How to Start a Tobacco Shop

Tobacco may not be so great for your health, but that hasn’t stopped people from using it! This is due in part to smokeless tobacco options and the increased use of water pipes, or hookas. Tobacco shops now sell much more than just cigarettes and cigars, so the industry is now worth $14 billion and expected to grow in the coming years. 

With your own tobacco shop, you could help others indulge while making a good living. You also have the option of starting a physical shop with a larger investment, or an online shop for less. 

But before you jump in, there is so much you should know about starting a business. Luckily, this step-by-step guide will fire you up with all the information you need to get your successful tobacco shop up and running. 

Step 1: Decide if the Business Is Right for You

Pros and cons

Starting a tobacco shop has pros and cons to consider before deciding if it’s right for you.

Tobacco industry trends

Industry size and growth

• Industry size and past growth – The US tobacconists’ industry was worth $14 billion in 2020 after expanding moderately the previous five years,((https://www.ibisworld.com/united-states/market-research-reports/tobacconists-industry/)) although it took a hit during the pandemic. Interestingly, however, US tobacco production increased by nearly 6% in 2020 as the pandemic took hold.((https://www.ibisworld.com/industry-statistics/market-size/cigarette-tobacco-manufacturing-united-states/)) 
• Growth forecast – The US tobacconists’ industry is projected to grow slowly the next five years. 
• Number of businesses – In 2020, 51,732 tobacconists’ businesses were operating in the US. 
• Number of people employed – In 2020, the US tobacconists’ industry employed 84,156 people. 

Trends and challenges

Trends in the tobacco shop industry include:

• 33% of tobacco users aged 21-29 use non-combustibles, such as chew, dip, dissolvables, e-cigarettes, and snuff. 
• Premium cigarettes and deep-discount cigarettes have shown the largest increases in sales in recent years.

Challenges in the tobacco shop industry include:

• Since the US raised the minimum age for tobacco from 18 to 21, more and more youth are using fake I.D.s to make purchases, presenting a risk for tobacco shops.
• New taxes have been imposed on “reduced-risk” tobacco products such as e-cigarettes, and the dangers of e-cigarettes are increasingly being exposed, which may cause sales for that product segment to decline.

How much does it cost to start a tobacco shop business?

Startup costs for an online tobacco shop are about $11,000. The largest cost is for an inventory of tobacco products. To start a brick-and-mortar tobacco shop costs about $60,000. Costs include shop rental and preparation, and an entire inventory for your shop.

How much can you earn from a tobacco shop business?

Prices for tobacco products vary greatly. Packs of cigarettes cost around $7 depending on the brand and your location. In New York City the average pack costs about $14. Pipes, cigars, and other tobacco products have varying prices. For an online store, your profit margin should be about 40%. For a physical store, it will be about 10%. These calculations assume you’ll start with an online store. 

In your first year or two, you could make $300 in sales per day, bringing in $110,000 in annual revenue. This would mean $44,000 in profit, assuming that 40% margin. As your site grows in popularity, sales could climb to $1,000 per day. With annual revenue of $365,000, you’d make a tidy profit of $146,000.

What barriers to entry are there?

There are a few barriers to entry for a tobacco shop. Your biggest challenges will be:

• The startup costs of inventory and the physical store
• Breaking into a competitive market

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Step 2: Hone Your Idea

Now that you know what’s involved in starting a tobacco shop, it’s a good idea to hone your concept in preparation to enter a competitive market. 

Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.

Why? Identify an opportunity

Research tobacco shops in your area to examine their products, price points, and what sells best. You’re looking for a market gap to fill. For instance, maybe the local market is missing a shop that specializes in smokeless tobacco products like vape products or a pipe tobacco and cigar shop. 

You might consider targeting a niche market by specializing in a certain aspect of your industry, such as hookah tobacco or electronic cigarettes.

This could jumpstart your word-of-mouth marketing and attract clients right away. 

