With the recent court ruling that will see the display ban in Scotland enforced within months in larger stores, 2013 is shaping up to be a dramatic year for the category, but behind the problems remains a vibrant market shaped by trends in value for money.
by Kevin Scott
The new year hadn’t even begun when the first major change to the tobacco market occurred. Retailers are used to the constant legislative changes in the category and the defeat of Imperial Tobacco’s legal challenge to the tobacco display means that from April, stores over 3,000 sq ft will have to cover up they’re tobacco displays.
The news means that Scottish retailers will now have the opportunity to boost sales as customers become tired of increased transactions times in supermarkets. The window will not last for long however as the Scottish Government has confirmed that small stores will still have to cover up their displays from April 2013 – this costly and prohibitive move is something retailers will have to start planning for now. In the meantime, there is some anecdotal evidence that would suggest stores situated near supermarkets will see their tobacco sales. It’s not often c-stores next to supermarkets are seen to have an advantage but it’s there and with the right range, convenience stores can benefit.
Colin Wragg, Imperial Tobacco’s Head of UK Corporate & Legal Affairs, comments; “We were disappointed with the judgment as we believe our legal argument was strong. We will now await the publication of the Scottish display ban regulations and consider our options.” He adds that Imperial Tobacco remains fully committed to supporting independent retailers through every stage of the display ban implementation. “Our focus will be on helping them understand how the legislation will affect their businesses and providing guidance and support through our dedicated sales force. Our message is; you are not alone! We are here to help.”
Despite Northern Ireland and Wales having joined England in going dark, it’s too early for any real evidence to emerge, says JTI’s Head of Communications, Jeremy Blackburn. He says: “Anecdotal evidence suggests there has been some movement at local level where a large and small store have been positioned close to each other. “
Alan Graham, Head of Marketing at STG UK, agrees that it’s too early for statistical evidence, but anecdotally it’s all there. He mentions one nationwide chain of convenience stores that had two stores in the same small town in England – one over 3,000 sq ft and one under. When the market went dark, sales of tobacco went up 25% in the smaller shop. “So, when Scotland does go dark in 2013, there will be a limited window of opportunity. That means it’s more important than ever for retailers to ensure they are consistently ensuring they’re ranging and merchandising is spot on,” he says.
When the Scottish market does go dark, retailers who have prepared properly will have the best opportunity.
Philip Morris International recommends that retailers should ensure they are well stocked up with a range of quality brands. In addition, staff should be well trained in each product’s characteristics so that when requested by the adult smoker, they can converse with adult smokers to advise on the shop’s offering, and find a product suited to the individual when necessary.
Andreas Nicolaou, Head of Trade at BAT UK points out that although the display ban is now being introduced it was the campaigning of retailers that helped the Scottish Government rethink its ridiculous plans to allow an area of display during a transaction to be about the size of a packet and a half of cigarettes. Nicolaou says: “The voice of retailers and wholesalers of all sizes must be heard. Retailers have successfully defended their businesses in the past. Important changes to the display ban regulations were made as a result of successful campaigns run by retailers themselves. Retailers should never fall into the trap of thinking legislation is inevitable – together they can make a difference and continue to defend their businesses against speculative legislation.”
BAT UK will be providing as much support as possible to help retailers manage the change in legislation with minimal disruption and ensure they don’t suffer as a result. Produced earlier this year, ‘Your guide to the Retail Display Ban’ has already been distributed to thousands of retailers across the country. “Our aim is to arm retailers with practical support that will enable them to maintain customer loyalty. The key to this is simply getting the basics right, whether within a display ban environment or not,” says Nicolaou.
Imperial Tobacco’s latest research demonstrates shoppers, tobacco regard availability as the most important factor when choosing where to make their purchase. Horne says: “Location, price, offers, staff attitude and layout were also important factors. Demonstrating best practise in terms of availability means stock on the shelves, not hidden away in the store room. Having an effective stock replenishment system and planning when to re-stock the shelves is also key to maintaining excellent availability. If you go out of stock during peak periods and then have to re-stock the shelves, not only will the task be difficult for staff but you will risk alienating your customers.”
The illicit issue
Blackburn’s main concern continues to be from the illicit trade and JTI recently published a report called ‘The Billion Pound Drop’ which showed the extent of the illicit market. The company has used the findings to gain exposure in regional press like The Glaswegian newspaper, which helps push concerns over the illicit market to a wider audience, all of which can help stall it.
