Every year that passes seems to bring with it more tobacco legislation, and this year marks the introduction of the EU Tobacco Product Directive 2, which will lead to sweeping in-store restrictions, so for retailers 2016 is year of education, adapting and training.
by Kevin Scott
If 2015 was the year of the dark market, 2016 is set to be the year of TPD, though retailers should be aware that while the new Europe-wide regulations come into force in May, there is a year-long sell-through period, which will minimise disruption. The real change will occur in May 2017, when retailers will no longer be able to sell the likes of 10 pack of cigarettes and smaller RYO packs.
This year then, should be one of education, training and preparation. JTI’s Head of Communications, Jeremy Blackburn, believes the impending ban on 10 packs will have a “serious impact” on trading. But even before it comes into play, there is a more fundamental issue of education. “I don’t think enough retailers are up to speed with the changes coming,” says Blackburn. “Those who are aware are prepared. The regulations are on the horizon.”
Ahead of the changes, JTI will helping retailers do just that. Literature is available at www.jtiadvance.com, which Blackburn describes as the first step in a full programme of support. “Visit the site, talk to our reps, read the trade press,” he says. “Know what is coming, but remember that it is business as usual for now so there’s no need to panic.”
In terms of availability, Blackburn suggests keeping stock on shelf for as long as possible – until May 2017. With the price increases that will come in on certain brands following the banning of 18 and 19 packs, it’s a question of ensuring staff are aware of the changes and that these changes are relayed to customers. “Make staff aware, make shoppers aware,” is Blackburn’s advice.
Ahead of the restrictions coming into play in May, Imperial Tobacco launched its ‘Partnering for Success’ initiative, which has designed to offer retailers guidance around the revised European Union Tobacco Products Directive and Standardised Packaging legislation.
Partnering for Success is comprised of a programme of communications designed to both advise and support retailers through the potential legislative changes.
Melvin Ruigrok, General Manager of Imperial Tobacco UK and Ireland, comments: “I appreciate this a challenging period for retailers, but the tobacco industry and the trade have a long history of working together through changing legislation – most recently with the Dark Market.”
He adds that Partnering for Success reflects the company’s continuing commitment to working together with the trade to secure the ongoing success of the category in a highly regulated environment. “It will also ensure our sales force becomes the go-to source of expertise, authority and reassurance around the EUTPD II and Standardised Packaging legislation. Partnering for Success is all about helping our trade partners navigate any possible changes in the tobacco category. We’ve already started to drive this new platform forward with retailers through initiatives including engagement evenings, information packs and presentations.”
As Ruigrok says, down the years the tobacco industry and the trade have a long history of working together through changing tobacco legislation, ensuring the category remains both a key footfall driver and profit generator. “Partnering for Success continues this tradition, and we’re looking forward to revealing more details in the months ahead and continuing to drive the success of the category.”
Duncan Cunningham, Imperial Tobacco UK&I’s Head of Corporate and Legal Affairs, adds: “We believe that both EUTPD II and Standardised Packaging are unlawful, and continue to fight the latter legislation through the courts on behalf of our employees, our retailers and our investors. However, until the outcome of these challenges is known, as a responsible business we also recognise the need to help prepare our partners for compliance.”
As part of Partnering for Success, Imperial Tobacco has created START packs. START stands for: Support, Training, Availability, Range and Trust.
Imperial says the packs will keep retailers updated with all the latest legislative and tobacco category information – and help ensure their business is a success. START packs will soon be distributed to retailers by Imperial Tobacco representatives. Retailers can also download digital versions from www.imperial-trade.co.uk.
The key then is in awareness, as retailers found when preparing for the display ban. Blackburn says that retailers who prepared well have found that their tobacco sales have remained constant, though overall figures do show there has been a slight channel shift to those larger stores who did prepare early and who have good availability.
“Because of the [different regulations in] Scotland we had to go in and start fitting new gantries early. It was a quirk of necessity but it did give people – retailers and consumers – time to prepare, so the stock and availability issues were addressed ahead of time, which led to a smooth transition.”
As further restrictions are heaped onto retailers some are choosing to move tobacco away from its natural home behind the till. Solutions are now available that see tobacco housed above or below the tillpoint, with that traditional gantry space being used to promote other products. However JTI’s Blackburn urges anyone thinking of moving cigarettes to be wary of possible sales repercussions. “With all the changes going on you and retailers think about moving cigarettes under the counter, they have to be careful that customers don’t think they’ve stopped selling tobacco. My advice is to not make wholesale changes if you want cigarettes to remain a footfall driver. This is not the time for further disruption.”
