Contraband killing convenience stores

Montreal — From Wednesday's Globe and Mail

A rising number of Canada's ubiquitous convenience stores are closing because they simply can't compete in a market rife with black-market cut-rate cigarettes, the industry association says.

More than 2,300 corner stores - six a day, or about 10 per cent of the total number of locations across Canada - closed last year, with contraband tobacco sales siphoning off more than $2.5-billion in sales and $260-million in profits during that time, according to a study released yesterday by the Canadian Convenience Stores Association (CCSA).

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The profitability of convenience stores is "barely holding" at about 1 per cent and the sector faces a tough business environment in the future, said the industry-sponsored report whose research partners included PricewaterhouseCoopers, the Desjardins financial group and the business school HEC Montréal.

The impact of contraband tobacco sales has been compounded by high credit card transaction fees and - last year - by the effects of the recession as consumers tightened their belts, said Michel Gadbois, executive vice-president of the CCSA.

"The contraband situation has been building up over the past five years, with sales taxes on legal cigarettes continuing to rise," he said. "The industry is slowly being killed off."

High sales taxes on cigarettes continue to push cash-strapped smokers into doing business with suppliers of much cheaper black-market smokes, he said.

The CCSA estimates that about 40 per cent of Quebec's cigarette sales are on the black market, and about half of Ontario's are contraband.

The industry lobby group has been urging the government to cut taxes on legal cigarettes to reduce the unfair advantage of illegal tobacco.

Corner stores are heavily dependent on the sale of tobacco products and, in Quebec, beer and wine. The new study said the industry is nevertheless resilient and continues to enjoy advantages such as proximity to neighbourhoods, but that the stores must work harder to replace tobacco with other traffic-generating items, such as fresh food, to attract and retain new customers.

Stores that also sell gas should move to increased sales of in-store goods to replace dependence on gas sales because of the unpredictable price of gasoline and weak increases in demand, the study said.

About 75 per cent of the 2,300 store closings last year were in Ontario and Quebec, the two principal markets for contraband cigarettes, the report said.

Mr. Gadbois said there is continuing pressure from governments, citing Quebec's decision last week to boost the provincial sales tax by two percentage points over two years, and rising taxes in Saskatchewan and Nova Scotia.

Sales of beer and wine in Quebec have helped to offset the impact of declining tobacco sales, said Mr. Gadbois, who was attending the industry group's annual meeting in Laval, Que. As for credit card transaction fees, the report said they slash close to $200-million from the industry's net profitability every year. Increases in the minimum wage are also hurting overall profitability, the study said.

Consolidation will continue to be the order of the day, Mr. Gadbois said. Montreal-based Alimentation Couche-Tard Inc. has become a North American convenience store giant over the past several years through growth by acquisition, including significant purchases in the United States.

But there remain thousands of independent mom-and-pop stores or small chains throughout Canada and the U.S.

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