Government pressure to discourage smoking is increasing all the time with the ban on smoking in public places coming into force in Scotland last month, and plans for similar legislation in England, Wales and Northern Ireland over the next 18 months. This follows on from the ban on tobacco advertising and increasing levels of tax and duty on tobacco which have resulted in UK smokers paying the second highest prices in Europe.
But despite all the pressure the number of people smoking has hardly changed over recent years, slipping marginally from 31.2% of the population (14.8 million adults) in 2001 to 29.5% of the population (14.3 million adults) in 2005. Experience in the Irish Republic, where a ban on smoking in public places is already in force, suggests this pattern will continue.
Iain Watkins, UK trade communications manager for Imperial Tobacco, says: “In Ireland the licensed trade has suffered in terms of tobacco sales, but other channels such as forecourts, off licences and c-stores have actually seen increases not just in tobacco, but in alcohol too. There is clear evidence that people are socialising more at home.”
Gallaher distributed information for the Scottish trade ahead of the ban there, and trade communications manager Jeremy Blackburn says: “Learnings from Ireland show a lot of licensees de-stock under the misapprehension they are no longer allowed to sell, or that tobacco will no longer sell, but there is still an opportunity to sell and to provide a smoking area.”
While the high tax and duty prices that were first implemented in the 1990s did little to deter smokers, it did wonders for another ‘industry’. Smuggling of tobacco and legal imports rocketed, hitting the sales of legitimate retailers and wholesalers in the UK. Although the Government has been putting increasing resources into combating smuggling since 2000, it has only managed to reduce the illicit market share from 21% to 16% over five years, and the hand rolling tobacco (HRT) market is suffering particularly badly.
In its latest strategy document issued after last month’s budget it admitted: “Less than a third of HRT smoked in the UK bears UK tobacco duty, and over half of HRT consumed in the UK is smuggled. A significant proportion of the HRT smoked in the UK is also legitimately shopped from other EU countries, and there is some evidence that the level of non-UK duty paid HRT has now plateaued at around 70% of the market.” While it has made progress in reducing cigarette smuggling, with help from the tobacco manufacturers, it also admits that counterfeit cigarettes are a growing problem.
As a result the Government says it is stepping up its anti smuggling strategy particularly with regard to HRT and counterfeit cigarettes with an extra 200 staff to focus on HRT, closer liaison with the tobacco manufacturers and overseas authorities, and publicity to increase awareness of its enforcement actions and to stigmatise smuggled products.
Despite the competition from smuggled products and other legitimate channels, the wholesale sector and its independent retailer customers are still thriving and are crucial to the tobacco manufacturers’ business. Tony Mears, distributive trade sector manager at Imperial Tobacco, points out that the independent convenience sector, with a 39.1% share of the cigarette market, and forecourts with 12%, account for more than half of the UK’s cigarette sales.
As the route to this market wholesalers are vitally important, says Mears. “They are also an important way of promoting our brands to the independent retailers,” he adds. Although advertising to the public is banned, tobacco manufacturers are allowed to promote their brands to retailers within cash and carries and through delivered wholesalers’ PLOFs. “The retailers benefit from that information and can pass that onto smokers,” adds Mears.
Using wholesalers to communicate with retailers is also important to Gallaher, says Jeremy Blackburn, and it uses 250 tobacco rooms within cash and carries to advertise its products.
Both the major manufacturers have large sales forces advising independent retailers and helping to pull through products. Mears says his company has a sales force of about 300 covering every postcode in the UK.
Within the cigarette market Imperial Tobacco’s Lambert Butler King Size is the leading cigarette with 12.7% of the market and the brand has annual sales of pound;1.7bn. In a move that Imperial Tobacco expects will make it the first pound;2bn cigarette brand in the UK, the company is launching two new additions. The Lambert Butler Superkings range and Lambert Butler King Size Smooth will provide an option for smokers of mid price cigarettes and of milder cigarettes seeking to downtrade in price.
Gallaher’s Benson Hedges Gold on 7.1% and Mayfair King Size with 7% are the second and third leading cigarettes. However trends in the market, with smokers increasingly looking for lower price brands, suggest Mayfair will shortly overtake its stablemate. Benson Hedges Gold is in the premium price category, which is in decline, while Mayfair King Size is in the ultra low cost category, which is showing the fastest growth. Blackburn comments: “Mayfair is climbing and has the potential to climb to number one within five years.”
