England became the last part of the UK to ban smoking in public places on July 2, but tobacco manufacturers are confident the move will not have a lasting impact on overall sales. Wales and Northern Ireland also implemented similar legislation in April, but wholesalers and retailers in all three countries had the experience of Scotland in 2006 and the Republic of Ireland in 2004 to draw on when preparing for the change.
In both the Irish Republic and Scotland there was a small dip in sales immediately following the ban, but for the 12 months to September 2006 volume grew by 1.4% in the Irish Republic and there are signs that the recovery in sales in Scotland has occurred even faster. In the Irish Republic there were big winners and losers among sectors of the trade with the on trade losing 39% of market share and vending down by 31%, but c-stores’ share was up 20%, off licences increased 16% and forecourts by 4%. In Scotland, however, while there have been moves in market share they have not been as dramatic
Iain Watkins, trade communications manager for Imperial Tobacco, says the fact that Scottish ban had a muted effect compared with the Irish Republic was because the trade in Scotland was able to learn from the Irish experience and prepare accordingly. For instance, sales teams had been emphasising to licensees that the ban on smoking did not mean they could not sell tobacco, and that pub customers would still want to buy cigarettes to smoke outside pubs or in shelters. Another tactic that some retailers in Scotland have been using, is promoting “the big night in”. With some smokers preferring to have a drink with friends or entertain at home where they can smoke, retailers have found they can increase tobacco and alcohol sales following the ban.
In the run-up to the bans in Wales, Northern Ireland and England, sales teams from Imperial and Gallaher have been passing on advice based on the experience in Scotland and the Irish Republic, to ensure retailers are prepared, and while a minor dip in volume is expected, both companies are confident the market will recover.
Deprived of any way of promoting a new brand to consumers it would have been understandable if tobacco manufacturers had simply concentrated on their big sellers following the government’s ban on tobacco advertising. Instead there has been a succession of new launches adapting to changing consumers tastes.
The changes have principally been driven by another government policy, hikes in tobacco duty, which has taken the price of some packs of 20 cigarettes over the pound;5 mark. With such high prices, consumers have been seeking less expensive ways to smoke, which has led to the development of lower cost cigarettes and strong growth in the RYO market but also fed an explosion in tobacco smuggling and counterfeit cigarettes.
Faced with a huge loss of revenue the government has invested heavily in trying to cut down on smuggling, but while it has had some limited success in stemming the tide of genuine cigarettes being smuggled, there is a growing problem with counterfeit cigarettes and HM Revenue Customs estimate that 70% of RYO tobacco smoked in the UK is not duty paid. While some of the RYO percentage is accounted for by legitimate imports by individuals for their personal consumption, the remainder represents a huge quantity of illegal importation.
To cater for smokers of legitimate cigarettes who were looking for the lowest price option, Gallaher and Imperial Tobacco gave national launches to their Sterling and Windsor Blue brands respectively. Eighteen months on Gallaher claims Sterling is now the largest selling brand in the ‘cheapest’ sector of the market. It says latest figures show that Sterling is leading the sector with a 44% share, and is valued at more than pound;261m in retail sales, and with a growth of 52.5% since 2005.
“We launched Sterling into all channels in recognition of the fact that a key driver for a proportion of smokers is price,” says Jeremy Blackburn, group trade communications manager at Gallaher. “The smoker who chooses to trade down to brands in the cheapest sector, as continued tax increases impact on the UK tobacco market, is evident in all trading channels. Sterling offers a combination of a great looking pack and a low price, which gives Sterling the edge over its rivals.”
More innovation from Gallaher has focused on its Benson Hedges brand. Last year it introduced a 14-stick pack for both B H Gold and Silver and later in 2006 it introduced a limited edition slide open pack for B H Silver 20s.
Since then, Gallaher says Silver has achieved a 23% increase in market share and Blackburn says: “Benson Hedges Silver has captured the imagination of young adult smokers and has widely been regarded as the brand that is doing something different. The limited edition slide packs that were launched last year have proven to be so popular that we have decided to make the unique format permanent. Benson Hedges Silver 10s, 14s and 100s, remain unchanged.”
Most recently, Gallaher has introduced Benson Hedges Black, a full flavour 10mg cigarette, which is priced at pound;4.89 for 20, placing it in the value for money sector. It will only be available in the slide pack format. Blackburn says: “Benson Hedges Black will appeal to the 70% of UK smokers who prefer the taste of a full flavour cigarette. Black is all about affordable style and the new addition will be especially popular with young adult smokers.”
