Rolling tobacco to scale new hights

With its double-digit growth figures and sweeter profits, Roll Your Own tobacco (RYO) has long since been the darling of the tobacco category and convenience store retailers alike. And over the next 12 months they look set to fall even deeper in love.

Last month it was revealed that for the first time ever, a RYO product took the mantle of biggest overall seller in the tobacco category. According to Nielsen Market Track data for May, JTI’s Amber Leaf brand is officially the number one tobacco brand in the UK, with a 9.4% volume share of the combined tobacco market. It’s a development which perfectly reflects the astronomical rise in demand for products which offer greater value for money and flexibility within the tobacco category.

The value of the RYO category has bloomed by 26% year on year, according to JTI estimates, with sales pepping up even further over the summer months, driven by the raft of national and sporting events, not least the Olympic Games, which has seen about six million extra people flood into London alone.

Wholesale orders of the Scandinavian Tobacco Group’s (STG) Natural American Spirit brand increased almost ten-fold in the weeks leading up to the Olympic Games and STG is expecting to report a significant sales uplift thanks in part to adult European smokers’ much larger appetite for additive-free products.

“Consumers are becoming increasingly interested in the sustainability of, and ingredients in, their purchases, a fact which is being reflected in the tobacco market and other FMCG sectors,” STG head of marketing Alan Graham says. “While demand for these types of products is growing in the UK they still represent a tiny slice of the market compared with other European countries where they are in the majority. One of the best-selling tobacco brands in Sweden, for example, is additive free,” he adds.

Graham is sceptical additive-free in the UK will ever reach this level of popularity, but says: “I wouldn’t be surprised if it accounts for 10% of sales in the next five to 10 years.”

Sales of STG’s Natural American Spirit brand are growing steadily, and since January alone it has made significant distribution gains in convenience stores, with an additional 2,000 now stocking it.

Imperial Tobacco’s launch of Drum Additive Free and Zig-Zag’s Rasta earlier this year will only help fuel growth of additive-free and propel the general popularity of RYO even further.

“One in three adult smokers choose to smoke RYO and the growth of the sector is predicted to continue for the next three years as adult smokers continue to seek out greater value for money,” JTI head of communications Jeremy Blackburn says.

And it’s not just sales that are swelling - the volume of different brands and variants available in the category is also on the up. This year alone has seen the launch of Salsa RYO from STG and Sterling Rolling, which is showing really strong performance in independents and across London, East Midlands, the North and Northern Ireland, according to JTI. This has led to a 1.4% volume share of the RYO market in just five months, the company says.

And that’s just the developments from the UK’s big tobacco manufacturers. Smaller independent suppliers have also been busy launching an array of interesting new flavoured products, such as Gawith Hoggarth’s new pina-colada flavour, helping innovative independent retailers to spice up the category.

However, this explosion of products is requiring store owners to think much harder about how they display RYO, especially since large stores are now trading in a dark market.

“The space on retailers’ tobacco unit filled with RYO tobacco products has increased dramatically over the past five years,” Imperial Tobacco head of convenience Mike Laney says. “The proportion of space given to RYO will vary from region to region but, on average, it has increased from about 6% to more than 15%.”

BAT’s Lewis points out that about 80% of that space should be allocated to top-selling brands and 20% for new brands, and that RYO should also be relocated to a more prominent spot on the gantry.

In recognition of this, Imperial created its RYO gantry solution. Bolted down the side of a retailer’s existing gantry, the slimline RYO unit gives the segment more room, and allows leading brands the luxury of double facings.

In Droitwich, Costcutter retailer Sat Sohal saw his sales of 25g packs jump by 23% in the four months after the unit was installed.

JTI has also developed dedicated RYO merchandising equipment, which retailers can add to their gantries to accommodate the extra room

Packaging within the RYO segment has also undergone something of an overhaul of late as Imperial’s Laney explains. “Over the past five years new printing inks and innovative new materials have become available for use with RYO packaging. These improvements in technology have enabled manufacturers to produce more varied colour schemes while keeping the packaging quality consistent and durable. New mechanisms to seal pouches to keep the tobacco fresh have also been introduced.”

The use of laminate pouches which help to keep products fresher for longer - particularly important for additive free tobaccos - has also increased. “Back in 2009, JTI introduced ‘Foil Fresh’ technology to the launch of Benson & Hedges Gold and Silver RYO, which incorporates a thin layer of foil in the pouch to ensure the tobacco stays fresher for longer.

