Tobacco: Smoke signals

It might be out of sight in large stores, but tobacco was rarely out of the spotlight in 2012, and this year looks set to be no different, with legislative changes, the illicit trade and electronic cigarettes all set to make headlines in 2013.

Almost one year has now passed since the display ban was first introduced in large English stores (followed by Wales in December 2012). Scottish stores of 3,000sq ft and up are readying themselves for a ban on April 29.

As predicted, tobacco volumes dropped by 2.5% in large stores once the English ban was introduced (just a couple of weeks after the Chancellor’s Budget and during a period of unseasonably bad weather). However, much of the volume was picked up by smaller convenience outlets, says Colin Wragg, head of corporate & legal affairs at Imperial Tobacco.

“Tobacco shoppers believe the doors have affected queue times in dark outlets, with 7% of shoppers telling us they have changed their tobacco purchase habits since the ban has come into force,” he adds.

The volume shift between large and small outlets has been particularly prominent in the UK cigar category, where the ability for customers to see and discuss the different variants with staff is key.

“Cigar sales through multiples, for example, are down 1.1% MAT, but prior to the display ban they were increasing month on month for the past five years,” Alan Graham, head of marketing at the Scandinavian Tobacco Group (STG), says.

“On the other side of the coin, CTNs, forecourts and convenience stores have gained market share since the display ban, with independent and symbol group retailers, in particular, doing well,” he adds.

As predicted, smaller stores also reported much stronger than usual cigar sales over the all-important festive season as UK adults turned to these, rather than the multiples, for ease of access and expertise when buying cigars as gifts, or as personal festive luxuries.

“Cigar sales through convenience stores did really well in the lead up to and over the Christmas period, with cigar sales up 1.6% through these outlets,” Graham adds.

And with a further two years before small stores have to join the bigger boys in the dark, a significant opportunity to grow sales and footfall exists for small stores.

Tobacco manufacturers are certainly not blind to the small stores opportunity, with many now viewing convenience stores as integral to the success of new product launches or packaging refreshes.

The hugely valuable role that convenience stores play in getting new products off the ground was drummed home to STG in 2012 when it launched the miniature cigar brand Moments Yellow through a retailer that had both large and small stores. “In the large stores where gantries were covered up uptake was very slow. However, it rocketed in the smaller format outlets where customers could see the gantry, ” Graham adds. “It just goes to show what a huge opportunity small stores have for the next two years,” he adds.

However, it certainly doesn’t mean that small stores can afford to sit back. Convenience stores looking to profit from their status as the last bastions of visibility will need to make sure they talk to their tobacco customers about new products.

“As the market goes dark, it will become even more important for retailers to be aware of new innovations and the differences between products - for example, what makes one capsule cigarette different from another - so they can answer any queries adult smoking customers may have,” says BAT head of trade Andreas Nicolaou.

“Innovations and packaging upgrades generate interest within the category and it is therefore important for retailers to stay up to date on these developments as they may produce questions from customers,” he adds.

Getting the basics right - such as ensuring good availability, and that stores are clean and welcoming - will also help, says JTI head of communications Jeremy Blackburn.

“Smaller stores should closely monitor their sales and respond to increased demand by adapting their range to fit the profile of their new customers purchasing tobacco. Let’s not forget that the increased footfall of existing adult smokers making tobacco purchases could potentially have a positive impact on sales of other items throughout the store,” he added.

According to HIM, 68% of adult cigarette shoppers purchase more than just cigarettes, often buying confectionery, soft drinks, newspapers and magazines while in store as well.

“Our advice to retailers is to maintain full range and availability. It sounds obvious, but it’s so important for retailers to monitor and respond to sales at a local level and ensure that the basic principles of category management are continuously put into practice,” Blackburn adds.

Plain packaging

Any legislative round-up cannot fail to mention plain packaging. The public consultation on plain packaging closed in August after generating an incredible response. Vast numbers of retailers, wholesalers and other industry members signed petitions, contacted their MPs or responded directly to the document, with almost a quarter of a million people alone using the ‘Hands Off Our Packs’ campaign to voice their opposition to the proposal.

The Tobacco Manufacturers’ Association estimates that more than half a million responses were against the plain packaging proposals.

And just because the consultation is closed doesn’t mean that MPs’ ears are, Wragg adds. “This does not mean views cannot be expressed to local MPs, who are waiting for the publication of the full report in spring of this year before making up their own minds.”

The experiences of Australian retailers, who have now been complying with plain packaging laws for almost three months, will certainly prove useful when having these conversations.

Research conducted by Imperial Tobacco Australia shows that transactions have initially taken up to six times longer as staff struggle to quickly identify the correct product in the cigarette unit.

And while it’s still too early to make any concrete statements, sales do not appear to have fallen too dramatically, STG’s Graham adds. Sales of cigarette cases, covers and stickers to hide the ghoulish packs, which now display much larger graphic health warnings, have rocketed, with some companies reporting double-digit growth.

The real concern, Wragg adds, is the impact plain packaging will have on the illicit trade. “Plain packaging plays straight into the hands of counterfeiters. The unintended consequence of an increase in illicit tobacco will further reduce tobacco excise revenues for the Australian Government,” he adds.

Cigarettes

At more than £13bn per annum, sales of cigarettes still account for 86% of the total UK tobacco category, according to JTI, with value brands accounting for the lion’s share.

