Despite Government attempts to discourage smoking a sizeable minority of the population are strongly resisting its advice, to the benefit of the wholesale channel.
According to IGD’s Grocery Wholesaling 2005 report published last month, tobacco accounts for 49% of sales through the wholesale channel, although the delivered sector is far more reliant on it than cash and carry with tobacco making up 65% of sales compared with 37% in cash and carries.
And refreshingly for the independent sector, it is a product category where it has a clear lead over the major multiples when it comes to sales, with wholesalers’ independent customers selling more than one and a half times the figure achieved by the major multiples. And if this did not already mean wholesalers are vital to the tobacco companies then the recent restrictions on advertising tobacco products at the point of sale has emphasised the point.
At IGD’s Wholesaling 2004 Conference last November, Gallaher trading director Mark Rock explained that the new era of tobacco legislation had created a “dark market” for tobacco manufacturers. The restrictions on tobacco advertising and sampling mean that communication of new products will be critically reliant on the tobacco company’s close links with the wholesalers and the independent trade. Rock told the conference: “As a tobacco company, the retail outlet is now our only chance to influence consumer choice.”
In its latest report IGD says: “For Gallaher, the wholesale sector is no longer simply a route to market, but it is now a critical route to the consumer. This is particularly so because of the fact that the independent and distributive sector sells 1.6 times as much volume as the key multiple grocers, and is therefore crucial in terms of the purchase and trial of new products.” Gallaher also carried out a significant restructure in preparation for the legislation by increasing the size of its salesforce, as well as creating distributive merchandising representatives, responsible for store compliance and identifying potential stock problems.
In order to work more closely with the wholesale trade, Gallaher has also been heavily involved in initiatives such as Landmark’s Hot House project, and has sent members of staff to work at Booker and Bestway on a secondment basis.
Imperial Tobacco has been looking at new opportunities and has set up a new sales team with 80-plus members for the HoReCa (hotels, restaurants and café bars) channel. Paul Matthews, HoReCa channel manager says: “As the market changes, Imperial Tobacco must extend its vision to include any outlet or environment where adult smokers spend leisure time. I have called it FASTER â following adult smokers through every recreation.”
While the greater restrictions on advertising are new, and the ban on smoking in public places has yet to make it into law, there is another long-standing Government policy that has helped destabilise the tobacco market for years. The huge disparity between duty rates in the UK and on the Continent has resulted in thriving legal importation of tobacco for personal use, and has fuelled smuggling by criminal gangs.
In 2003/4 Customs Excise estimated that 24% of all cigarettes smoked in the UK were non-UK duty paid, meaning legitimate UK wholesalers and retailers were losing out on millions of pounds of sales every day. Legitimate cross-border shopping accounts for 9% of UK consumption with smuggling making up the remaining 15%, according to Customs Excise.
Another growing problem the tobacco companies and the authorities are tackling is counterfeiting, where sub-standard cigarettes are passed off as leading brands. Operations by Imperial Tobacco alone resulted in the seizure of 473 million counterfeit cigarettes in the year to September 2004.
Not surprisingly, the high cost of UK cigarettes has resulted in a trend for smokers buying economy brands and roll your own (RYO) tobacco. Iain Watkins, Imperial Tobacco trade communications manager, says: “Adult smokers in the UK continue to demonstrate a propensity for switching to lower-priced cigarettes such as Lambert Butler and Richmond. Nearly 30% of UK purchases were down to these two brands.” For Gallaher, its economy offering, Mayfair, was the fastest growing cigarette brand in the UK.
RYO tobacco has been the sector of the market hardest hit by smuggling, but sales in 2004 still topped the Â£500m mark with most of the leading brands growing their shares. One of the trends helping to boost sales is the changing demographic of the RYO smoker. The older male social stereotype is no longer valid with around half of RYO smokers aged 18-35 and growing numbers of women rolling their own. The number of “dualists” â people who smoke both cigarettes and RYO â has also risen steeply in the past five years, from just over three million in 2000 to almost five million in 2004.
