of Smart Stop Food Stores.

Beyond that, though, “most people drink it all the time versus just morning when most of our coffee sales are generated.”

Energy drinks like Red Bull and Monster combine caffeine – the booster in coffee – with sugars, amino acids and B vitamins. Red Bull says it has about 80 milligrams of caffeine in an 8-ounce

View this issue and past issues of The Quarterly at www.naylornetwork.com/tffa/

container while Consumer Reports testing pegs Monster’s caffeine at about 92 milligrams per 8-ounce serving. An 8-ounce cup of coffee can range widely, from about 90 milligrams to nearly twice that.

Coffee also has a slight edge in profit margins, typically. “Brewed coffee is such a high-margin item,” said Johnson. “It’s not that energy drinks aren’t a good margin, but coffee typically doubles that. So if you sell half the coffee that you do energy, you’re coming out about even. I’d still say we have some stores that do have more overall sales in our liquid energy drinks.”

And that’s on a per-item basis; energy drinkers are more likely to keep the caffeine high going by purchasing multiple cans. They are – Johnson believes – particularly open to promotions on multiple cans or mix-and-match. “That really is driving incremental sales,” he said.

It’s something that both of the major players – Red Bull and Monster – have accentuated in recent years. A current Wag-a-Bag mix-and-match promotion on Monster has the retailer up more than 400 cases over a two-month period.

“With any promotion, the question is take rate,” Johnson said. “Energy drinkers have some of the highest take rates that we’ve ever seen, maybe 60-70 percent, where the standards on others may be 20-40 percent. They’re a loyal group, no doubt.”

They’re seeing the effects at the wholesale level, too, said Kirk Bailey, McLane Company’s merchandising manager. “We are seeing more and more c-stores offering multi-packs as consumers are wanting these types of offerings in this channel, too.”

But where is the increase coming from? John Lennon, president of energy drink maker Xyience (rhymes with “science”) and a beverage industry veteran, believes the biggest bite is from soft drinks.

“In the Sunbelt markets, I can go in some convenience

October November December 2013

chains where they are devoting two doors – and some chains are devoting three doors – to energy,” said Lennon, former president/CEO of Pabst Brewing Company and Beck’s North America.

“Carbonated soft drinks are declining and you’re seeing the major carbonated soft drink companies coming out with new and different products or acquiring brands.”

And in warmer locations, he sees coffee taking a hit in favor of energy. Xyience has even done promotional tie-ins with its Xenergy drink and doughnuts. “Those have actually gone quite well,” Lennon said. “It surprised me. I thought coffee and doughnuts were a natural.”

A Crowded Field Though two energy drinks dominate the market, there are other significant players, like 5-Hour Energy, a 2-ounce shot rather than a beverage. Like Red Bull and Monster, it includes a blend of caffeine, B vitamins and amino acids; a decaf version also is available. Energy boosts come in other packages, too, including foods – like Power Bars – and sublingual sprays.

In such a rapidly moving and expanding market, it can be a challenge to keep up with what’s available and what customers are demanding.

“There are way too many new products coming out,” Johnson said. “You can get exasperated with it all. We have scan data, but we’re not large enough where we have teams of people that can go through tons of scan data. We work with grocery wholesalers and ask, ‘What is moving?’ Most of it is word of mouth.

You’ll hear from a manager, ‘This item is starting to blow through the stores.’

You’ll try to grab whatever you can then.”

Wholesalers have challenges, too, with the hybrid distribution model.

“Energy-type products are typically a mix of direct store delivery (DSD) or wholesale delivery in different markets, so we strive to ensure the manufacturers are upfront in their dealings with us by identifying where we have the ability to distribute their products outside of their DSD territories,” said Teresa Voelter, product director for McLane. “This poses a challenge for those customers that are housed in multiple regions throughout the country. The customers themselves prefer that the distribution model is consistent, however that is not always an option when the manufacturers themselves are using both network options for delivery.”

It is an area with high turnover, too.

Wrigley Alert, a caffeinated gum, was pulled two weeks after it launched earlier this year. That move came after Wrigley met with the Food and Drug Administration.

“With all the fl avors coming out in energy drinks there hasn’t been anything ‘new’ that has grabbed hold until recently,” Smart said. Smart is starting to see interest in West Coast Chill, released

by Joseph Company in Irvine, Calif. It boasts no caffeine, no sugar and no artificial fl avors – and comes in a self-chilling can. The active ingredients rely heavily on B vitamins, amino acids like taurine and ginseng. “With the emphasis on the dangers of caffeine lately I believe this will be the next up and coming trend,” Smart said.

Energy drinks that feature natural fl avors will be the next mover, believes Lennon. “All natural fl avors and colors are a core component,” he said. “We also were the first out there with no sugar and no calories,” a move that proved popular with females. Lennon said that one-third of the company’s customers are women, primarily those ages 21-34. “We thought zero calorie

21

“The demand is driven by the guests.

The guests are from all walks of life, but are looking for healthier options and graband-go snacking.”

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22

619248_Phillips.indd 1

was the number one proposition, but they told us it was taste.”

And Xenergy is hardly alone in disproving the image of energy drinks as a primarily millennial male demographic.

“We see all types of people buying energy drinks,” Smart said.

Xenergy, which includes caffeine, B vitamins and ginseng, has maximized a tiein with the rapidly rising UFC mixed martial arts league. Lennon’s background is in the beer market and he likens the UFC affiliation to the way that certain beverages established a strong tie-in with the NFL. “That’s been critical for our brand and our company,” he said. “We’ve been a partner with UFC dating back to 2006.

