Tobacco companies like to refer to smokers as “resilient” and that is not just because they put up with wind, rain, snow and whatever else the British climate has to throw at them outside pubs and workplaces, but because of the way they have coped with successive waves of legislation aimed at persuading them to give up.
High duty rates, health warnings, and bans on advertising and smoking in public places have had very little effect on the level of smoking in the UK. Over the last decade sales volumes of factory made cigarettes have recorded a slight year-on-year decline of about 2% – with a temporary additional 4% immediately after the smoking ban was imposed – and sales values have increased because of the additions of duty to top £13bn.
The latest piece of legislation, which came into force on October 1 last year, was the introduction of pictorial warnings on tobacco products. From that day all products released to the trade have had to carry the warnings. However, wholesalers and retailers have been given until September 30 this year to clear old cigarettes through the supply chain and they have until September 30, 2010, to clear old stock of other tobacco products.
Mike Laney, trade sector manager distributive for Imperial Tobacco, says the trade has had previous experience of introducing packaging changes and this has helped in the planning and execution of the process this time round. Nevertheless, he reminds wholesalers that they need to be vigilant and ensure strict rotation of stocks. He adds: “We have set up a team to manage the change and they have been visiting depots and RDCs. If there are any issues wholesalers need to contact them as soon as possible.”
Even while this change is being introduced Parliament is already debating the next change in tobacco legislation, and this has the trade far more worried because of the implications for retailers. The primary concern about the ban on display of tobacco in stores is the potential cost implications for smaller stores.
At present it has not been decided whether this should be achieved by curtains or cupboard boards on gantries, or by forcing retailers to store tobacco under the counter, which would require a considerable financial outlay for smaller stores. The proposals are clearer on a date, suggesting that whatever changes are agreed should come into force for larger stores in 2011 and in 2013 for smaller stores, but again no definition of what constitutes larger or smaller stores has yet to be finalised.
The proposed legislation sparked one of the strongest ever reactions from the trade with manufacturers, trade associations including the FWD, individual wholesalers and retailers all protesting about the potential cost imposed on small businesses. They also argued that it would have the opposite effect to the stated intention of the proponents – to reduce the amount of underage smoking.
Jeremy Blackburn, JTI’s head of communications in the UK, says that rather than deterring underage smokers it is likely they will turn to the flourishing black market where age restrictions are irrelevant. He says that experience in Canada where a display ban was introduced showed that many small stores were forced to close down, but the volume of tobacco sales was unaffected. Laney says the Government has plans to consult again when the proposals are finalised and this will be another chance for the trade to get its message across.
Another scourge that is affecting wholesalers and retailers legitimate trade is the illicit trade in cigarettes and RYO tobacco, and legitimate importation for personal use. According to Government estimates 27% of factory made cigarettes consumed in this country – more than one in four – is non UK duty paid. With RYO tobacco the problem is far greater, having been brought down from 80% 10 years ago to about 68% now. Laney says manufacturers have worked closely with HM Revenue amp; Customs and some initiatives that have been introduced have helped to reduce the volume of illicit trade. Higher duty rates in Europe and Sterling’s fall against the Euro, will make smuggling a less attractive option for criminals in the future.
One of the effects of high duty rates on UK smokers has been a trend towards downtrading as they have sought less expensive ways to smoke.
Lambert amp; Butler is the biggest cigarette brand by a considerable margin and with Richmond gives Imperial Tobacco the top two with a combined sales value of £3bn and accounting for one in three cigarettes sold in the UK. While downtrading is the major trend in the cigarette market, with strong growth in the lowest cost brands, Blackburn points out premium products such as Benson amp; Hedges Gold and Silk Cut are still top ten brands with substantial sales and greater cash margins.
Mayfair is JTI’s top selling brand in the UK and recently ran a limited edition King Size Smooth pack to emphasise the growing popularity of the Smooth variant.
JTI’s Sterling is the leader in the super value sector, and demonstrated how price sensitive the market has become with a surge in sales after a price cut in October. Its market share in the super value sector was 52.1% at the end of the year, and in the three months following the price cut its share of the overall market climbed from 5.2% to 6.1%.
