Smoke signals

Now a year down the line since the EUTPD2 regulations were introduced, the tobacco picture is a little clearer than before and suggests that the category will remain vital in retail for a long time to come.

by Antony Begley

We’re now a year down the line since the infamous EUTPD2 legislation was first introduced in the UK with many hailing it as the beginning of the end for the tobacco category – with the Scottish Government in particular positively willing it to be curtains for the category.

With a year’s experience behind us, the consequences of the seismic shift in the tobacco market are now beginning to become reasonably well understood and documented, although the picture remains slightly blurred by the huge impact on category sales caused by the untimely collapse of P&H at the tail end of last year whose business relied so heavily on tobacco.

That collapse caused untold bedlam in the supply chain and affected supermarkets and local retailers for several months, so the conclusions that are drawn from last year’s data must be drawn with care.

At the top line level, tobacco sales have indeed continued to fall by volume, but the decline is perhaps less steep than had been anticipated and demonstrates yet again how resilient the category is.

Andy Stevens, Head of Sales at JTI, puts the category into context: “[We estimate that] the UK tobacco market is worth £15bn and tobacco continues to be the biggest FMCG category and the number one contributor to store turnover.”

So the market remains resilient but the challenges facing it are becoming no less daunting, particularly with regard to the seemingly unstoppable rise of the illicit trade, something the tobacco industry warned about for years before plain packs finally hit the shelves.

To RSP or not to RSP?

In such a complex environment, and with falling sales, there is also mounting evidence to suggest that more and more retailers are choosing to price above RSP in order to maintain their cash profits. This is something that all the major manufacturers warn against, stating that the short-term gains will be outweighed by the longer-term loss of footfall, sales and profit.

Stevens again: “Price is a key factor for existing adult smokers when choosing where to shop for tobacco, so retailers should look to remain competitive by selling at RSP or below, although retailers are of course free to sell JTI products at whatever price they choose.”

Imperial Tobacco goes further, advising retailers to be very careful with the pricing of their tobacco range: “Premium pricing by independents is an ever-decreasing circle.

“Retailers may be making up for drops in volume with increased prices and margins but it will lead to diminishing return as consumers eventually turn elsewhere – most likely to multiples like supermarkets – to buy their tobacco.”

Imperial Tobacco believes independent retailers have one big advantage over their major multiple cousins: a personal service and the chance to build a genuine relationship with their tobacco-buying customers through excellent category knowledge.

It’s not an easy puzzle to solve and many retailers are clearly toying with higher prices, but only time will tell what the consequences of premium pricing are.

Innovation continues

Despite the dark market and predicted death of innovation in the category, there is still a fair bit of it about. One of the most striking has been the relaunch of the Kensitas Club brand with a hugely reduced RSP of just £7.65 accompanied by the launch of a Superkings variant. The JTI’s move took everyone by surprise and has led to a very successful revitalisation of the brand in Scotland.

Sales in our own Woodlands Local store increased by hundreds of percent in just a matter of weeks, with Kensitas Club pitched as the cheapest cigarette on the gantry.

Also new from JTI is a capsule variant of its Benson & Hedges Blue value range. The Superkings Dual variant joins the UK’s fastest-growing factory-made brand portfolio.

The launch taps into the growing capsule segment which is now worth over £630m a year in independents and symbols alone and accounts for 13% of total cigarette sales in the UK [Nielsen, Jan 2018].

The demand for Superkings in the Ultra Value market has grown by 45% in in the last year alone, according to the same data, as consumers continue to seek out value for money products.

The new variant is now available in all channels with an introductory RSP of £8.

Capsule cash

In a category as tough as tobacco, it pays to focus your attention on the areas where they’re most likely to reap rewards; that means staying on top of the prevailing trends.

According to Imperial Tobacco, the crushball (capsule) sector continues to be a key area of focus. A spokesperson says: “Crushball now accounts for almost 14% of the overall cigarette market. This has increased considerably in recent years. If they don’t already do so, retailers should consider stocking our award-winning JPS Player’s Crushball (£7.65 RSP) and JPS Crushball (£8.30 RSP).”