Blackburn also says there is ample room for tobacco and ecigs to co-exist, in fact he argues that by having investment from tobacco companies, ecigs will go from strength to strength. “We’ve invested in Elites because we see a future in that sector,” he says. “The pace of change is hard to predict but there’s an opportunity for both to co-exist. Market forces will drive that.”
Blackburn also believes that now the tobacco industry has invested in ecigs, we will see more innovation. He also advises retailer to become as knowledgeable as possible. “Those who invest time in the category will benefit. The more advice they can provide, the more likely their customers will be to return.”
Do new products still matter?
With no visible way of communicating new products to consumers, it’s fair that retailers may question the purpose of NPD in the modern day, and whether they should find room for it on a crowded gantry. The argument from the tobacco firms is that NPD remains important as smokers do switch brands, particularly when downtrading to the value sector. While retailers may not be able to market products to their customers they can offer advice when asked, and these small holes are the very ones being plugged by tobacco NPD.
In fact, it is line extensions rather than new brands that dominate NPD in the category, and manufacturers tend to use new technology to refine current offerings.
For example, Imperial Tobacco added Crushball to Player’s portfolio last May. Retailers may ask themselves why, but the answer lies in the price: JPS Crushball is the best value capsule cigarette in the market (King Size 18s with an rrp of £6.40 (PMPs at £6.14) and King Size 10s with an rrp of £3.53 (PMPs available at £3.33). While all of these products will be outlawed in time, for now they fill an important role. If a shopper asks for the best value capsule cigarette – as research indicates more shoppers are doing, then the Imperial product gets the sale.
Andrew Miller, Head of Field Sales at Imperial Tobacco UK says Crushball has been extremely well received by retailers and customers alike. “Both our sub economy brands are continuing to perform admirably, with Carlton and Player’s contributing to a current sector share of almost 43%,” he says.
Indications show that the downtrading trend is set to continue for some time yet, says Miller, meaning manufacturers need to continue to offer compelling solutions.
Imperial’s latest big launch comes from the JPS stable, with JPS Triple Flow, which it describes as “a revolution in cigarette technology”. The firm describes Triple Flow as possessing ‘easy draw’ channels, with a new smooth blend and a mineral filter that aims to offer a fuller smoking experience. Each cigarette is also wrapped in a special paper, designed to actively reduce the amount of smoke emitted – which may result in less smell.
The Value segment remains key to maintaining sales levels, as the overwhelming trend is towards cheaper lines. JTI’s Jeremy Blackburn says: “The Value price sector which includes Value, Super Value and Ultra Value holds a 55.1% volume share of the total RMC market and JTI has a number of brands which cater towards this trend including Sovereign, Sterling and B&H Blue.”
Also using brand houses to expand choice for smokers, and reducing stick numbers to lower prices, Sovereign Blue, Sovereign Sky Blue, Green and Dual all available in 17s, at a super value price point, making the entire house a must stock for any retailer.
JTI’s Jeremy Blackburn points out that when it comes to NPD it is important to ensure retailers know what is out there to ensure they can offer customers great service. For example, if a B&H smoker is looking to trade down, a retailer can let them know about B&H Blue, which in Blackburn’s words “offers affordable quality from Benson and Hedges.”
One thing retailers must always remember is that despite most of the trend talk focussing on value, one in four packs are premium – and with premium lines offer improved cash margins, they remain important.
“The enhanced margins provided by illustrious brands like Davidoff, Embassy, Regal, Superkings and Lambert & Butler Silver means they continue to be ‘must-stocks’ for retailers in 2015 and beyond,” says Imperial’s Andrew Miller.
Filters and paper pushing up sales
While there may have been huge changes to the way tobacco is sold, the continuing popularity of rolling tobacco means the accessories market remains buoyant. From papers to filter tips, lighters to rolling machines, it pays for retailers to have a wide range, and like the rest of the tobacco category, availability is key.
Gavin Anderson, General Sales Manager for leading RYO accessories supplier Republic Technologies, says the combination of value, choice and quality of RYO accessories is proving attractive to consumers. “The display ban means retailers must think long and hard about how to promote and maintain tobacco sales,” he says.
Unlike in England and Wales, where accessories can be openly displayed – and indeed are prominently displayed by retailers – in Scotland, accessories must remain behind the shutters with the rest of the category.
Nevertheless it’s important for retailers to ensure they have what shoppers demand and that means brand’s like Imperial Tobacco’s Rizla and Republic Technologies’ Zig-Zag and Swan brands.
Republic Technologies’ recent NPD has concentrated on activity which taps into key consumer trends. The Zig Zag Unbleached paper range – the most transparent and unrefined rolling paper is a good example, providing RYO enthusiasts with a smoother taste and enhanced tobacco flavour with further innovation in both filters and papers to be announced in early 2016.