Throughout the year, we are visible on the octagon [the ring where fighting occurs] with our logo and we sponsor a number of fighters as well. Millions and millions of consumers see our logo on the octagon.”

That tie-in – which also features bringing fighters in for in-store promotions – has helped Xenergy break through at the retail level. But there have been challenges – primarily in the East, he said – in making it into distributor catalogs due to exclusivity agreements.

Not Just Liquids If the focus has been on beverages, it’s unwise to ignore food-oriented energy boosters. Bars like Kind and Clif and protein-heavy Greek yogurt all are experiencing double-digit growth, said Ellen Todd-Good, business manager for Living Well general merchandise at United Supermarkets, a retail grocery chain in 30 markets in north and west Texas.

“The demand is driven by the guests,” she said. “The guests are from all walks of life, but are looking for healthier options and grab-and-go snacking. The category continues to grow and the choices continue to expand.”

This creates a challenge that is typical for any type of high-demand category, she said, “for space to accommodate the breadth to offer our guests the best of the best.”

View this issue and past issues of The Quarterly at www.naylornetwork.com/tffa/ 09/02/13 5:46 AM

Sports, a subsection of the energy marCongressional ket, has its own challenges, Todd-Good Oversight said. This millennial favorite includes highIf there is anything that can slow or protein bars like Nogii (which is gluten change the energy market, it is regulafree), Power Crunch and Muscle Milk. tion. Earlier this year, Congress held Ready-to-drink protein beverages like hearings into the safety of these prodMuscle Milk, EAS and Isopure also have ucts, citing inconsistent labeling and martheir place on shelves. “The challenge is keting to children. balancing space with selection, with this Xenergy’s Lennon, while quick to point being a very volatile category,” she said. out that he’s not speaking for the entire While energy drinks may target a industry, believes that his customers are wide swath of the population, energy “careful scrutinizers of the labels – because foods and sports drinks are more narwe’re targeting an older consumer, one rowly segmented. Johnson sees protein and meal-replacement bars as being more popular in stores located in higher socioeconomic neighborhoods.

“Perhaps lower socioeconomic levels may not have access to the advertising or the information about some of the products, like the bars,” he said. “You see some advertising with Clif and others, but not like Frito-Lay, which bombards you with advertising. That’s what drives convenience stores. That’s what the majority of our c-store customers are going to be looking for: the name brand.

Ones that are a little more educated are more apt to go into protein bars, more health food bars.”

The latest health and diet trends can heavily influence this category. Bethany Vose, executive marketing coordinator for Nutrafuels – a sublingual spray that gets its energy boost from B vitamins – says that the popular Paleo diet – which strictly limits caffeine and grain 625360_Werts.indd 1 products – is causing people to look for energy boosts elsewhere. The spray also allows consumers to control how much of the energy boost they receive; three sprays equals one serving, but “it’s up to you whether you want to do a full dose,” Vose said. The product recommendations limit servings to three per day.

“You feel more in control of what you’re putting into your body rather than getting the energy drink where you think you have to finish the whole bottle,” she said.

October November December 2013

630846_Jack.indd 1

who is pursuing an active, healthy lifestyle.

We want to be the energy drink of the health club, not the night club.” The product’s new cans clearly disclose the level of caffeine and include a warning label that the product is not recommended for those under 18, nursing women or anyone sensitive to caffeine.

While it’s too soon to tell whether government oversight or industry pressure will significantly alter the products, there is the hope that they will continue to be the big sellers – and seen as safe. ■

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Index of

Advertisers ACCOUNTING SOFTWARE ADD Systems ..............................................24

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INVENTORY CONTROL LBS, Inc. .....................................................25

ALCOHOL BEVERAGE LICENSING & COMPLIANCE Jack Martin & Associates ............................23

CONVENIENCE STORE EQUIPMENT D & H / United Pump .........Outside Back Cover

INVENTORY SERVICES Riggins Inventory Service............................25

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OIL COMPANIES Johnson Oil Company .................................25

ENVIRONMENTAL SERVICES D & H / United Pump .........Outside Back Cover

PETROLEUM EQUIPMENT - SALES & SERVICE A&A Pump Company ...................................19 A-1 Pump, Inc. ............................................19 B&J Equipment, Ltd ....................................19 D&H / United Pump .....................................19 D&H/ United Pump ............Outside Back Cover Petroleum Equipment Service, Inc. ..............25 Petroleum Solutions, Inc.......................... 8, 19

ATTORNEYS Jack Martin & Associates ............................23 BEVERAGES DISPENSERS Bevco, Inc. ....................................................6 BIOFUELS Renewable Energy Group ..............................3 COMPUTER HARDWARE/SOFTWARE ADD Systems ..............................................24

INSURANCE Federated Insurance .....................................4 Tank Owner Members Insurance Co..................... Inside Back Cover

PETROLEUM REFINERS & MARKETERS Alon Brands ................................................10 Citgo Petroleum ............................................7 Phillips 66...................................................22 PUBLICATIONS Lundberg Survey ........................................24 SOFTWARE/AUTOMATION ADD Systems ..............................................24 TANKS Youngs Tank, Inc. ........................................11 TANKS & TRAILERS Werts Welding.............................................23 TOBACCO PRODUCTS FIN Branding Group............. Inside Front Cover 666537_Editorial.indd 1

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View this issue and past issues of The Quarterly at www.naylornetwork.com/tffa/ 25/10/13 2:49 PM

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