More than one in three cigarettes now sold is a value brand, and value is also the UK’s fastest-growing tobacco sector, accounting for almost 40% of the total cigarette market and growing, JTI’s Blackburn says.

When it comes to product choice, 60% of shoppers say that cost is their key priority (according to the IGD) and this is certainly reflected in the cigarette market, where the downtrading dynamic continues to prevail. According to Imperial Tobacco UK communications manager Gayatri Barua-How, the economy sector is growing at about 8% year on year, with brands such as JPS ‘Silver’ showing sales increases month on month. ‘Silver’ was also recently extended with the launch of JPS Silver Superkings 10s and 20s and JPS Blue Superkings 10s, to reflect the increasing numbers of adult smokers who are purchasing economy cigarettes above King Size. Currently, 47.2% of economy cigarettes purchased are above King Size.

Recognising the growth in the Low Price segment, BAT’s new Rothmans Gold and Rothmans Silver range is now available at a reduced price. Gold and Silver Kingsize are available in packs pricemarked at £5.99, Super Kingsize £6.04 and 10s at £3.12.

Sales of pricemarked packs (PMPs) have also been growing steadily over the months, with 57% of packs purchased by adult smokers now displaying PMPs, according to Imperial.

Another particularly interesting trend has been the boom in packs of 19 cigarettes. The value-seeking trend has led to a growth in market share for these slightly smaller packs which offer adult smokers a lower ‘out of pocket price’ than 20s. In December, Imperial Tobacco’s sub-economy priced Player’s brand moved to a 19s pack size for both King Size and Superkings SKUs.

JTI’s Winston brand also moved to a 19s format last month. Packs were previously priced at £6.10 for 20. “The new price point gives retailers an opportunity to grow their tobacco sales with a well-known brand of American blend cigarettes at a competitive pricemark of under £6 per pack,” JTI’s Blackburn said.

Sales from Philip Morris International’s Chesterfield range are also growing, with its 19-pack of cigarettes priced at £5.75 proving particularly popular.

The Make Your Own (MYO) segment of the category has benefited from the downtrading trend, and is expected to be a prominent feature within the tobacco category in 2013. In the past 12 months JPS Cigarette Tobacco has almost doubled its sales. JPS Cigarette Making Kits enable adult smokers to make 20 cigarettes for £3.76.

However, while cheaper brands and variants are making the biggest waves, it’s vital that premium-priced products are not lost in the squall. Despite the challenging economic conditions, cigarettes from the premium-priced sector still account for about one in four of all packs of cigarettes purchased.

In a bid to keep its premium cigarette brand Camel looking its best, JTI launched the world’s first curved pack design in September 2012. Recognising the fact that demand for premium brands varies hugely across the country, Imperial Tobacco also launched Davidoff iD in selected areas of the South East of England last year. Premium-priced cigarette brands account for more than 40% of all sales in the Greater London area, generating about £290m each year for retailers there, it claims.

RYO

The Roll Your Own (RYO) tobacco sector continues to be the most dynamic of all, with more than 70,000 tonnes of RYO sold by UK retailers last year - about 12% more than in the previous year, according to Imperial Tobacco. Volumes and values are both expected to keep on climbing in 2013, although perhaps at a slightly slower pace as the impact of the illicit trade continues to take its toll on legitimate sales. Most recent HMRC estimates suggest that 50% of all RYO tobacco consumed in 2011 was illicit.

Not surprisingly, the strong downtrading trend is also apparent in RYO. Just like cigarettes, where growing numbers of brands are being downsized to 19s, RYO packs have also been getting smaller.

Following research conducted in 2012 which showed that adult smokers wanted a quality RYO product priced under £3, BAT introduced a new 11g pack format for Pall Mall RYO at £2.99. By moving its 12.5g variant into the 11g pouch the gram for gram price was reduced and the needs of value-seeking adult smokers satisfied.

New Golden Virginia Smooth (Yellow) 8g Handy Packs were also made available across the UK in mid-August. The new 8g packs replaced the 12.5g Handy Packs for Golden Virginia Smooth, and contain a zip-lock tobacco pouch, rolling papers and filter tips all in one convenient flip-top box.

The tail end of last year also saw Imperial Tobacco add papers to all 50g packs of Golden Virginia Original (Green) and Smooth (Yellow). If sold at rrp, the packs provide adult smokers with an 18p saving compared with purchasing separately. The development came after Imperial tobacco research revealed that 62% of RYO tobacco shoppers prefer their tobacco to come with papers.

And as the UK economy teeters on the brink of a triple-dip recession, STG’s Alan Graham expects demand for low-priced products to keep on growing. Good news for its Salsa brand, then, which was launched in new pricemarked packs last summer.

Value isn’t the only trend driving growth in RYO. Interestingly, demand for additive-free products is also on the up - albeit from a very small base compared with other European countries such as Italy, where they account for significant chunks of the market.

Sales of STG’s 12.5g Natural American Spirit are “booming”, according to Graham, up 200% year-on-year and driven via sales through independent retailers.

“Sales of additive-free will continue to grow in 2013,” he says. “And it will be particularly interesting to see what the UK’s big three tobacco manufacturers do on additive-free this year. We are quietly confident that if one of them launched a big brand additive-free variant, it would produce something of a halo effect for us,” he points out.

Adds Imperial’s Barua-How: “The successes we have had with Drum Additive-Free and the continual growth in this sub-segment show that additive-free variants offer retailers a significant opportunity.•