Duty bound

Despite the ban on tobacco advertising and growing restrictions on smoking in public, the tobacco category is showing great resilience with new packs and products being introduced by all the main players. The high price of tobacco in the UK is fuelling growth in the low cost end of the market, but even premium cigarettes and cigars are seeing a piece of the action.

All this is good news for the grocery wholesale sector which relies on tobacco for about 50% of its turnover. Iain Watkins, trade communications manager at Imperial Tobacco, comments: “Despite some forecasts to the contrary, market data confirms that the grocery wholesale sector continues to grow. The IGD valued the grocery wholesale market’s turnover at around pound;17bn in 2005, up by just under 0.5% on the previous year. Looking forward, it is predicted that the sector will be worth pound;18.3bn by 2009 – a compound growth rate of 1.8%.

He adds: “Fifty five per cent of total distributive revenue is now generated through tobacco sales, up 2.6% on the previous year, which is five times greater than overall revenue growth and tobacco is the only category within the grocery sector to increase in both cash and carry sales and delivered wholesale.”

Imperial Tobacco remains the leading tobacco manufacturer accounting for 44.5% of total UK cigarette sales. The ultra low cost sector continues to increase and now accounts for 40% of total cigarette sales. Continual duty increases have resulted in more adult smokers down-trading to lower priced cigarette brands and IT’s Lambert Butler and Richmond now account for more than 30% of total cigarette sales in the UK and generate over pound;3.5bn in turnover for retailers.

Imperial Tobacco recently made two new additions to its Lambert Butler brand, with the launch of a Superkings range and a King Size Smooth variant. Both of the products have been available since April.

Watkins, comments: “It has become clear that there is a significant opportunity for Lambert Butler Smooth and Lambert Butler Superkings. The Lambert Butler range is the preferred brand of over three million adult smokers in the UK, so it is perfectly positioned to ensure the success of new products. Retailers should realise the potential that these exciting opportunities present and ensure they don’t miss out.”

Gallaher, the second biggest manufacturer, has been carrying out activity in both the cheapest and the premium sectors. In the cheapest sector it launched Sterling into all channels at the beginning of the year. The brand had previously only been available in the multiple sector, where it had built up a volume share of 6.7%, giving it a head start in a market where no advertising is allowed.

Gallaher trade communications manager Jeremy Blackburn comments: “Retailers have been delighted with Sterling’s fantastic growth since launch earlier on in the year, as more and more smokers look for a better value for money proposition, which Sterling provides. Since the launch, retailers are stocking more of the variants in an effort to meet smokers’ demands.”

In the premium sector Gallaher is urging wholesalers not to forget the importance of its Benson Hedges, Silk Cut and Camel brands. This summer it will launch new Camel limited edition packs. The Summer Art packs are intended to build on the success of the art deco style packs launched earlier this year in driving consumer awareness through differentiation from competitor brands.

The new Camel Summer Art packs replaced all standard Subtle 20s from July 1 and will be available for a three-month period. Camel Summer Art packs will also have a presence at a series of UK festivals, helping to drive sales and awareness among the core audience of young adult smokers.

Gallaher also introduced another first into the tobacco market in May with the launch of Benson Hedges Silver Slide. Instead of the traditional flip-top boxes, the limited edition B H Silver Slide packs slide open horizontally, offering the consumer something different.

Philip Morris introduced a new Marlboro Racing Edition for 2006 on its Marlboro Reds King Size 20s in May. This is the third year Philip Morris has released the limited edition packs which feature racing car imagery. The pack is distributed in the UK through Imperial Tobacco, and Philip Morris is supporting it with a dedicated direct mail and trade advertising campaign.

Clare Walker, Philip Morris trade marketing manager, says: “We know, from the success of the previous packs, that the 2006 Marlboro Racing Edition and its unique pack design will generate brand interest among adult smokers, and will continue to build on the success of the Marlboro brand which gained the number one UK premium brand position last year.”

Roll Your Own

With UK tobacco taxes among the highest in the world, many adult smokers have reacted to duty increases by entering the roll your own (RYO) market as they search for value for money tobacco products.

