Resilient is the word Imperial Tobacco has applied to the tobacco sector for years to describe the way it has coped with increasingly aggressive legislation designed to curb smoking. But now, says trade communications manager Iain Watkins, it is a description it is applying to smokers themselves as they face a growing number of restrictions.
Despite one of the highest duty levels in the world, a blanket ban on any advertising to consumers and large health warnings on packs, the number of smokers in the UK has remained fairly stable at around 27%-28% of the adult population. Now the government is looking to increase the pressure by introducing a raft of new measures during 2007.
First off was the new restriction on cigarette lighters. From March 11 all lighters supplied by manufacturers must be child resistant and wholesalers and retailers will have until March 11, 2008, to sell through any non compliant stock.
Next up is the ban on smoking in pubic places which came into force in Wales on April 2, with Northern Ireland due to follow on April 30 and England on July 1. Experience in Scotland and the Irish Republic, which introduced similar bans in 2006 and 2004 respectively, suggests that smokers will adapt to the new legislation. In each case, there was a dip in sales immediately after the ban, followed by a recovery, and in the Irish Republic sales for the 12 months ending in September 2006 were up by 1.4%. In a trading update released last month, Imperial Tobacco forecast that duty paid market volume in the UK would fall by about 3% in the year to September 2007.
Hardest hit by the Irish ban was the on trade where market share was down 39%, and vending where it fell by 31%. But wholesalers’ biggest customers saw increases in market share, with forecourts increasing market share by 4%, off licences up 16% and convenience stores up 20%. Watkins comments: “It may seem strange to describe a ban on smoking as an opportunity, but for many retailers and wholesalers that is exactly what it is, and they need to ensure they are prepared to take that opportunity.”
The next law change, which is potentially the most difficult for retailers, will be the increase in the minimum age for buying tobacco from 16 to 18. In England and Wales it will come into force on October 1, but the date for Scotland and Northern Ireland has not yet been announced. For retailers this will mean 16 and 17-year-old customers, who were previously entitled to buy tobacco, will have to be refused.
Jeremy Blackburn, Gallaher group communications manager, says: “2007 will see changes in the legislation surrounding tobacco in the UK and we understand that it can be difficult to keep up to date. We also recognise that there will be developments that retailers need to be made aware of and it is important that we provide updates when changes to legislation are announced.
“Gallaher’s salesforce are regularly informed of any developments to legislation so that they are able to answer any questions that retailers might have. On-going, we will also be communicating through the trade press and at trade shows throughout the year. At CRS, for example, we ran a number of seminars to answer questions that retailers had in respect of changes in legislation. There was particular concern expressed by retailers surrounding the area of age related sales and as a result Gallaher will be distributing updated ‘No ID, No Sale’ packs through our salesforce this summer.
“We actively support the ‘No ID, No Sale’ campaign, which raises awareness of age related sales issues. For the licensed trade we have distributed a specific booklet called ‘Bright Ideas for The Ban’ to over 50,000 licensed premises, designed to update them on legislation and raise awareness of the benefits of preparing early.”
Added to all these new measures, high duty levels are exacerbating another problem that has hit wholesalers’ customers particularly hard. The latest 11p increase on a packet of 20 in the Budget will only spur on the criminals involved in smuggling tobacco, and smokers legitimately importing duty free products for personal us. It is estimated that 70% of RYO (roll your own) tobacco and 24% of cigarettes smoked in the UK are not duty paid, with 18% of cigarettes being smuggled. Counterfeit cigarettes are also a problem with wholesalers advised to ensure they are buying cigarettes from a reliable source.
In such a tough marketplace, tobacco manufacturers say the wholesale channel is vitally important to them. Tobacco is one of the few categories where the independent sector still holds a greater market share than the major multiples, and wholesalers not only sell through to the sector, but also provide tobacco companies with a communication channel through to their retailer customers.
Watkins says: “It is incredibly important to Imperial Tobacco that there is a thriving cash and carry and independent sector and that is why we put lots of resources into serving that area.”
The company has a national account team dedicated to the distributive sector and its sales force, one of the largest in the FMCG sector, calls on cash and carries. Imperial and Gallaher also are working with wholesalers to develop better stock management. A study by HIM of shoppers at cash and carries found that eight out of ten will visit with the intention of buying tobacco, but if a brand that is on their list is not available they will go elsewhere, so it is essential that cash and carries ensure they maintain availability to ensure they do not lose business.