Also in October Imperial Tobacco launched a new competitor in the sector with JPS Silver. It has five variants all of which are available in standard or price-marked packs. Laney says: “By utilising our sales force and with promotions in cash and carry tobacco rooms and with trade support we were able to achieve 100,000 distribution points by December.” The brand has already achieved a 1.5% share of the overall market and more than 2% in independents, he adds.
BAT says the wholesale channel is a vital route to market accounting for about one third of its volume, and this is currently increasing both through delivered wholesalers and the cash and carry sector, where price-marked variants are proving popular.
Since its launch 14 months ago, it says Pall Mall has been an important addition to the value for money sector and is currently approaching 2% market share in the UK. It says the Royals brand family also remains a strong performer in the value for money sector. As an established offering, it has earned loyalty through consistent quality and messaging since its launch almost 18 years ago.
Roger Jones, BAT UK’s national account manager, says: “BAT UK is focusing significant effort on supporting the sector during 2009. As well as an ongoing series of cash and carry promotions, we are attending a full programme of trade shows across the UK. We see these events as fantastic opportunities for us to build and strengthen our relationships with businesses. We aim to proactively provide advice in order to help support businesses drive sales.”
A combination of down trading by cigarette smokers, greater vigilance by HMRC and increasing duty rates on the continent have all fuelled growth in the RYO tobacco sector in recent years with volume up 12% for the year to the end of October 2008.
In addition to the people who have switched permanently to RYO there has also been growth in duallists, who smoke both RYO and factory made cigarettes.
Golden Virginia holds a massive lead over the sector with a 44.3% market share, but as price is becoming more of an issue even within the RYO sector lower cost products have been increasing their share.
Building on the strength of the Golden Virginia brand, the most recent launch in the sector has been Golden Virginia Yellow. It is a lower cost, milder tobacco intended to appeal not only to cost conscious smokers, but also to duallists, many of whom find that other RYO brands taste harsh when compared to factory made cigarettes.
For BAT, Cutters Choice had strong year-on-year growth through the wholesale and cash and carry channels, and moved up from fourth to third place in the sector, gaining an 8.77% market share (Nielsen, November 2008). JTI’s Amber Leaf also achieved strong growth. Blackburn says there has also been a trend towards consumers buying the larger 25g and 50g packs and JTI is encouraging wholesalers and retailers to ensure they stock the full range of packs.
Cigar specialist Henri Wintermans is styling itself as the category leader for the UK after taking distribution of its Café Crème brand back in-house. In December the company announced that from January 10th it was ending its distribution deal with Imperial Tobacco after 42 years.
Huw Williams, managing director of Henri Wintermans, says it is natural for the company to wish to manage its own brands. He emphasises the company is a cigar specialist and says the move will give it more freedom to innovate, and enable it “to correctly position its brands and to position them in a timely fashion.”
While the cigar market has suffered a decline in recent years, the market share held by Café Crème has steadily climbed. Since 2002, miniature cigars’ market share has increased from 39.5% to stand at 52.7% in 2008, compared with small cigars decline from 57% to 42.9% over the same period. Café Crème holds more than 50% of the miniatures market with Café Crème original holding 26% and Café Crème Blue on 30%.
In response to the needs of time-pressed consumers the company has announced a new smaller variant of Café Crème, Café Crème Express, which it will be launching on April 1. James Higgs, head of commercial marketing, says Express provides added convenience for consumers because it takes less time to smoke, and it will also appeal to more cost conscious smokers. In France, where Express is known as Piccolini and has been sold since 2001, Higgs says it attracts incremental sales where availability of all the Café Crème variants is ensured. Express will be launched in both the Café Crème original and Café Crème Blue with a recommended retail price of £3.29 for a tin of 10.
JTI’s Hamlet brand can still claim to be the individual brand leader in cigars, although its market share fell 8.7% in the year to October 2008.
Papers and accessories
Imperial Tobacco’s distribution channels throughout the wholesale trade help its Rizla brand to hold a massive chunk of the papers market, but Zig-Zag has now teamed up with BAT to enhance its distribution.