Imperial also says that the latest RYO consumer trends suggest adult smokers appreciate all-in-one products that combine papers, filters and tobacco. “Our Gold Leaf 30g handy pack – with an RSP of £10.50 – has proved extremely popular in this regard,” adds the spokesperson.

Also highlighting the importance of this trend, JTI launched two new capsule products in January this year: Sterling Dual Superkings 20 and Sterling Dual Double Capsule King Size 20.

Roll with it

Roll Your Own (RYO) tobacco continues to play a significant role in offering value for money for shoppers and is an area retailers should pay particular attention to.

Amber Leaf is the number one tobacco with a 33.6% share of the RYO market and is the best-selling RYO brand in every region within the UK [Nielsen, Jan 2018] with two out of the top three selling tobacco SKUs in its portfolio.

With the current trend towards value set to continue, larger RYO packs are also expected to become increasingly popular. Larger RYO packs, such as 50g, can provide existing adult smokers with the option of improved value for money.

Sterling Rolling, JTI’s value RYO product from a best-selling cigarette brand offers existing adult smokers more value for money. The line is now available in a 3-in-1 format that includes tobacco, papers and filters all in a convenient box format. The product takes advantage of recent trends in the market that have seen an increase in popularity for box formats.

Having increased by over 6% year on year, sales of box format now account for over 31% of RYO pack sales. To take advantage of this trend wholesalers are advised to stock both pouch and box variants of Amber Leaf and Sterling Rolling [Nielsen, Jan 2018].

Imperial Tobacco’s Gold Leaf JPS is a product that made significant strides in terms of sales growth in 2017 and retailers should strongly consider stocking it if they don’t already do so.

Cigars exploiting EUTPD2 exemptions

Cigars still benefit from being exempt from the restrictions around minimum pack sizes and standardised packaging, so they can still be branded, wrapped and sold individually, or in five or 10 packs and some are now the cheapest option on the gantry.

With the tobacco category tougher than ever, retailers need to be exploiting every opportunity they can find – and one of the most obvious out there is the cigar category. Cigars still benefit from being exempt from the EUTPD2 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 five or 10 packs. This means some cigars are now the cheapest option available on shelf, which may attract existing smokers from other categories.

Worth £197m, the cigars category presents a significant sales opportunity for retailers. Scandinavian Tobacco Group UK (STG UK) is leading the way in the category, accounting for seven of the top 16 brands (as highlighted in the panel) and over half of the entire category with a 53% market share. With a portfolio benefitting from many category-leading cigars, including most notably Café Crème which is the number one cigar brand in the UK, its brands should be considered must stocks for any tobacco retailer.

Jens Christiansen, Head of Marketing & Public Affairs at STG UK, comments: “Many consumers remain loyal to well-known brands they can trust as they provide reassurance in terms of the quality and perceived value of the product. As a result, it’s important for retailers to include a range of top-sellers from each segment in their range so that they don’t miss out on sales. As the number one cigar brand in the UK, Café Crème Blue accounts for 22% of cigar sales single-handedly [IRI, Jan 2018], making it a valuable asset for any tobacco retailer.”

Value proposition

Price continues to be a major focus for shoppers, especially within the tobacco category, and STG UK expects the value for money trend to gain even further momentum now the EUTPD2 restrictions are firmly bedded-in. With the Small Cigar segment worth £75m, STG believes with the right product there is a huge opportunity to capitalise on this demand for value and drive growth back into the category.

Christiansen comments: “To tap into this demand for value, last year we launched the Moments Panatella, which is available to buy in packs of five with an RSP of £4.20, making it the cheapest product on shelf within the Small Cigar segment. Thanks to its exemption from the plain packaging restrictions, the range also benefits from an eye-catching yellow design to help stand out on-shelf.”

The Miniatures segment is now dominating the value for money category as consumers continue to seek out quicker-smoking cigars.

“Priced at just £3.83 for a pack of 10, stocking Moments Blue allows retailers to take advantage of the sales afforded by this leading segment, whilst also responding to two of the major trends we’re seeing in the category: trusted brands and value for money,” says Christiansen.