The lion’s share of sales in the tobacco category is accounted for by cigarettes, with the Lambert Butler range heading the list with sales approaching pound;2bn. However, brand preferences are highly regional and wholesalers need to be aware of regional variations to ensure they stock the right brands. For instance, Watkins says: “Regal is a very strong seller in Wales, Northern Ireland and Scotland, but you won’t sell any on the south coast.”
A long-term trend in the cigarettes is down-trading, with smokers migrating to lower cost brands, and in many cases dropping out of the cigarette market altogether into RYO. Imperial separates the cigarette market into five price sectors, and these clearly demonstrate the movement. The top price band, Premium, with brands such as Embassy, Regal, Benson Hedges Gold, Marlboro, Silk Cut and Camel, accounts for 28% of the market, but this is down from 28.7% in 2005 and is forecast to decline to 25.5% by 2009.
One brand bucking that trend is Camel, which has achieved growth of 15%, and Gallaher is looking to looking to build on that trend with the nationwide launch of Camel Natural Flavour, following a successful three-month trial in the London region.
Blackburn comments: “Camel Natural Flavour is set to build on Camel’s continued success in the UK. Its higher Virginia tobacco content is well suited to the UK market and consumer research shows that the brand is set to be very well received by UK smokers. Camel is the smoking style statement for young adult smokers and has global appeal. It is the fifth most popular cigarette brand in the world.”
Next in the price hierarchy are mid priced cigarettes such as Superkings and Berkeley, which have an 8% share, down from 8.9% in 2005 and forecast to fall further to 7.5% by 2009.
The standard category comprises brands such as L B, JPS, Sovereign and B H Silver and is still growing slowly, from 21.4% in 2005, to 21.9% now and is forecast to climb to 22.5% by 2009.
The value sector, with brands such as Richmond, Mayfair and Royals, is the largest, at 33.9% and is also growing. It is forecast to reach 35% by 2009.
Economy is the lowest price band, covering brands such as Sterling, Windsor Blue and own label, and has the fastest rate of growth, albeit from a low base from 6.1% in 2005, to 8.2% now, and is forecast to increase to 9.5% by 2009.
Smokers seeking a lower cost alternative to cigarettes have made the RYO sector the one growth area in tobacco. The influx of new smokers, and some success by HM Customs Revenue in intercepting illegal imports, have helped the sector achieve double digit growth for two consecutive years, and it now totals pound;683m.
From being a niche for students and older smokers, RYO is becoming increasingly socially acceptable and accessible, says Watkins, particularly with women smokers. RYO smokers now top five million with the number of women growing from 1.7 million in 2005 to 1.9 million in 2006.
Imperial’s Golden Virginia dominates the sector with a 48% market share, but Gallaher is also making a strong showing with 32%. Last month Gallaher launched Samson Virginia Blend, a new blend designed to cater for a growing consumer preference for lighter coloured Virginia tobacco, which is exclusive to the independent trade. The launch coincides with a refreshed pack for the Samson brand. Blackburn comments: “Samson has a long heritage in the UK, and the new pack and launch of Virginia blend are set to bring the brand bang up to date. Retailers are urged to make the most of this new sales opportunity by prominently displaying all Samson variants on the gantry and keeping well stocked.”
Papers and accessories
With the increasing use of RYO tobacco, papers are another area that has grown significantly. Research by cigarette rolling paper manufacturer Gizeh, based on people requesting samples from its website, reflects the growing number of women rolling their own
Andrew Barker, managing director of the UK distribution business, says: “The most fascinating finding is the number of female users. We knew that more women were smoking roll-ups but now 43% of our requests for samples are from women. Our research shows that British women are becoming more like their continental counterparts. They also roll thinner than men, which is probably why they prefer the Gizeh Extra Slim paper.”
Imperial’s Rizla is the leading brand and Watkins says it offers opportunities for retailers and wholesalers, with margins of around 50%. Filters are also growing strongly with one in three new entrants to RYO using them.