What? Determine your products

You can offer a wide variety of products in your shop including:

• Cigarettes
• Cigars
• Pipes
• Smokeless tobacco products
• Bags of tobacco and shells for rolling
• Cigarette rolling machines
• Chewing tobacco
• Ashtrays
• Lighters
• Incense
• Pipe tobacco
• Hookah tobacco
• Electronic cigarettes
• Candy, gum, nuts, snacks 

How much should you charge for tobacco?

Prices for tobacco products vary widely. Check competitor prices to find an average. For an online store, you should aim for a profit margin of about 40%.

Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

Your target market will be broad. You should spread out your marketing to include sites like TikTok, Instagram, and Facebook. 

Where? Choose your tobacco shop location

If you decide to open a brick-and-mortar shop, the success of your tobacco shop is largely dependent on its location.

Look for a location where customers can comfortably browse your products. Consider areas with a high concentration of cigar bars, lounges, or fine dining restaurants, as these places may attract a clientele that values premium tobacco products.

You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.

When choosing a commercial space, you may want to follow these rules of thumb:

• Central location accessible via public transport
• Ventilated and spacious, with good natural light
• Flexible lease that can be extended as your business grows
• Ready-to-use space with no major renovations or repairs needed

Step 3: Brainstorm a Tobacco Shop Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some ideas for brainstorming your business name:

• Short, unique, and catchy names tend to stand out
• Names that are easy to say and spell tend to do better 
• Name should be relevant to your product or service offerings
• Ask around — family, friends, colleagues, social media — for suggestions
• Including keywords, such as “tobacco” or “tobacco shop”, boosts SEO
• Name should allow for expansion, for ex: “Smokin’ Deals Tobacco” over “Vape Station”
• Avoid location-based names that might hinder future expansion
• Use online tools like the Step by Step Business Name Generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that sets your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.

Step 4: Create a Tobacco Shop Business Plan

Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:

• Executive Summary: Provide a concise overview of your tobacco shop, highlighting its range of tobacco products, target market, and strategies for creating a unique shopping experience.
• Business Overview: Describe your shop’s focus on selling various tobacco products, including cigarettes, cigars, pipe tobacco, and smoking accessories.
• Product and Services: Detail the range of products offered, such as premium cigars, tobacco blends, smoking pipes, rolling papers, and possibly vape products.
• Market Analysis: Assess the local demand for tobacco products, identifying potential customers like regular smokers, cigar enthusiasts, or newcomers to pipe smoking.
• Competitive Analysis: Compare your shop to other tobacco retailers in the area, focusing on your product variety, quality, or specialized services like tobacco sampling or cigar lounges.
• Sales and Marketing: Outline your strategy for attracting customers, using tactics like in-store events, social media marketing, or loyalty programs.
• Management Team: Highlight the expertise of your team, particularly in tobacco product knowledge, retail management, and customer service.
• Operations Plan: Describe the operational aspects, including inventory management, supplier relations, and customer service standards.
• Financial Plan: Provide an overview of financial aspects, covering startup costs, pricing strategy, and revenue projections.
• Appendix: Include supplementary documents like supplier agreements, market research data, or detailed product catalogs to support your business plan.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.

Step 5: Register Your Business

Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business! 

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you’re planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to tobacco shops. 

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state. 

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your tobacco shop will shape your taxes, personal liability, and business registration requirements, so choose wisely. 

Here are the main options:

• Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
• General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
• Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
• C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
• S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have. 

Form Your LLC

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Step 6: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN. 

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

The IRS website also offers a tax-payers checklist, and taxes can be filed online.

It is important to consult an accountant or other professional to help you with your taxes to ensure you’re completing them correctly.

Step 7: Fund your Business

Securing financing is your next step and there are plenty of ways to raise capital:

• Bank loans: This is the most common method but getting approved requires a rock-solid business plan and strong credit history.
• SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
• Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
• Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
• Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
• Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best option, other than friends and family, for funding a tobacco shop business. 

Step 8: Apply for Tobacco Shop Business Licenses and Permits

Starting a tobacco shop business requires obtaining a number of licenses and permits from local, state, and federal governments.