The two companies have signed a deal giving BAT the rights to distribute 12 Zig-Zag branded rolling papers, filter tips and accessories and JOB Double rolling papers. A BAT spokesperson said: “This is a great opportunity for both parties. We don’t currently have a range of smoking accessories and can now supply our key customers with a full range of rolling papers, filter tips and sundries. As well as adding another string to our bow, Zig-Zag will benefit from our comprehensive distribution network.”
With papers not restricted by the advertising ban applied to tobacco products, Zig Zag has been strongly promoting its JOB brand with a fly posting campaign in major UK cities and advertising in Big Issue magazine. Zig-Zag managing director Andrew Armstrong says: “JOB is a niche brand trying to reach a younger demographic with its double message. Fly posting works really well because it’s an area younger people notice and our full colour posters tend to stand out among the usual one and two colour posters. Reflecting the arty feel of the campaign the next advert in the series will feature artists Gilbert and George.”
Armtrong says fly posting is a very cost effective way of advertising and having built up knowledge of how it operates he will now be looking to exploit it for Zig Zig.
The company is also launching an innovative half-size outer for JOB which can be used as a conventional outer for display or can be stuck on the wall using a sticky strip and used as a gravity feed device. This means it does not have to compete for space on the gantry and it is likely to be stuck at or near eye level.
Armstrong says sales of Zig-Zag papers were up about 4% year-on-year and filters are selling very strongly. “Duallists are used to factory cigarettes and want a filter. Slim filters are up 25%, menthol tips up 30% and ultra slim up 39.8%.”
The leading force in the filters market, with an 85% market share, has just changed its name from Swedish Match to Republic Technologies following a takeover. The deal includes the transfer of Swedish Match UK’s smoking papers, filters, rolling machines and associated products business, together with the Swan brand in UK and Ireland for such products, and the filter packaging operation in Belgium.
John Catania, managing director of Republic Technologies (UK), said: “Our strong focus on customer service remains at the forefront of our business and our commitment to our consumers and our customers remains unchanged. Following three years of excellent growth, this acquisition offers us a great opportunity for future development.”
Regarding the wholesale sector, which accounts for about 50% of sales, Andrew Hardie, marketing manager at Republic Technologies (UK), advises: “The increase in volume in the RYO market has been driven by consumers looking for value for money, which is evident through the popularity of the Swan 5+1 Multipack as it supplies six packs of green papers for the price of five, all available in one handy pack.
“To tap into the growth in the RYO category, we suggest that wholesalers recommend their customers to stock-up and display key RYO tobacco brands and a wide range of requisites, with a focus on the filters, papers and lights categories that generally offer strong margins.”
He adds: “Our account managers set up regular promotions with wholesalers to meet mutual business objectives including our highly successful 15 for 12 on slim-line and 20 for 16 on Pop-a-tip filters. For consumer promotions we often have a mechanic to help drive sales in the wholesale channel, such as the recent “Tech Promotion” where consumers could win premium consumer technology goods and accessories.
“We have had two major product launches over the past two years. Swan Combi was introduced into the market in 2007 and Swan Smooth in 2008, so 2009 is a crucial year for us to build on these launches and increase product loyalty alongside our other ranges of Swan papers and filters.”
OCB is another papers company investing in its range. In an on-going promotion, over a quarter of a million free samples of OCB Premium #1 have been distributed with the 25g pack of Native American Spirit tobacco. “With continued advertising in specialist retail magazines like FHM and Loaded, smokers cannot help but become increasingly aware of the quality of the OCB range,” says general manager Justin Rudd
The company is also launching the new X-pert range, aimed at more discerning smokers. The papers are more transparent than OCB’s Premium range, and a new hot steam process has been used in the watermarking so that the papers are smoother to the touch. The packaging has also been embellished with a selective varnish on the packet and a new metallic print on the lettering. This addition to the top end of the OCB range is featured in current advertising in Bizarre magazine.
Along with the new X-pert range, OCB is introducing OCB cardboard filter tips and a new look OCB standard metal size rolling machine.