One of the key findings may have been that £2.9bn was lost in tax revenue last year to the illegal trade of tobacco, but it is the health dangers that need to be spelled out to consumers, to make them realise this is a problem that affects them and the only solution if they plan on continuing to smoke is to buy legitimate tobacco products from legitimate retailers. Blackburn says: “It’s all about highlight the message to consumers, while at the same time protecting our trade customers, and our own business. Everyone has to come together to try and stop this from happening – from a community perspective we need to stop it.”
This spring will undoubtedly see an increase in the duty on tobacco, which Blackburn points out will gives criminals more opportunity for. “It’s very concerning,” he says. “The illicit market is starting to grow again. The retailer frustration is that if they report something they want to see actions right away. What they don’t see is what’s happening in the background where bigger pictures are being put together. Every call and every piece of information is logged, it helps to create a picture. All information is anonymous. Retailers should call up if they have information.”
Alan Graham says: “The illicit trade doesn’t affect us massively because the bulk of our business is in cigars, which tend not to be replicated in that way. With RYO it’s the top two or three brands that have the biggest problem. I believe it is getting worse though – people are literally hawking cigars around markets quite openly. It’s clearly a price thing – the more duty goes up the easier it is for illicit traders. And if plain packs come in it will make it even easier.”
Andreas Nicolaou from BAT UK adds: “Illicit trade is a major problem for everyone involved in the legal tobacco industry. It is driven by very high levels of taxation – around 90% of the retail price in some cases. Ultimately, this negatively impacts retailers, wholesalers and legitimate manufacturers as adult smokers increasingly seek out cheaper tobacco products from illegal sellers. We also know from research that children are twice as likely to buy illicit tobacco than adults.”
Sales still come first
While it’s easy to get bogged down in the issues that affect the tobacco category, retailers should always remember that first and foremost they sell legal products in a legal way and therefore category management remains as important for tobacco as for any other area of the store. JTI has recently developed a tobacco management system that can be remembered with the handy ART acronym – availability, range and training.
Jeremy Blackburn says: “We continue to invest in our reps, in their training and development so they can pass their learnings onto retail customers and we continue to invest in our brands; brands that have a meaning to the trade.”
Over the past year Blackburn points out the work that has been by JTI, including the launch of Sterling RYO, B&H Dual, Camel Curve, the brand refresh of Sterling, the launch of Amber Leaf Blonde and Sterling Fresh Taste. It’s fair to say JTI had a busy 2012 – and that’s something that will continue throughout 2013.
“It’s important to have an innovative and vibrant marketplace,” he says. “In 2013 there are two sectors that retailers cannot afford to ignore – RYO and the Value segment of the cigarette market. Don’t lose sight of other areas of the market though. For example, premium brands still take 19% of cigarette sales. There are a lot of people who opt for those brands so it is still up there.”
Much of the movement in sales has come as a result of Price Marked Packs. PMPs account for 34.7% of all tobacco sales in Scotland to date this year, up from 32% in the same period last. Andreas Nicolaou of BAT UK says: “Taking into account the current state of the economy, and seeing no real signs of improvement, we believe this trend toward PMPs will continue. With financial constraints resulting from the recession, it is only natural that adult smokers continue to look for the best value on their regular ‘convenience’ purchases, including tobacco products. We advise retailers to stock PMPs wherever possible to give adult smokers confidence that they are getting a fair deal, which in turn will encourage repeat visits.”
Philip Morris says that communicating value for money is very important so price marked packs of cigarettes are invaluable to the independent retail trade in order to retain adult smokers and to help increase the frequency of their purchase.
“Research shows that price marked packs re-assure adult smokers of value for money, and the majority would always buy price marked packs over non-price marked packs if they were available,” says the firm.
Whilst the value market is growing and is a key price segment for Philip Morris its Marlboro, products is among the biggest selling premium brands in the UK and is in fact the sixth biggest UK grocery brand. The company says: “Affordability remains important, which is why we launched Marlboro Gold Touch, and why we plan to offer retailers the option of stocking Marlboro Gold original in price marked packs.”
Elsewhere for the company and recently, Chesterfield trade communication activities have included in-store training to engage with retailers using an iPad application, direct mailings, trade press advertising, trade money off coupons and informative point of sale in Cash & Carry outlets. The range is handled by the Imperial Tobacco UK field sales force and they also provide price callouts and guidance on how best to merchandise the Chesterfield brand family in store.