Imperial Tobacco leads the RYO tobacco segment accounting for more than 64% of UK sales. Imperial Tobacco’s portfolio includes Golden Virginia, which has long been established as the market leader with a share of almost 50%, and the Drum range. Imperial Tobacco recently revitalised its RYO offering with the launch of a new 14-gram cigarette-style box pack of Golden Virginia, containing two separately wrapped 7-gram bricks of tobacco.

Watkins comments: “As market leader, it is vitally important we continue to innovate and develop our RYO brands appropriately. The new Golden Virginia packs provide adult RYO smokers with many benefits and we are extremely confident they will be a positive addition to the highly successful Golden Virginia brand portfolio.”

Cigars

While cigarettes take the lion’s share of the tobacco market, cigars are a highly profitable line for wholesalers. This is particularly so at certain times of the year, such as Christmas, when retailers will stock up. Overall there are 600,000 cigar smokers in the UK spending pound;465m on their brands. Small cigars make up the largest segment of the market with a 53.5% share of the market, but the fastest growing segment is miniature cigars. While large and small cigars lost market share in the last year, miniatures grew by 3.4% to finish 2005 with a 43.2% share of the market. Watkins comments: “In the UK there are more than 300 cigar brands but the top 10 account for around 90% of sales. It is therefore vital that retailers stock an appropriate range suited to the preferences of local cigar smokers.”

Gallaher’s Hamlet brands are the strongest in the wholesale market, taking the number one and two spots as the most popular brands with a 46.8% share of the market. However, Hamlet’s greatest strength has been in small cigars and it has reacted to the growth in the miniatures segment with re-development of the Hamlet range and the launches of Hamlet Fine Aroma and Hamlet Smooth, which, since its launch in April 2005, has been the UK’s fastest growing cigar variant.

Henri Wintermans Café Crème brand, which is distributed by Imperial Tobacco, is number one when it comes to miniature cigar sales, accounting for more than 50% of the market. Its Café Crème Blue variant accounts for 28.1% of sales, followed by Café Crème with 24.5% of sales.

Sylvain Laporte, Henri Wintermans UK sales and marketing director, says the reason for miniatures, popularity is that more and more smokers are “dualling” between cigarettes and cigars and when cigarette smokers do this, they typically choose a miniature cigar. In addition to this dualing trend, many miniature cigars are being bought on impulse, and in these cases smokers are much more likely to purchase them in smaller packs to minimise wastage.

A further Henri Wintermans success story comes in the large cigar sector where the Half Corona is now the top-selling brand, accounting for over 30% of sales through all outlets. Laporte comments: “While the UK cigar market is declining by around 7% annually, sales of our brands such as the Café Crème range and the Half Corona continue to grow. Retailers should therefore ensure that their shelves are always fully stocked up with these top selling brands.”

Papers

The UK is the biggest market for rolling papers, accounting for more than 30% of worldwide sales and the good news for wholesalers and their customers is that multiple grocers only account for about 15% of this sector.

Imperial Tobacco’s Rizla papers remain the industry leaders, and as thinner and premium quality papers have grown in popularity in recent years Imperial Tobacco has reacted by launching Rizla King Size Slim Silver and Rizla Regular Silver.

In early June, Rizla launched Rizla Ultra Slim Filter Tips and unveiled a new design for Rizla Slim Filter Tips. The new Rizla Ultra Slim Filter Tips are presented in a convenient pack with cello-wrapped rods to meet adult RYO smokers’ preferences for slimmer, more manageable packaged filters. The Rizla Slim Filter Tips pack keeps its existing format, but the new design depicts the contents.

Watkins comments: “Filter tips ensure an easy transition for those adult smokers wishing to move from factory-made cigarettes to RYO tobacco, and around one in three adult smokers entering the RYO segment use filter tips. Imperial Tobacco encourages retailers to recognise the significant opportunity offered by the world of RYO, and filter tips remain an integral part of this.”

Another high-profile player in the papers market is Zig Zag, which has kept its brand in the target audience’s consciousness with advertising in magazines such as Viz, Loaded, Front and The Big Issue. Though 85% of all the company’s rolling papers sales are from green standard size booklets, Zig Zag claims to have the largest range of all suppliers within the category with six standard variants and five king size variants as well as rolls and rips.

