Cigarettes and tobacco have always been an essential element of a convenience offering, often accounting for 40% or more of sales. The margin on this category has historically been much lower than for other products, justified by the high tax element, its role as a footfall generator and the small amount of space it takes up relative to sales.

This has always been a bone of contention for indies, but has been accepted as a necessary evil. What cannot continue to be accepted is the fact that the tobacco companies have now depressed this profitability to an unacceptable level just as other costs for small store operators increase massively above inflation or any increase in sales.

My records show that the total percentage margin, shared between wholesaler and retailer, for Embassy Number 1 (a premium brand) has dropped from 10.27% to 7.71% since 1990. The margin for Lambert & Butler has fallen from 9.08% to 6.25%. The margins on many of the price-fighting brands increasingly dominating the market are even lower, typically less than 6%.

To survive and cover costs to break even, most stores need to generate an overall margin of 20% to 22% and when tobacco and KVI lines are taken into account this rapidly increases the margin demanded of all other categories, potentially creating a downward spiral of competitiveness.

“The solution is sensible margins - at a minimum of 10% shared”

Many outlets have now taken to premium pricing of these products to ensure their profitability mix remains acceptable. Increasingly, the reaction of the brand owners has been the production of price-marked packs for independents to force adherence.

I am a huge fan of price marking as long as it gives an acceptable margin for the retailer - but this is no longer the case.

Some wholesalers are now challenging the status quo by recommending a higher retail price than the manufacturer for non price-marked packs, mirroring decisions already taken by some retailers.

I now wonder if this disorderly market may increasingly threaten the brand owners, as tobacco is unique in having an element of duty calculated on an ‘ad valorem’ basis - linked to the retail price. How long will HMRC stand for the manufacturer’s rsp being widely ignored?

The sensible solution would be a return to acceptable margin levels, which should be a minimum of 10% shared. A commitment from brand owners to achieve this with a clear timescale in mind would be welcomed by wholesalers and retailers alike - it would still leave tobacco margins much lower than other categories but might deter the problems both of retailer profitability and excise duty risk.

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