He adds that wholesalers play a vital role in helping manufacturers market innovations in the tobacco category. Advertising to consumers is banned, but advertising is allowed if it is directed at retailers, so promotional displays in wholesalers’ tobacco rooms play a key role for manufacturers wanting to communicate with retailers and raise awareness.
Mike Laney, manager of the distributive trade team at Imperial Tobacco, also sees wholesalers as a vital communication channel between manufacturers and retailers. He says: “We communicate through the tobacco rooms giving advice to retailers on category layout and legislation.” This is backed up by Imperial’s sales force who visit all stores that sell tobacco, keeping retailers up to date and helping to “pull through” stock to retailers.
With many consumers looking for the lowest cost way to smoke, the RYO tobacco sector is in growth, having increased by 175% since 2000. Duty paid volumes increased by 10% in 2006 alone, and sales totalled pound;685m, a 14% increase from 2005. With smokers seeking lower cost options even within the RYO category, Imperial has launched Player’s Gold Leaf. It is available in 11.5g and 23g pack sizes, in both plain and price-marked packs with flashes highlighting the RRPs of pound;2.35 and pound;4.65 respectively, and also contains Gold Leaf rolling papers to provide smokers with an all-in-one RYO solution.
Watkins comments: “We’re delighted with the launch of Gold Leaf as it offers adult smokers great value for money in a strong and growing segment of the tobacco category. Both the product, brand name and pack design researched extremely well gaining very positive feedback among adult smokers.”
Overall the RYO category is dominated by Imperial’s Golden Virginia, which has a 47.6% share of the total market. However, Blackburn says Gallaher’s Amber Leaf has a 21.5% share and is in strong growth. He says more and more retailers are moving to 25g packs to upweight sales to customers.
Total cigar sales in the UK are worth pound;458m a year, with the Hamlet brand the clear leader with an overall share of the market of more than 40%. However the sector is segmented into miniature, small and large cigars, and while the main Hamlet variant is in the declining small segment, it is the miniature segment that is in growth. In the last 10 years the small segment’s market share has declined from 70% to just over 50% while miniatures have increased from 27% to just under 50% in the same period.
James Higgs, head of marketing UK and ROI at Henri Wintermans, which produces the market leaders in the miniature segment, predicts that miniatures will overtake small within 12-18 months. His Caf eacute; Cr egrave;me Blue and Caf eacute; Cr egrave;me varieties are in strong growth, with Caf eacute; Cr egrave;me Blue, the leading miniature cigar, holding a 29.9% share of the segment and Caf eacute; Cr egrave;me holding 23.2%.
Higgs also highlights the growing trend for aromatic cigars, with Caf eacute; Cr egrave;me Filter Aromatic growing 17.4% over the past year, although from a much smaller base compared to its stable mates.
He believes that NPD has been a strength of Henri Wintermans with introductions such as a tin of five Caf eacute; Cr egrave;me Blue. He says demand used to be for 10 or 20, but the new tin was introduced in reaction to the reduced amount of smoking.
Papers and accessories
With the low margins available on cigarettes, papers and filters offering 50% margin or more are an attractive business for retailers, according to Andrew Armstrong, managing director of Zig Zag. He also predicts that the new ban on smoking in public places will not affect sales, pointing out that Scotland is a strong market for his company, and the smoking ban there had virtually no impact on sales.
The vast majority of papers that are sold by all producers are the green variety, but Armstrong says there is strong brand loyalty among many consumers. For this reason Zig Zag has invested heavily in promoting its brand and will be spending pound;500,000 on consumer advertising over the rest of the year.
In addition to the Zig Zag brand, his company also took over distribution of the Job brand of papers in January. He says the brand already has great distribution and he believes it should be possible to double or even treble sales, having seen month-on-month growth since the changeover.
Armstrong says sales of filters are also buoyant. He believes that the growing number of dualists – smokers who roll their own and smoke cigarettes – is fuelling the growth because they tend to want filters for their roll-ups. Another lucrative related area, he says, is rolling machines. Zig Zag sold 324,000 last year, and he says research suggests that the average user will have five because rolling machines are treated like lighters, and if they haven’t got one to hand when they need it they buy another.