It also has four filter tip variants which are all packed in tamper-evident, re-sealable bags to keep the product fresh. This is particularly important for menthol tips, which tend to lose flavour if they are not stored correctly.

Commercial director Andrew Armstrong explains: “Products like liquorice papers and menthol filter tips are never going to be huge volume sellers, though retailers are well-advised to stock them as consumers of these lines are likely to be very loyal and shop elsewhere if they can’t buy them locally. They don’t actually take up a lot of room on the gantry and they do add colour and interest to the fixture.”

He also points out that Zig Zig is not sold in multiple retailers and says independent retailers stocking a full range of Zig Zag products give themselves a point of difference from large retailers.

A newer entrant to the market also using arresting advertising is OCB Papers, with its new “Lick It Up” advertisement for OCB Premium cigarette papers. Increased demand for high quality cigarette papers convinced UK distributor Basil Bush to set up a separate company, OCB Papers (UK), dedicated solely to the distribution of OCB products in this country.

OCB has been a leading brand in Europe, and claims it is beginning to make an impression on the UK market, with an 18-fold rise in the value of UK sales in the last three years.

Leading the way is the OCB Premium range, which is strong, ultra-light, and so thin that it is almost transparent. Now, in addition, OCB is launching the TOP range of flavoured papers available in vanilla cream, sunrise strawberry and velvet peach.

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=== Buyer’s viewpoint ===

Trading in the tobacco category for us is extremely good with 3% growth over the same 25 weeks measured against 2005, whereas I understand the category as an industry is trading down by approximately 6%.

More and more there is a large swing to RYO, along with a switch to the value for money cigarette brands. Mayfair and Richmond are doing extremely well along with the new value brands Sterling and Windsor Blue.

Products in long-term decline are the Superking range along with B H, and in the main the more premium end of the category.

Gallaher has improved tremendously with the level of support they are giving and are now challenging that of Imperial. Strong promotions have included local activity provided through the Sterling brand with an extra 30p per 200 funding, plus free Coca-Cola with selected B H lines. In the main it is Gallaher that is driving this.

For the future we are looking for continued support and loyalty from the manufacturers to our sector, along with good innovation and NPD that will help drive the category forward.

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=== Buyer’s viewpoint ===

Since realigning our pricing in April 2005 our sales have grown by 7%. The three most successful areas are hand rolling tobacco (plus papers and filters), ultra-low price and more fashionable premium brands such as Marlboro Gold, Lucky Strike and Camel. The biggest losses are coming from “traditional” brands such as JPS and Superkings. It is vital that suppliers invest the time to understand the intricacies and complexities of our business. Then they can tailor their support and equipment solutions to our mutual benefit. Although Imperial Tobbaco is our biggest supplier, Gallaher is the one that understands our business best and supports us accordingly.

I think the learning from our Irish business is that the ban on smoking in pubs will damage the on trade and force people into socialising at home much more. This will be good news for convenience store sales of tobacco and alcohol.

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=== Top 10 cigars in independent c-stores 2005 ===

1 Hamlet 27.8%

2 Hamlet Miniatures 16.8%

3 Café Crème Blue 12.3%

4 Classic 12.2%

5 Café Crème Standard 12.1%

6 Panama 6.1%

7 King Edward Coronets 2.1%

8 Hamlet Smooth Miniatures 1.4%

9 King Six 1.1%

10 Café Crème Filter Aromatic 1.1%

== Top 6 RYO brands in Independent c-stores 2005 ==

1 Golden Virginia 46.9%

2 Amber Leaf 17.7%

3 Drum 12.4%

4 Old Holborn 7.7%

5 Cutters Choice 6.9%

6 Drum Gold 5%

== Top 10 cigarette brands in independent c-stores 2005 ==

1 Lambert Butler 13.6%

2 Mayfair KS 7.7%

3 Richmond SK 6.8%

4 Benson Hedges Gold 6.6%

5 Richmond KS 5.2%

6 Marlboro Gold KS 4.9%

7 Royals KS Red 3.5%

8 Regal KS 3.3%

9 Silk Cut Purple 3.2%

10 Mayfair KS Smooth 3%

Source: RAL

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