However, Mayfair is facing increasing competition as Gallaher and Imperial Tobacco both launched new ultra low price brands into the independent sector in January. Imperial Tobacco launched Windsor Blue, and Iain Watkins emphasises the company’s track record in developing brands. He points out the success it has had in developing the Richmond brand since its launch seven years ago, and adds: “The early signs with Windsor Blue are very good. It has very good levels of distribution, heading towards 80%, and we anticipate that within a year it will have a market share of about 1.8%.”
Gallaher gave a national launch to Sterling, which had previously been available only in multiples. Blackburn comments: “Sterling achieved 2.4% market share just through sales in major multiples. Now smokers looking for that brand will bring more custom to the independent trade.”
Another market sector that has benefited from smokers seeking to lower their costs is rolling tobacco, which saw an 11.5% increase in volume last year. Tony Mears says: “RYO gives smokers more control and an economic way of smoking. The 12.5g pack is the most popular size in RYO with 53.2% of the market, but we forecast 25g will grow from 32% last year and by 2008 we expect it will hold 35% of the market.”
In a break from the usual formats, Golden Virginia, the market leader with 47.8% of the market, is launching a new 14g pack. It contains two separately wrapped 7g bricks of tobacco in a cigarette style box, which can also be used to hold rolling papers, filter tips and a lighter. The new pack will be launched in packs price marked pound;2.99, giving a cash margin of 29.8p per pack.
Blackburn agrees the growth in 25g presents an opportunity for retailers. He says one of the reasons for the growth in RYO is that it has developed a new image. “It’s no longer a cloth cap image,” he says. “Far more younger adults and women are rolling their own.” He also points out that there are a lot more brands in the sector than a few years ago and it is now a far more competitive market. In a bid to drive trial of its products Gallaher has launched a new 6g trial pack of its Old Holborn Yellow.
The cigar market is worth nearly pound;465m and is clearly segmented into three categories: miniature, small and large. Gallaher’s Hamlet is the number one brand in the market, topping the small sector with its standard offering and the miniatures sector with Hamlet Miniatures.
Classic, Imperial Tobacco’s top selling brand, is third overall in cigars, and Henri Winterman’s Café CrÃ¨me Blue and Café CrÃ¨me, which are distributed by Imperial, are in fourth and fifth place. Watkins comments: “There are over 300 cigar brands in the UK but the top 10 account for more than 90% of sales, so there are 290 brands that don’t really sell. With limited space for cigars retailers need to make sure they get the range right.”
Another opportunity that is often overlooked is pipe tobacco, says Mears. He points out that there are half a million pipe smokers in the UK, compared with 600,000 cigar smokers, and adds: “Pipe tobacco’s total retail sales value last year was pound;69.6m. That’s about the size of Kelloggs cornflakes or Smirnoff Ice. It’s still big business and the trade margin on pipe tobacco is around 15%.”
=== Buyer’s viewpoint ===
Currently trading volume is up by a marginal percentage. There is no doubt that consumers are continuing to trade down in terms of going for cheaper brands. The recent introduction of more cheaper brands from the big manufacturers is proof of that.
When it come to suppliers, some are better than others, and no we will not name names. What we need is a good understanding of the difficulties that are continuing to affect all the wholesale trade.
The proliferation of new brands is causing stocking difficulties both for the independents and ourselves – space is at a premium so some rationalisation must happen.
The smoking ban in public places will have a short-term affect on the market, but perhaps in the long term, as has happened in Ireland, sales will come back more.
=== cigarette papers ===
With profit margins of at least 50% and requiring minimal storage space, cigarette papers are a popular earner for wholesalers and retailers. Imperial Tobacco’s Rizla brand is the clear leader in a market that is worth more than pound;110m. Following the launch of Rizla King Size Slim Silver and Rizla Regular Silver, high quality thinner papers are becoming more popular. However, the best selling paper remains Rizla Regular Greens.
A high-profile competitor is Zig Zag which, taking advantage of the fact that the advertising ban on tobacco does not extend to papers, has kept up a heavyweight campaign in lads’ mags such as Loaded and Front.
Like Rizla its green variant is its top selling paper, but it also produces red, blue, silver and hologram black in standard and king size. A spokesman for the company says: “The two main drivers for the brand are sustained marketing and advertising campaigns and high wholesaler and retailer margins. All Zig Zag products offer wholesalers and retailers a return in excess of 60% and many independent retailers like Zig Zag because it is not sold through multiples.”
A newer entrant to the market is OCB Premium cigarette papers which has launched a new advertising campaign titled “lick it up”.
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.