Tobacco Retail Business Plan

We anticipate that 90% of all our patrons will be men. We have divided up our clients into the following market segments based on their dedication. These segments are the specialty smoker, the recreational smoker, average smokers, and occasional smokers.

Since the specialty and recreational smokers will be the most frequent patrons of Kiowa and have the highest average profit margin, we will be focusing on marketing and servicing these patrons the most.

Currently we have six competitors within the city limits of Kansas City. Most of these competitors are single store firms, and many of them have more limited stock. In addition, over the past ten years the number of local participants in the tobacco industry has seriously declined. As more participants leave the market, much of the client base, declining though it may be, will be left for the survivors and this means a real chance to consolidate and gain market share. At the moment, management is exploring the possibility of being a leader in market consolidation. This would create a buffer to declining profits by increasing the aforementioned market share and volume.

4.1 Market Segmentation

At the moment our potential list of patrons include all the smoking population in the Kansas City area and its suburbs, with an adult population of 3.5 million people (over the age of 21) we estimate this to be 450,000 people. However, only a small fraction of these potential patrons are specialty smokers and most of the rest are consumers accustomed to purchasing nationwide brand cigarettes and smokes from non-specialty stores such as grocery markets and convenience stores. Therefore we have divided our clients into the following market segments based on their dedication:

• Specialty Smokers: These are your hard core smokers who actively patronize smoke shops and are looking to find the most hard to find brands that give a unique smoking experience.
• Recreational Smokers: These are habitual smokers of everyday brands, but who occasionally are looking for something else.
• Average Smokers: These clients are dedicated to everyday brands but shop at smoke stores rather than markets or convenience stores.
• Occasional Smokers: These are people who only occasionally smoke a cigar or cigarette, but will sometimes be drawn to shop at a smoke shop due to special occasions (bachelor parties, birthdays, etc.)

While we acknowledge that there will be some female customers, we anticipate that 90% of all our patrons will be men. When we launch our Internet site with online ordering in 2004, we will be able to sell to all the potential clients in the U.S. Therefore we see the number of potential patron sharply increase in that year. Once we become established as an online retailer of specialty and nationwide brand smokes we expect to have an estimated potential customer base of ~150 million patrons.

4.2 Target Market Segment Strategy

Since the Specialty and Recreational Smokers will be the most frequent patrons of Kiowa and the highest average profit margin, we will be focusing on marketing and servicing these patrons the most. Usually these are clients who posess a upper level of income as well, which improves volume. Other segments will be drawn into the Kiowa shops through trickle down advertising and interest. We are seeking to create a larger dedicated client than what we possess through the creation of our website, to be launched in the second month of 2004.

4.3 Industry Analysis

Tobacco is the nation’s sixth largest cash crop, valued at $2.4 billion. The United States is the world’s leading tobacco exporter and importer and the second largest tobacco producer, behind only China. Most U.S. tobacco is used for cigarettes. However, both cigarette consumption and cigarette exports have fallen 16 percent since 1991, and the consumption of other tobacco products has suffered a similar loss. For example, domestic consumption is expected to fall just over 1 percent to 420 billion cigarettes. During the first nine months of 2002, only 96.3 billion cigarettes were exported. If this trend continues during the fourth quarter, cigarette exports could be the lowest since the mid-1980s.

All of this makes for a current market situation that is unfavorable to Kiowa Smoke Shops. Since the Master Settlement Agreement was signed in November 1998, the cigarette industry has been forced to raise prices to cover the costs associated with the settlement. The agreement between the attorneys general from 46 States and the major cigarette companies was intended primarily to reimburse States for expenses related to the treatment of smoking-related illnesses. Cigarette companies have boosted prices as a result of payments required by the settlement. Higher prices have curtailed consumption, although not as much as originally expected. The long-term decline in cigarette consumption due to non-economic factors continues as well, as private tobacco opposition and health care organizations continue to push for the elimination of all smoking throughout the nation.*

*Source: USDA Publications Website

4.3.1 Competition and Buying Patterns

Currently we have six competitors within the city limits of Kansas City. These include Tobacco Row, Durango Smoke Shop, Crossroads Tobacco, Brett’s Tobacco Emporium, Esquire Smokes, and Smoke Rings. Of all these various establishments, Kiowa is the largest. Most of these competitors are single store firms, and many of them have more limited stock. In addition, over the past ten years the number of local participants in the tobacco industry has seriously declined. According to the Kansas City Board of Trade, in 1992 the number of tobacco stores in the greater metropolitan area was 11 firms. As more participants leave the market, much of the client base, declining though it may be, will be left for the survivors and this means a real chance to consolidate and gain market share. At the moment, management is exploring the possibility of being a leader in market consolidation through aggressive acquisition of local competitors in the near future. This would create a buffer to declining profits by increasing the aforementioned market share and volume.

At the same time, there is a serious risk from marginal competitors who sell tobacco products as a small percentage of their total sales. These include grocery and convenience stores. At the present time these competitors only offer a limited number of nationwide brands and do not appeal to our target market segments. However, they do seriously impinge on our business due to the large volume of customers who shop in these establishments. We feel that despite any attempts to alter shopping habits the smoke shops across the country do not possess the power to change the overall market share that these indirect competitors have.

Starting in 2004, Kiowa will be launching its nationwide website with online ordering. This will open up new potentials for the firm and help to turn the company’s declining profits around. However, we will also be running into new competitors who are already established online. These include ZEES.com, Cigsonline, and Cybersmoke. It is Kiowa’s intention to create a defendable position in this cyber market through an easy-to-use and attractive website, multiple shipping options, low cost, and comprehensive marketing.