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Why Tobacco Shops Fail

The Real Threats and How To Beat Them

Opening your tobacco shop was a dream come true, giving you the chance to be your own boss, connect with fellow tobacco enthusiasts, and hopefully turn a healthy profit.

What you didn’t sign up for are the endless struggles: competitors undercutting your prices, payment processors canceling your account, random inspections and audits, and constant inventory discrepancies.

These problems are more than just frustrating — left unchecked, they could lead to the closure of your tobacco shop. In fact, half of small businesses fail within their first five years because of issues like these. 

So, how can you stave off these threats? In this guide, we’ll explore the top five reasons why tobacco shops fail and the specific strategies you can use to protect your business. 

Let’s dive in and explore how to keep your small business dream alive. 

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Decreasing Popularity of Traditional Tobacco Products

Feel like fewer customers are coming through your door than in past years? You’re not imagining it. 

Cigarettes, cigars, and pipe tobacco have historically been smoke shop staples, but the popularity of these products has been falling steadily over the past few decades. Currently, only 12% of Americans smoke cigarettes, and fewer smoke cigars or pipe tobacco. 

This decline is even sharper among young adults — making it harder for shops like yours to appeal to a new generation of shoppers. 

This means that your base of actual and potential customers is shrinking significantly. And once you start experiencing this decline in foot traffic and sales, it’s hard to claw your way back to high profits. 

How To Appeal to a New Generation of Customers

With the right approach, a decline in overall smoking rates doesn’t have to mean a decline in your tobacco shop’s success — but it does mean that you’ll have to pivot to stay relevant and competitive. 

Our number-one tip is to update your shop’s product selection. While some customers still reach for the classics, many young shoppers are opting for items like: 

  • Vapes: Disposable vape pens, rechargeable e-cigarettes, and e-liquid refills
  • CBD and delta-8 products: Edibles, tinctures, vapes, and salves
  • Kratom: Capsules, powders, and teas
  • Alternative nicotine products: Pouches, patches, gum, and lozenges

Adding these products to your tobacco shop’s shelves helps you appeal to a new, on-trend group of consumers —  growing your customer base and revenue even as the popularity of traditional tobacco products falls. 

Related Read: What Do Smoke Shops Sell? 6 Most Popular Products

Compliance Violations That Threaten Your Tobacco License

With so many strict state and federal laws governing the sale of tobacco products, keeping your business above board can feel like a full-time job. 

And worse, one mistake can lead to serious consequences for your tobacco shop, ranging from hefty fines to the loss of your tobacco license. 

Here are just a few ways things can go wrong: 

  • Underage tobacco sales lead to increasingly expensive fines. Most states charge at least $1,000 for your first offense, and the fines continue to climb for repeat instances. After multiple underage sales, you could even have your license suspended. 
  • Surprise FDA inspections could uncover products that are illegal to sell, improper storage methods, or missing manufacturer invoices and receipts. This could be financially disastrous for your shop since the maximum penalty for selling unauthorized products is almost $20,000. 
  • State tax audits could make simple tax stamp discrepancies seem like intent to defraud, leading to expensive fines and legal trouble. At best, you’ll have to pay back taxes with a penalty of $2.50 to $25 per pack. At worst, you could be charged with a misdemeanor and face jail time. 

If these issues happen frequently or at inopportune times, your shop might not recover.

How To Achieve Peace of Mind

Fortunately, you don’t have to live in fear of tobacco board inspections, fines, and threats to your tobacco license. 

The right tobacco POS system can help you stay compliant with the laws surrounding tobacco sales, ensuring you’re always ready for checks and audits from state and federal authorities. 

Let’s look at a few features that can protect your store:

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Age Verification

Age verification prompts your cashiers to ask for customers’ IDs during every single transaction. You can make this process quicker and more secure by investing in an ID verification scanner. 

Advanced Inventory Management

Advanced inventory management makes it a breeze to keep up-to-date, in-depth records of every single product you stock — including where you sourced it, how many units you have on hand, and how much you’ve sold.

Sales Reporting and Analytics

Sales reporting and analytics simplify your tax season decisions by providing you with an accurate record of your tobacco tax liability, manufacturer rebate submissions, and state reporting requirements — all searchable by date. 

Flaky, Unreliable Payment Processing

If you’re opening a new shop, you might face a string of rejections from payment providers who don’t support tobacco sales. If you’re a veteran in the smoke shop industry, you’ve probably been let down by processors who have unexpectedly terminated your account. 

Payment processing cancellation brings your tobacco shop’s sales to a screeching halt — costing you revenue, plummeting your profits, and driving customers toward your competitors. 

How To Find a Stable, Tobacco-Specific Payment Processor

So, how can you find a trustworthy payment processor? Our top tip is to look for a provider that specializes in supporting high-risk businesses. 

Since products like tobacco, vapes, CBD, and delta-8 are under legal scrutiny, businesses that sell them are often given the “high-risk” label. This might sound like a disadvantage, but some payment processors cater exclusively to retailers in these industries. 

High-risk merchant accounts often come with stricter application requirements and higher processing fees, but the benefits are worth it. Your merchant account is unlikely to be suspended, you’ll enjoy better protection from fraud, and you’ll have access to support from a team that understands your business and the challenges you face. 

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Increasing Competition From Gas Stations and Big-Box Stores

As a small business owner, it’s easy to feel like the odds are stacked against you — especially in the competitive tobacco market. 