Sales keep rolling in
In the RYO category, trends over the past few years have seen a marked increase in the number of adult smokers who are shopping ‘little and often’, and who are also seeking a quality product with a lower out of pocket spend. For instance, currently more than 44% of RYO retail sales in the UK are 12.5g or below. While that trend is set to continue, it will come to an ignominious end when the EUTPD 2 comes into play – thankfully retailers will have a year from May to sell through any packs less than 40g, so the advice is to continue doing as you are doing, but be aware that you can’t do it for much longer.
Value RYO commands a 20.3% volume share of the category. Sterling Rolling is one of the leading value RYO brands with a 12.5% share in this segment. JTI’s Jeremy Blackburn says: “The continued growth of many of JTI’s brands such as Amber Leaf and Sterling can be attributed to the fact that in recent years many adult smokers have chosen to switch to products which offer greater value for money – a trend which has manifested itself in the considerable growth of Value RYO within the UK tobacco category.”
At Imperial Tobacco, new products GV Midnight and GV Sunrise have bolstered its offering in the value sector. GV Midnight and GV Sunrise are currently available in 10g format only. Both include papers and have an rrp of £3.75. There has, in fact, been much movement on the GV front, as the brand aims to win back market share lost to Amber Leaf. Standard Golden Virginia (the leading premier RYO) was redesigned, while a 25g GV Smooth (rrp £8.99) now comes with ‘Pocket Plus’, a built-in internal pouch which allows smokers to store accessories like papers, filters and a lighter in one convenient, on-the-move packaging solution.
Another recent launch in this sector came from Player’s Red Volume Tobacco, which Imperial’s Andrew Miller calls a versatile blend that will appeal to adult smokers who roll their own or use a cigarette maker. “While smaller packs tend to be more prevalent in independent stores it’s important for retailers not to discount stocking larger sizes either. With more than one in five packs of RYO tobacco sold being the 50g variant, larger offerings are becoming increasingly relevant as they offer adult smokers excellent value for money.”
With sales up 32% for the year to end-October, 2015 marked a successful year for Natural American Spirit’s rolling tobacco brands. The brand, which has recently been acquired (outside the US) by JTI stands out due its tobacco being additive free. The growth though, is down to a long-term strategy put in place by General Manager Alan Graham.
“To be +32% in a market that’s +1.7% is very good. We’ve had particularly strong numbers in Scotland,” says Graham. Previously, the company had a 0.6% share in value and volume; that has now grown to 1.1% and 1.2% respectively, doubling the marketing share.
For Scottish retailers not currently stocking the NAS range of RYO products, Graham says it’s time to consider it. “Look at our growth rate. We can show how we’ve made the product work in new stockists. And as it’s a premium product it’s got good cash margins.”
Distribution has focused on urban areas, but that is moving out now as demand for the product spreads, and as Graham points out, the number of stores stocking NAS has doubled – a tally he’s hoping to grow on in 2016. There are now two reps covering Scotland, which means more coverage and more support.
Natural American Spirit cigarettes are also in growth (+1%) in a decline cigarette market, as demand for niche products, such as additive free lines, grows. “We can now offer retailers half outers,” says Graham. “We recognise it is quite an expense to buy a full outer of a product not currently stocked, so the half outers allow are giving us more of a foothold.”
£6m a day lost to taxman due to illicit trade
Illicit tobacco remains one of the biggest threats facing legitimate retailers. According to the latest HMRC figures, 10% of cigarettes consumed in the UK are illicit and a huge 35% of RYO. Take a step back and consider those numbers – it’s a huge negative influence on the business of every law-abiding retailer in the country, and £6m being lost in tax revenue every single day.
In 2015 JTI joined forces with the UK’s only independent crime fighting charity, Crimestoppers, to work together to stamp out the illegal tobacco trade across the UK.
“What is disturbing is the fact that there are more retailers being sucked into selling illicit goods in their store. Anyone who is found to be doing this will have their gantry removed by JTI and be reported to HMRC,” warns JTI’s Jeremy Blackburn.
The best thing retailers can do if they are offered illicit tobacco products is to report it to either Crimestoppers or HMRC – or both. Phone lines are anonymous. “Retailers can engage, they can help stop this trade and they need to know that all calls are followed up,” says Blackburn. “Good retailers should know they have a role to play in reporting it. There’s a perception among some consumers, perhaps, that small shops shouldn’t be trusted, but that’s wrong. No one has to migrate to larger stores if small shops protect their reputation.”
The key then is to ensure every retailer takes this responsibility seriously. Be vigilant, and ensure anything suspicious is reported.