What is the cost of offering tobacco products in the newsagency and is it worth it?

Sales of tobacco products are down more than 7% year on year on a same store basis in the first quarter of 2016. The latest decline on the back of declines for most through 2015 and 2014 mean it could be useful to consider getting out of the sale of tobacco products.

In considering whether to stay in tobacco or to quit, newsagents need to consider:

1. The cost of the retail space and the value of alternative uses for the space. Tobacco units, by necessity, are at the counter. They are bland, promoting nothing other than warning signs. This is premium space that could be used for alternative products people would purchase on impulse at the counter. Calculating the cost of the retail space could be more about opportunity cost than the actual cost of the space.
2. The labour cost of managing the tobacco category. With average hourly labour costing $23.00 and more plus on-costs and at least an hour a week needed to properly manage even a small tobacco department, you need to sell close to $200 a week just to cover the labour cost.
3. The cost of theft by employees and or customers. The average cost of theft of tobacco products is between 3% and 5% of revenue a year. While many retailers will say they do not have a theft problem, only those with tight inventory management and tracking procedures will know this for sure.
4. The return on inventory investment. If, for example, you have $1,000 invested in tobacco products, what is the return this investment generates for the business through a year and is there a better return opportunity for you from the same level of investment?
5. The message it pitches about your business. If you are transitioning your newsagency from the old-style traditional newsagency of magazines / newspapers / tobacco / cards / stationery / lotteries to something new, fresh and relevant to your area, which I hope you are, does tobacco fit with this or is it too old school? Think about the tobacco message and its relevance to you.
6. Community health. How does selling tobacco products fit with what you stand for?

A newsagency I am helping at the moment sells $800 in tobacco products a week. The labour cost is an hour, or $26.45 a week (including on-costs), the retail space costs $44.50 a week or $120.00 a week if you consider the counter position to be prime space and theft tracks back at a weekly average cost of $30 a week. Assuming they can stop the theft, this leaves, at the most generous estimate, a cost base of $70.95 for tobacco in the business.

On their current margin, they are above the break even point of $475.00 a week in sales. However, once I factor in regular discounting they do to drive sales and apply the cost of theft back in, I would say this business ought to get out of tobacco now.

Their sales trend is down, in line with the national average so it is only a matter of time. My advice to them is to get out of tobacco ahead of the curve, to own the terms of their departure from the category.

If I factor in opportunity cost of tobacco, the decision has an urgency. This is a good retailer, they would use the space well and make far more money with products with 50% GPO and more in the tobacco space. Feather, they would use the space to drive a difference for the business. See, as things stand for them right now, the business is different compared to your average old-school newsagency, except for tobacco. This is a big factor in crafting my advice.

If your tobacco sales are under $2,000 a week, do the analysis. Let your data be your guide. If they are under $1,000 a week, it is almost certain you ought to get out, urgently.

Every day you hang on to any product category that is not paying its way or that is not relevant to the narrative of your business is a day lost for the future of the business.

We have to manage our newsagency businesses by the numbers. This is better for the business than emotional decisions and gut feel when it comes to considering your position on matters such as what to do with tobacco.

Footnote: I have no personal experience in this space having got out of tobacco products in 1999.