There’s not a retailer out there who won’t have noticed the extent of NPD over the last year and Imperial’s Stephen Horne comments: “We have been at the forefront of this innovation responding to changes in adult smokers’ preferences by developing innovative new SKUs such as capsule cigarettes, handy packs of roll your own tobacco and additive-free tobaccos.”
He highlights the launch of value for money Golden Virginia Smooth 8g Handy Packs, Drum Additive-Free tobacco, Lambert & Butler Fresh Burst, adding: “We will continue to innovate and to provide our trade partners with tobacco products which are relevant, profitable and earn their space on tobacco units across the UK.”
Around 1.1 million adults choose to smoke in Scotland spending around £1.5bn on tobacco products in 2012. With one in four adult cigarette smokers now choosing brands from the economy priced sector, sales within this price sector continue to increase.
Horne says: “Many adult smokers will also continue to move into the RYO tobacco segment where brands such as Golden Virginia Original, Golden Virginia Smooth, JPS RYO and Gold Leaf are perfectly positioned to offer the economy and control which adult smokers prefer in these tough economic times.”
RYO sales rocket
Retail sales of RYO tobacco have generated over £125m for Scottish retailers with the volume of RYO sales in outlets increasing by over 15%. “RYO tobacco offers a significant opportunity to independent retailers; growing numbers of adult smokers currently ‘dual’ between the cigarette and RYO segments of the tobacco category,” says Imperial’s Horne. “That means they may smoke RYO tobacco during the week but ‘trade up’ to their preferred cigarette brand at the weekend. This group represents a significant consumer set and their preferences need to be addressed by the retail trade to protect their turnover.”
The RYO market is a revelation of late. In fact, almost one in four tobacco sales made these days are for RYO so retailers really should be giving over around a quarter of their gantry to RYO products.
“RYO as a concept is being stretched hugely now,” says JTI’s Blackburn. “There are subsectors emerged and it’s a main part of the tobacco category. It’s a huge opportunity for retailers if they have the right range.”
The RYO growth has also benefited Scandinavian Tobacco Group UK, which has the Salsa and Natural American Spirit. Alan Graham comments that RYO’s current rate of growth is astonishing. “Our quickest growing cigar is Moments and we’re heavily pushing our Salsa RYO brand, so that’s a clear sign that Value for Money is the overarching trend in the tobacco market. If you look at all the major RYO launches this year – with the exception of Amber Leaf Blonde and Drum Additive Free – then they’re all in the VFM market.” He adds that having split into segments over the last year, most of the growth is coming from Value for Money brands, like Salsa. “A lot of it is to do with lifestyle, but you also need to examine things like foreign exchange,” he says. “When the pound was weak against the Euro there was a lot of people, legally, bringing products back from the continent. The stronger the pound, the less that happens and the more products are bought here.” There’s no doubt RYO is on the increase though, whatever the reasons, and for independents, it’s worth knowing that RYO has a bigger share of the overall market in Indies than in mults. Graham adds: “We ascertain that the market will grow a further 10% and we’re targeting fairly aspirational growth rates for our RYO brands in 2013.”
When it comes to pack sizes there’s a further opportunity for retailers. In convenience 12.5g packs are dominant, with a share of 44% – and that’s in growth, but it’s slowing down. 25g packs are falling but tellingly 50g is on the increase, and it’s already got a 27% share. Graham says: “For c-stores, it’s a big investment to fill shelves with a product that costs upwards of £15 at rrp, but it’s certainly worth experimenting with. My view is that retailers of all sizes should be looking at different pack sizes” he adds. If regulars buy them, it will become a destination purchase, and that’s not a bad basket sell.”
RYO may be a growth area for STG UK, but the company’s expertise remains in the cigar market. Graham comments: “We’re still very happy with Café Crème. On an MAT basis our figures are great and sales are up. There aren’t many cigar brands that are in growth, but Café Crème is doing well and Moments is flying.”
He confirms that STG is committed to a “reasonable” amount of NPD in 2013, saying: “We’ll be looking to expand our share of the RYO market, and there are other plans being finalised. Our schedule of activity is busy and I suspect everyone else in the category is the same. Our learning are that we need to firmly establish our definitive market position before 2015.”
