Selling Smokes or Smoking Sales: Investigating the Consequences of Ending Tobacco Sales
64 Pages Posted: 25 Aug 2018 Last revised: 13 Oct 2018
Date Written: September 2, 2018
Measuring the cross-category spillover effects of product offerings by a retail firm on the outcomes for that firm and for others in the industry is a challenging task given the difficulty in accounting for environmental factors concomitant with the action. In this paper, we study the voluntary decision by a national drugstore chain, hereinafter referred to as the Exiting Chain (EC), to drop the tobacco category from its stores in 2014. By leveraging the quasi-experimental nature of the exit "intervention" on revenue outcomes for other drugstore chains, we measure the spillover effect of selling tobacco on the revenue generated by non-tobacco products. We show, using Nielsen RMS data, that for each 1% increase of cigarettes sales in non-EC stores that are located near an "exiting" EC store relative to those non-EC drugstores that are not, the revenue generated by non-tobacco products grows by 0.04%. Next, using Nielsen Homescan panel data, we attempt to understand the underlying mechanism for this spillover using household purchase behavior. We find that the transfer of non-tobacco revenue to other retailers is mainly explained by reductions in the frequency of trips made by smokers to exiting stores rather than changes in the basket size. In particular, the frequency of trips to the exiting stores that included some tobacco product was negatively affected, suggesting that tobacco was one of the main drivers of store patronage for those trips. For non-smokers, we find that they react to EC's action by increasing the frequency of trips to the exiting chain. However, the gains from attracting new non-smokers to the store does not seem to outweigh losses. We acknowledge that these findings are limited to this case study and specific time period. To test the generalizability of these results, we analyze the impact of a set of tobacco bans imposed by municipalities in Massachusetts and find similar cross-category loss patterns. Our results show that prohibiting tobacco sales in pharmacies can have cross-category spillover effects and may lead to distortions in competition between retail chains by changing the nature of store visit behavior by consumers.
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