Another brand with a high profile is Zig Zag. Managing director Andrew Armstrong says it has taken advantage of the fact that it can advertise to consumers, and established itself as a “cool” brand
He says: “The good thing about the UK market is that it is the biggest in the world. It is three times bigger than the US, and is 30% of the world market, and two thirds goes through wholesalers.
“Many retailers overlook the size of the market and don’t realise that there is more physical profit in a packet of papers than a packet of cigarettes.” He also points out that accessories such as rolling machines and filter tips are growing and provide high margins.
He adds: “Over the past 10 to 12 years we have doubled in size and all our growth has come through cash and carries and wholesalers.”
In January Zig Zag took over distribution of Job papers. Armstrong says: “It is an iconic brand with a great history. There is great loyalty to the two single booklets together.”
Another company using advertising to raise its profile is OCB, which currently has a campaign in Loaded and Uncut magazines, with further exposure in FHM later this year. General manager Justin Rudd says: “OCB has been manufacturing papers for over 80 years and has always been quick to embrace new technology in the production both of the paper and packaging. The Premium range is a good example: six versions of an ultra-light, near transparent paper, crisply water marked, presented in a smart jet black pack with holographic lettering.
“OCB is the brand leader in France, number two in Germany and Spain, and is pretty popular throughout the rest of Western Europe. Once we achieve full national distribution, we expect to climb to similar prominence in the UK. That’s why the wholesaler is so important to us and why we offer such attractive margins to both wholesaler and retailer.”
V Papers is the latest entrant to the papers market. The point of difference about its products is that, after several years of development, it has perfected self sticking rolling papers.
Lighters are another high margin area and sales last year topped pound;70m. With the new legislation (see above) all lighters supplied by manufacturers should be child resistant and wholesalers and retailers need to sell all non compliant stock before March next year.
Andrew Hardie, marketing manager of Swedish Match UK, comments: “Our Bryant May brand was the first safety match in the UK, and we were actually the first lighter manufacturer in the world to offer CR lighters to consumers when we began producing them in 1993. All of our leading brands including Cricket, Swan and Poppell, feature child safety devices. This will provide a clear benefit to the consumer and places a focus on lighters by adding value to the category.
Imperial Tobacco’s Clipper lighter is the best selling lighter in the UK and in independent convenience Imperial sells almost three times more than its nearest competitor.
There are around 600,000 cigar smokers in the UK, spending more than pound;450m a year. The market is segmented into three sectors with small cigars accounting for more than 50% of sales and miniatures making up more than 40%, leaving large cigars with a very small portion of the market.
In the small sector, Gallaher’s Hamlet is the number one cigar and took a 50.4% share of the cigar market in the independent and distributive channels during the last Christmas period.
In the miniature sector, Henri Wintermans Cigars is implementing a re-design across its Caf eacute; Cr egrave;me range. From the end of April, the new tins will feature a new logo and re-design.
The Caf eacute; Cr egrave;me range is the market leading brand in the miniature cigar sector, with 57.8% of total sales, and Caf eacute; Cr egrave;me Blue has just become the number one in the miniature sector, with over 31% of total sales.
James Higgs, head of marketing at Henri Wintermans UK, comments: “Miniature cigars continue to drive growth in the total UK cigar market, and much of that is due to the continued success of the Caf eacute; Cr egrave;me range. We’re confident that this new logo and exciting pack re-design should increase awareness and interest among smokers still further. We feel the stylish new tins reflect the brand’s worldwide status and heritage, and help make the Caf eacute; Cr egrave;me range absolutely integral to every retailer’s tobacco category.”
=== Top Ten Cigarette Brands in independent c-stores 2006 ===
Lambert Butler K.S. 13.3
Mayfair K.S. 7.4
Richmond Superkings 6.5
B H. Gold 6.0
Richmond K.S. 5.1
Marlboro Gold K.S. 4.0
Mayfair K.S. Smooth 3.2
Royals K.S. Red 3.2
Silk Cut Purple 3.1
Regal K.S. 3.0
== Top 5 RYO Brands in independent c-stores 2006 ==
Golden Virginia 46.4
Amber Leaf 19.8
Old Holborn 6.9
Cutters Choice 6.9
== Top 5 Cigar Brands in independent c-stores 2006 ==
Hamlet Miniatures 15.0
Cafe Creme Blue 14.5
Cafe Creme 13.0
Castella Classic 11.8