When customers want to stock up on their go-to cigarettes or try a new vape flavor, they might opt for the convenience store across the street rather than a local smoke shop like yours. 

What’s worse is that these chain retailers often offer lower prices than you can. For example, convenience stores that also sell gasoline use their fuel revenue to subsidize lower tobacco prices. Big-box retailers like Walmart do the same thing; their sales volume on products like groceries and home goods lets them undercut your tobacco prices.

How To Set Your Tobacco Shop Apart From the Competition

Our top tip is to avoid the race to offer the lowest prices. Gas stations and chain retailers have the revenue and purchasing power to tolerate losses on their tobacco products — but you don’t. 

So, how can you compete without lowering your prices? Let’s look at three ways to set your tobacco shop apart from the competition:

Offer better customer service.

Gas station attendants and big-box retail cashiers lack the training and expertise to help cigar enthusiasts choose between Connecticut and Maduro wrappers or guide customers transitioning to vape products. Train your employees to greet shoppers warmly, and educate them on tobacco origins, flavor profiles, and product compatibility.

Curate a unique product selection.

Chain retailers usually carry the most popular tobacco products — but they won’t have unique options. Keep a close eye on industry magazines to be the first in the neighborhood to offer new vape brands, CBD products, and other trending items. 

Take a smart approach to marketing.

Want customers to choose your shop over the competition? Give them a reason. Launch a loyalty program that rewards them for relying on you for all their tobacco needs. 

Create a unique experience.

Craft an immersive shopping experience that makes customers want to visit your store again and again. For example, you might consider opening a cigar lounge where they can enjoy one of their newly purchased products and connect with fellow tobacco fans. 

Cash Flow Issues and Stagnant Profits

Cash flow: It’s a critical ingredient for small business success, but it’s also the main driver behind most retail failures. 

In other words, your tobacco shop’s profitability depends on your ability to manage money effectively. Let’s look at some of the most common cash flow problems plaguing smoke shops: 

  • Inventory overspending: Without accurate inventory forecasting, you’ll order the wrong products in the wrong amounts — leading to stale tobacco sitting in your humidor and tied-up working capital. 
  • Inadequate revenue: Falling foot traffic and small basket sizes due to poor marketing or frequent stockouts result in low revenue, making it impossible for your shop to turn a profit. 
  • Inaccurate pricing: Charging too much for your products turns customers away, but charging too little means that your revenue can’t outweigh your business expenses. 

In short, high expenses and low revenue are a deadly combination for tobacco shops. 

How To Manage Your Tobacco Shop’s Finances Like a Pro

Fortunately, a smart approach to inventory management, marketing, and sales reporting can protect your tobacco shop’s cash flow. 

Let’s take a closer look at some strategies to protect your business’ cash flow

Master the art of inventory management:

Want to reduce your inventory expenses while avoiding stockouts? Then you need to monitor and forecast inventory like a pro. Look for a POS system with built-in inventory management features like real-time tracking, smart forecasting, and automated purchase orders and receiving. These features eliminate the need for manual calculations and help you order the right products in the right amounts.

Set the right prices:

Setting the right prices is a crucial step on your path to tobacco shop profitability. Instead of setting prices that “feel” right, use data to drive your decision-making. Products with higher wholesale costs should usually have higher sticker prices — but you can adjust your margins based on the popularity of the item. For example, you might charge more for high-demand bestsellers and less for underperformers. 

Dig into your store’s data:

Your POS system’s reporting and analytics suite is your most valuable tool for healthy cash flow. Set aside time to dive into this data to learn about your inventory flow, sales trends, customer product preferences, and profit margins. With these insights, you can make informed decisions to reduce your expenses and boost profits.

Putting It All Together To Protect Your Tobacco Shop

Congratulations! Reading this guide is the first step toward long-term tobacco shop success. 

What’s next? Let’s recap five action items to protect your business:

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Congratulations! Reading this guide is the first step toward long-term tobacco shop success. 

What’s next? Let’s recap five action items to protect your business:

  1. Refresh your product selection: Curate a well-rounded selection of traditional tobacco products and trending items like vapes, CBD, and delta-8. This will help you appeal to old-school cigar and cigarette fans and the new generation of smokers. 

  2. Make a compliance plan: Invest in tools like an inventory management system, accounting software, and ID scanners to prepare for surprise inspections and prevent underage sales. 

  3. Upgrade to high-risk payment processing: Achieve peace of mind by investing in industry-specific, high-risk payment processing from a provider that understands your business’ needs. 

  4. Create a unique value proposition: Set your shop apart from gas stations and big-box stores by crafting a unique shopping experience. Offer excellent customer service, tailored product recommendations, and loyalty rewards. 

  5. Take a data-driven approach: Rely on a powerful POS system to monitor your inventory expenses, forecast inventory needs, learn about your customers’ product preferences, and set the right prices.

These simple strategies will help you build a stable, future-proof tobacco shop — even as competitors encroach and customers’ preferences shift.

Protect and Grow Your Tobacco Shop With a Powerful, Modern POS System

Ready to take your business from surviving to thriving? We can help. 

Cigars POS is an all-in-one tool designed to help tobacco shop owners like you tackle their toughest challenges — from inventory management to marketing. 

Along with tobacco-specific high-risk payment processing and 24/7 support, Cigars POS includes real-time inventory management by the carton and pack, built-in age verification, sales-boosting marketing features like a loyalty program and scheduled promotions, in-depth sales reporting, and more. 

Discover what Cigars POS can do for your tobacco shop by scheduling your live, personalized demo today.