While Imperial Tobacco’s Rizla brand is the undisputed biggest seller in the papers market, when it comes to filters Swedish Match dominates the market and is still growing. Andrew Hardie, marketing manager of Swedish Match UK, says: “Filters sales are up 16.8% and are growing incredibly quickly.” More than 50% of that business is through wholesalers, which, he says, demonstrates the value of the wholesale channel to his business.
The latest innovation from the company is the Combi Pack, which comes with a flip-top, is no wider than a packet of papers, and contains 50 Swan Extra Slim filters alongside a pack of 50 Swan green papers. The green papers have also undergone a fundamental rethink, with improved glue, new chlorine-free paper, and even the running out slip has been moved from five papers from the back to ten, to reduce the risk of users running out.
Hardie say Swedish Match tries to incentivise independent retailers with extra free outers such as 15 filter packs for the price of 12. In addition it will be running a “Chill out” promotion across the range, offering consumers the opportunity to win a trip to Ibiza.
OCB is set to continue its “Lick it up” advertising campaign, which has already featured in FHM, Loaded, and Uncut magazines, and helped raise awareness of its papers in the UK.
In much of the rest of Europe the brand is well known, and is the best-selling cigarette paper in France, and number two in Germany and Spain.
In addition to the OCB Premium range in its jet back packs, and the OCB Classic White range which were among the first papers to use a 60% flax/40% hemp composition, OCB has introduced its new range of Crystal papers, a transparent rolling paper made from vegetal cellulose rather than traditional paper. These “papers” are gum-free, as the cellulose sticks strongly to itself when licked, and are extra slow burning.
General manager Justin Rudd says: “As we expand the OCB distribution network, we are reaping the benefits of competitive pricing allied to superior quality. That’s why we will continue to offer such attractive margins to both wholesalers and retailers.”
The lighters market is undergoing fundamental changes due to changes in legislation. From March this year all lighters supplied by manufacturers must be child resistant and wholesalers and retailers have until March 11, 2008, to sell through any non-compliant stock before it becomes illegal for anyone to sell it.
Imperial Tobacco has two of the top three selling lighters in the UK, with Clipper Silver Top outselling its nearest rival by more than two to one and Tokai Emphorel in third place. In the independent sector the lead is even more pronounced with it taking the top two places. Watkins says lighters are attractive products for both wholesalers and retailers because of the high margins involved, and wholesalers need to consider whether they are displayed prominently enough to attract retailers’ attention.
Hardie says Swedish Match was the first manufacturer to introduce child resistant lighters. Lighters have tended to be a lowest price commodity item for retailers and consumers, but if consumers are made more aware of the quality and safety aspects of lighters, he believes this may benefit sales of its relatively higher priced Cricket lighters.
Bic has struggled to make its mark in the market, but it has teamed up with the Trading Standards Institute to advise retailers about the forthcoming change in the law. Christine Heemskerk, lead officer consumer and product safety for the institute, warns that retailers and wholesalers could face fines of up to pound;20,000 and a prison sentence of up to two years if they break the new law. She adds that trading standards departments across the country will be carrying out checks after March 2008 to emphasise the message about compliance.
Gallaher has also moved into the lighter market with the launch of Brio lighters. They are available in a variety of different colours in maxi and micro formats.
=== Top ten cigarette brands in independent c-stores 2006 ===
Market share %
1. Lambert Butler King Size 13.3
2. Mayfair King Size 7.4
3. Richmond Superkings 6.5
4. Benson Hedges Gold King Size 6.1
5. Richmond King Size 5.1
6. Marlboro Gold King Size 4.9
7. Mayfair King Size Smooth 3.2
8. Royals King Size Red 3.2
9. Silk Cut Purple 3.1
10. Regal King Size 3.0
=== Top six RYO brands in independent c-stores 2006 ===
Market share %
1. Golden Virginia 46.4
2. Amber Leaf 19.8
3. Drum 11.2
4. Old Holborn 6.9
5. Cutters Choice 6.9
6. Drum Gold 5.6
=== Top 10 Cigar Brands in independent c-stores 2006 ===
Market share %
1. Hamlet 25.6
2. Hamlet Miniatures 15.0
3. Caf eacute; Cr egrave;me Blue 14.5
4. Caf eacute; Cr egrave;me 13.0
5. Castella Classic 11.8
6. Panama 5.7
7. Hamlet Smooth Miniatures 2.2
8. King Edward Coronets 1.9
9. Caf eacute; Cr egrave;me Filter Aromatic 1.7
10. King Six 1.3