Although the two biggest players in the market, Imperial Tobacco and Gallaher, have been active in the cigar sector (see box) and have tinkered with the packaging of their RYO brands, Philip Morris is the only company currently launching a mainstream cigarette product nationally into the “dark market”. This month sees the launch of Marlboro Blend 28, the first new line extension to its Marlboro range for five years.
Javier Muller, Philip Morris general manager in the UK, explains: “Marlboro Blend 28 will appeal to smokers who like Marlboro’s imagery but prefer the taste of Virginia style cigarettes.” The new line will be available nationally and will come in two pack sizes, king size 20s and 10s, at the same recommended retail prices as the other Marlboro king size variants.
Muller says: “Marlboro is the best performing brand in the UK’s premium segment and we are confident that Marlboro 28 will help to continue to grow the range.” The launch will be supported by the limited gantry advertising permitted, but Muller does not seem daunted by the “dark market” pointing out that it is the same for everyone.
“In an environment where we are competing on a level playing field we believe that the taste appeal and quality of our cigarettes will ensure that we will continue to enjoy good growth prospects in the UK.”
Firms focus on cigars
While developments in the mainstream cigarette and RYO market have been muted since the new advertising restrictions came into force, both the biggest players in the UK market have announced major activity in the miniature cigar market.
Gallaher, which claims to be the UK’s leading cigar manufacturer with a 47.2% share of the total market, is about to make major changes to its biggest selling cigar, Hamlet.
It is launching Hamlet Smooth this month, packaging is being redesigned across the range and later in the summer it will be phasing out Hamlet Aromatic and replacing it with Hamlet Fine Aroma.
Hamlet brand manager Tom Osborne says research had shown increased consumer demand for a smoother cigar and the new launch is designed to satisfy these customers. Jeremy Blackburn, Gallaher’s trade communications manager, adds: “Hamlet Smooth, with its stylish new pack design and smooth taste, will become a firm favourite.”
Osborne says the renaming of Hamlet Aromatic will help to strengthen consumers’ understanding of the product, and that the brand is already known as Hamlet Fine Aroma in Europe.
This month also sees the launch of new Castella Miniatures by Imperial Tobacco and its Small Classic Filter will change its packaging, coming in a tin with a modern new design.
Iain Watkins, trade communications manager, comments: “The miniature cigar sector has grown considerably in recent years to account for more than 42% of total cigar sales in the UK.
“By 2007, we estimate that this figure will be as high as 46% and we’re confident these new developments will further support this growth.”
Cigarette paper sales are on a roll
The growth in roll your own smoking in recent years has had a knock-on effect on sales of rolling papers.
Iain Watkins, trade communications manager of Imperial Tobacco, manufacturer of Rizla, says: “The papers segment of the tobacco category generates around Â£102m of consumer expenditure per year and offers significant profit margins to the retail trade of around 50% per booklet.”
New premium products Rizla King Size Slim Silver and Rizla Regular Silver have been launched and Watkins adds: “There have been major launches in this market in the last couple of years in response to customer demand for more premium quality products and a new price sector has evolved.”
Rival manufacturer Zig Zag is to extend its filter tip range by launching Ultra Slim Filters, the current filter tip offering includes Regular, Slim and Menthol.
Commercial director Andrew Armstrong says: “The trade told us that they wanted this product and we have responded by investing heavily in production facilities so that we can provide what the consumer is ultimately asking for.”
The new product comes in grip seal bags containing 150 Ultra Slim filter tips. Fifteen bags with an RSP of 63p, giving retailer margins of 60%, come in shelf-ready display outers.
With rolling papers not covered by the advertising restrictions on other tobacco product, Zig Zag is spending Â£500,000 promoting its brand this year.
Alan Robertson, senior trading manager, CJ Lang
The market is certainly in growth as far as we are concerned. Growth is coming from the budget end of the market with brands like Mayfair, and with our own label No 3. The bigger health warning on packs did not have any effect on sales but we are expecting that the ban on smoking in pubs will affect our sales to them.
Following the ban on advertising the tobacco companies have been investing in our tobacco room. I presume funds that would have been spent in shops have been diverted to the wholesalers, and if they are investing in our infrastructure then that’s got to be good for us.
Roll your own tobacco and cigar sales have been flat but there is currently a lot of activity in cigars with new lines and new packaging.