Speaking of which, Graham adds that in the run-up to the dark market in all stores there will be much jostling for position between manufacturers. “I think tobacco firms will be very busy between now and then. Whether that’s on shelf position, number of facings or NPD. In truth it could be a bit of a bun fight. The next couple of years is all going to be about convenience.”
That may well be good news for retailers for the moment but when the window that will open in April, shuts just two years later, both the tobacco and convenience retail industries are going to be faced with a monumental problem. Until then, make your sales count by ensuring your serving your customers as best as possible. By ensuring their loyalty, you can minimise the damage that will be caused to your business following April 2015.
Plain Packaging
Earlier this year the Government held a consultation on standardised (“plain”) packaging for tobacco products. Parties for and against submitted evidence and due to the sheer volume of submissions to the consultation the Government has not been able to respond within its usual three-month timeframe – although a statement could be made at any time.
Pro-right to smoke and anti-smoking campaigners have argued that their campaigns have been the most successful, but responses have come from all walks of life including the tobacco industry, retailers, trade organisations and members of the public.
What’s more, the fight did not stop when the consultation closed on 10th August when the consultation closed. There are several things that retailers might like to do to ensure the voice of UK business is not lost as MPs consider the evidence. These could include:
Writing or talking to your local MP about your concerns
- Inviting your MP to your shop and explaining what effect this measure could have on your livelihood
- Keep the topic alive within any retailer representative organisations you may be involved in.
As BAT UK says: “By standing up to the challenge now, retailers can again defend their businesses. Most importantly, they will demonstrate the power of the democratic process and avoid falling into the trap of assuming that legislation is inevitable.”
Top Tobacco Tips from BAT UK
- Best practice inventory management Keeping shelves regularly replenished and well-stocked with a comprehensive product range is critical for retail success. This is the biggest potential area of risk in terms of the potential to lose adult customers.
- Merchandising First and foremost, retailers must ensure that their adult smoking customers are aware that they sell tobacco products. Keeping a clean and tidy gantry will help adult smokers locate their brands quickly. Pricing information must also be kept up to date and correct to build customer trust.
- Customer Service Adult smoking customers will need support when tobacco displays are covered. Staff must be up to date on product knowledge so they can answer any questions confidently and be able to find requested brands quickly. Try training staff so they can locate the top 20 brands in 20 seconds: techniques such as these will stand you in good stead now and well into the future.
That’s a wrap
Suppliers of Fosters tobacco products and Karma rolling papers, Fosters Distributors say that their latest launch is the ‘next big thing’ in smoking accessories.
This month heralds the launch of Lone Star Wraps; these are flavoured tobacco leaf wraps, which are used instead of rolling papers and with tobacco to make the perfect flavoured ‘roll your own’. Andrew Armstrong, Director at Fosters, explains: “Wraps are already a developing part of youth culture in this country with sales taking place through alternative retailers and online. Many ‘in-the-know’ independent convenience retailers and newsagents are already cashing in on this growing trend by sourcing wraps from independent wholesalers. We are taking wraps into mainstream retailing through traditional channels, by supplying high-quality products from a reputable source in the Dominican Republic.”
Launching in six fruity flavours including blueberry, grape, strawberry kiwi, mango and watermelon as-well-as the most popular Straight-Up unflavoured wraps. Two wraps are sold in grip seal packaging for extended freshness. 25 packs of two wraps come in high-visibility display outer, which in turn are packed in cases of 24. An rrp of £1 per two-pack gives retailers margins as high as 50% as well as giving wholesalers enhanced margins.
Armstrong adds: “They say that whatever happens over there will eventually come over here. In the US wraps have been a great success with the market doubling over the last four years and to such an extent that wraps now outsell rolling papers there.”
The wholesaler’s view
While knowing what retailers and manufacturers have to say on the tobacco sector, it’s well worth seeing what the group that joins them thinks, and according to Landmark Wholesale, the opportunity that exists between April 2013 and 2015 is worth making the most of. The group says: “It sounds obvious but it’s so important for retailers to monitor and respond to sales at a local level and ensure the basic principles of category management are continuously put into practice.
“In 2013 we expect to see a continuation of the stunning performance for brands such as Amber Leaf, Pall Mall and JPS in the Roll Your Own category. In the cigarette market the mid-price and the value sectors continue to grow and brands such as No 3, Mayfair, Pall mall, JPS and Sterling will continue to thrive as a result of this.”