Every state has its own requirements to get a tobacco license. Check with your state to learn about the process. 

Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits. 

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Step 9: Open a Business Bank Account

Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your tobacco shop business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account. 

Step 10: Get Business Insurance

Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

• General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
• Business Property: Provides coverage for your equipment and supplies.
• Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
• Worker’s compensation: Provides compensation to employees injured on the job.
• Property: Covers your physical space, whether it is a cart, storefront, or office.
• Commercial auto: Protection for your company-owned vehicle.
• Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
• Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of the above insurance types.

Step 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business. 

Essential software and tools

Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks. 

You may want to use industry-specific software, such as Korona POS, PTechPOS, or NRS, to manage your purchasing, inventory, and payments. 

Accounting

• Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero. 
• If you’re unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial. 

Develop your website

Developing a website for a tobacco shop requires careful consideration of both design and functionality. You have two main options: using a website builder like Wix or Squarespace, which offers user-friendly interfaces and customizable templates, or hiring a professional web developer, which can provide a more tailored and unique design.

If the business model includes online sales, integrating an e-commerce store is vital. This store should be secure, easy to use, and well-organized, showcasing your products attractively and clearly.

Marketing

Launching a tobacco shop requires strategic marketing to attract and retain customers effectively. Here are some focused strategies to consider:

1. Optimize for Local SEO: Ensure your shop’s website is optimized for local search engine results. This includes using relevant local keywords, such as the city or neighborhood where your shop is located, and ensuring your site is mobile-friendly. Regularly update your content with local references and information about tobacco products.
2. Get Listed in Local Directories: Register your shop in local business directories and on platforms like Google My Business. This improves your visibility in local search results and helps potential customers find your shop easily.
3. Social Media Marketing: Leverage social media platforms to engage with your local community. Share posts about new products, special offers, and shop events. Use targeted ads to reach potential customers in your area.
4. Email Marketing: Collect email addresses from your customers and send regular newsletters with updates, promotions, and educational content about tobacco products. This keeps your shop top-of-mind and encourages repeat business.
5. Host Events and Workshops: Organize events like cigar tasting or educational workshops about different tobacco products. This can attract new customers and create a community around your shop.
6. Loyalty Programs: Implement a loyalty program to reward repeat customers. This could include discounts, special offers, or early access to new products.
7. Collaborate with Local Businesses: Partner with nearby businesses for cross-promotions. For example, collaborate with local cafes or bars where smoking is allowed, offering discounts to their customers.
8. Influencer Partnerships: Partner with local influencers or prominent personalities in the tobacco community to promote your products and shop.
9. High-Quality Product Photography: Invest in professional photography for your products. High-quality images can be used on your website, social media, and in advertising, enhancing the perceived value of your products.
10. Community Involvement: Participate in and sponsor local community events. This raises awareness of your shop and shows your investment in the local community.

Focus on USPs

Unique selling propositions, or USPs, are the characteristics of a product or service that set it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your tobacco shop meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire. 

Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your tobacco shop business could be: 

• Smoke up — we got you covered 
• Come chill in our smoke and vape shop
• Smokeless tobacco products – reduce your health risk

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a tobacco shop, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in tobacco for years and can offer invaluable insight and industry connections. The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in tobacco. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.

Step 12: Build Your Team

If you’re starting out small from a home office, you may not need any employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for a tobacco shop business include:

• Shop Clerks – make sales, customer service
• General Manager – ordering, inventory management, accounting
• Marketing Lead – SEO strategies, social media

At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need. 

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent. 

Step 13: Run a Tobacco Shop – Start Making Money!

The tobacco shop industry is thriving, offering a whole new world of products including smokeless tobacco products. If you have a love for smoking, with some hard work and a small investment, you can build a lucrative tobacco shop, whether online or in a brick-and-mortar location. It’s a great opportunity to be in control of your work life and your income while doing what you enjoy.

You’ve taken the first step by educating yourself, so it’s time to hit the ground running and launch your successful tobacco shop!