“Whether it’s through the materials used or devices applied, pouch technology is constantly evolving,” JTI Amber Leaf brand manager Javier Roa adds.

And as adult smokers’ demand for products that offer the best value for money increases, the development of new and convenient pouches that also enable the storage of RYO accessories such as cigarette papers and filters also comes to the fore.

One of the biggest and most recent developments in this area is Imperial Tobacco’s new Golden Virginia Smooth 8g Handy Pack.

Available now, it contains a zip-lock pouch containing 8g of tobacco, rolling papers and filter tips all in one convenient flip-top box - everything an

“Value-seeking is, and has been for some time now, the dominant trend in the tobacco category and the new 8g Golden Virginia Smooth Handy Packs offer consumers a premium product in a convenient format at a low price,” head of consumer marketing Amy Kiss says.

“There are currently about 5.2 million adult smokers who choose to smoke RYO, and more than four million of them choose to smoke RYO during the week and cigarettes at the weekend.”

While we’re on the subject of value, we couldn’t fail to mention pricemarking, which continues to increase in popularity. They might not offer store owners the best margins, but as most retailers attest, this is more than made up for by the key sales and footfall boost that they provide.

“Price flashed stock is a huge sales driver in these austere times. If it’s got a price flash it will sell, and fast,” says Pipers News’ Janis Brackatt.

“PMPs give adult smokers reassurance of a fair deal,” BAT’s Lewis adds. “We advise that retailers stock them wherever possible as they provide confidence that the product is being bought at the best price and this confidence encourages repeat visits.”

All change

However, the value-seeking trend is also sparking other interesting changes, namely the erosion of brand loyalty. While traditionally UK adult smokers are fiercely loyal to their brand of choice, barrelling out and away from stores in an instant if their brand is not available, cash constraints mean a growing number are switching between brands, choosing those that offer the best deal on any given day. It means that effective sales monitoring and eagle-eyed stock management are even more essential to limit out of stocks.

Says Lewis: “Simply getting the basics right in retail will always contribute to maximising profits. Through effective inventory management, clear merchandising and excellent customer service, retailers will maintain adult smoker loyalty as well as attracting repeat business.”

However, the reality is that even the most immaculately merchandised gantry and gold standard customer service can struggle to fend off the category’s toughest competitor: the illicit trade.

“Amid the positive news on the growth of legitimate RYO tobacco, the threat from the illicit trade is still having a major effect on consumers, wholesalers, retailers, manufacturers and the economy,” Imperial’s Laney says. “Excessive taxation increases, as well as the unintended consequences of disproportionate tobacco regulation, fuel the growth of illicit trade, and last year about 50% of all RYO tobacco consumed in the UK was non-UK duty paid, costing the treasury millions in lost revenue (HMRC/UKBA 2011.)”

So just why is RYO so much more susceptible to counterfeiting and smuggling? Well, the fact that it is so much cheaper to produce than ready rolled cigarettes is a key factor. “In addition, unlike cigarettes, RYO products do not suffer so badly from being crushed,” BAT head of corporate and regulatory affairs Ian Robertson adds. “Smugglers are therefore able to carry large quantities in a small container. Adult smokers go to illicit traders because of price, and so the supply and demand of these products is assured.”

The good news is that retailers, manufacturers and enforcement agencies are working together like never before to tackle the problem and, given the marked increase in reports of illicit seizures and sentencing, it does appear to be having an impact. However, with government plans to introduce plain packaging across tobacco, and further tax hikes in the offing, this progress is looking markedly perilous.

“The seriousness of plain packaging, if introduced, cannot be over-stated,” JTI UK’s managing director Martin Southgate explains.

“Plain packaging will make it easier to make fakes, putting money in the pockets of criminals and taking money out of the tills of legitimate shopkeepers. It also risks increasing underage smoking, by driving tobacco further ‘underground’.

“The crooks and the counterfeiters from the criminal underworld will never have found their work to be so easy or so cheap.”

Last month JTI launched a nationwide advertising campaign against the plain packaging proposals. The government consultation is now closed, and the following few weeks will tell if it, and the many hundreds of responses from other manufacturers, retailers, trade associations, packaging companies and, of course, Convenience Store have been successful in convincing the government to shelve plans. •