Tobacco remains a key element of convenience business, because many retailers rely on it to drive footfall and retain customer loyalty.
Recent years have been a time of turmoil for the category as suppliers and retailers have had to cope with legal restrictions on how products can be displayed, branded and packaged. It has also been a time of rising retail prices because of consistent duty rises and, of course, this has helped fuel the rise of the illicit trade. Illegal tobacco accounts for 15% of the ready-made cigarette market and 28% of roll-your-own (RYO) business, according to HMRC estimates, and there are industry concerns these figures may worsen because plain packs are easier to duplicate.
Despite the challenges facing the category, it remains a massive business for convenience retailers, being worth £6.5bn in the year to April 2018, although that was a fall of 7.7% on the previous year. The category is benefiting from successful product innovation, which is most evident in the growth of capsule cigarette brands.
RYO has enjoyed several years of growth and generated impulse business of £1.4bn in the year to April – a rise of 3.8%. Product innovation is also helping generate sales momentum for RYO (see panel). Another bright spot is vaping, which is providing a new revenue stream for convenience operators, although the growth of specialist vaping outlets has started to undermine this business.
Growing price sensitivity is the biggest factor hanging over this category and its impact is evident across most product sectors. Andrew Miller, head of field sales at Imperial Tobacco UK, says: “Rising prices have effectively contributed to the downtrading trend of recent years as many smokers continue to seek maximum value. Many smokers now seek value through purchasing both their factory-made cigarettes and RYO tobacco from lower-priced sectors.”
That is why the company is urging convenience operators to keep a close eye on pricing following last year’s introduction of the European Union Tobacco Products Directive (EUTPD2).
“We acknowledge that some traders have raised prices post-EUTPD2 and standardised packaging to capitalise on the absence of price-marked packs (PMPs). We believe this jeopardises the existing relationships they enjoy with their tobacco shoppers and potentially leads to channel shifts away from independent stores.”
Following a period of upheaval for the category, there is growing debate among retailers about the traditional placing of the gantry in such a prime position and the relevance of planograms now that tobacco is hidden from view. Miller counters: “We still believe in the importance of the traditional behind-the-counter tobacco gantry: it both clearly signposts that tobacco products are for sale, plus offers secure storage. We also recognise the category landscape is shifting through, for instance, the growing popularity of e-vapour products. We are therefore working on a case-by-case basis with our retailers through our salesforce to achieve the optimum merchandising conditions.”
Leaner ranges
The company is also encouraging retailers to persevere with planograms it has supplied. “The planogram is designed to maximise tobacco sales. Depending on the gantry arrangements retailers have with tobacco manufacturers, some traders may have chosen to reduce their range of SKUs. We have rationalised our factory-made cigarette and RYO portfolios because we recognise leaner, more-agile ranges are less confusing to smokers and retailers.”
Stephane Berset, head of marketing at tobacco manufacturer JTI, acknowledges the growth of the value segment, which now accounts for nearly 72% of cigarette volume, but also highlights another key trend for retailers: the growth of the capsule segment, which now accounts for 15% of sales.
The company has responded by extending its capsule range with the recent addition of Sterling Dual Superkings 20s and Sterling Dual Double Capsule King Size 20s. It also added B&H Blue Dual Superkings 20s to the B&H Blue portfolio – claimed to be the UK’s fastest-growing ready-made cigarette brand. “We are continuing to invest in product innovation and support for retailers to help them maximise tobacco profits,” says Berset. “Another important difference is that in today’s tobacco environment, we rely on retailers to communicate NPD to consumers more than ever, making it crucial that retailers are knowledgeable about the latest products. By investing in innovative products that meet consumer demand, and providing staff training, JTI has successfully launched new products.
Product knowledge
“At a time when smokers are seeking value products, price is a key area where independents can maximise sales. To remain competitive, we advise retailers to sell at the manufacturer’s RRP or below. Research shows 27% of smokers choose to buy elsewhere if their brand is unavailable, so maintaining range and availability is of vital importance. It is important for independent retailers to ensure that they and their staff are knowledgeable about their tobacco range and can talk confidently about the products they sell.
“We recommend retailers don’t make any snap decisions about changing the position of their gantry, diminishing brand range and stock holding. Those retailers who continue to invest in the category will reap the rewards. With staff accustomed to where stock is currently merchandised, we recommend retailers also maintain their current planograms to avoid confusion.” The company’s online tool (www.jtiadvance.co.uk) is regularly updated and its sales force constantly ‘upskilled’ to ensure retailers receive the best guidance.
Jens Christiansen, head of marketing and public affairs at Scandinavian Tobacco Group UK (STG UK), which owns seven of the top 16 cigar brands, says: “Cigars still benefit from being exempt from the restrictions around minimum pack sizes and standardised packaging, so they can still be branded beyond the product name and can be wrapped and sold individually or in 10-packs. This means some cigars are now the cheapest option available on-shelf, which may attract existing smokers from other categories. Stocking a strong selection of cigars will allow retailers to directly respond to these shopper insights, with well-known brands offering the reassurance of quality, as well as smaller pack sizes and even individually wrapped cigars offering low out-of-pocket spend.
“The average profitability for cigars is double that of cigarettes – so switching one cigarette smoker to cigars will provide an additional £250 of profit each year. It’s really worth investing the time and effort to understand the category and different products on offer. In doing so, retailers will be able to recommend a suitable alternative, and even a different segment within tobacco, enabling them to avoid missing out on sales and giving them the opportunity to capitalise on the high profit margins that cigars offer.
“Demand for value is nothing new, having been a major consumer trend for many years, but our research shows it can mean different things to different people. It’s important for retailers to tailor their cigar range to their store and customer demographic. By engaging with shoppers and discussing what they’re looking for, retailers can adapt their range accordingly to ensure it meets customer needs and they aren’t at risk of losing out on sales to competitors.”
By Martin Geary
