Smoking out the real effect of EUTPD2

This information is for tobacco traders only

With over three months since the implementation of EUTPD2, SLR looks at the early impact of the game-changing tobacco legislation on the local retailing industry in Scotland.

by Antony Begley


By now, Scotland’s local retailing community has gotten used to coping with and managing major upheaval in the tobacco category. The last decade or so has, after all, seen a litany of profound change in the way that manufacturers can market their products and the way retailers can sell them in-store.

There is no doubt, however, that May 20 this year marked the biggest set of changes experienced yet by retailers as the full force of the EUTPD2 legislation began to take effect in every store selling tobacco in Scotland. So, with three months of the new regulations under our belts, how has the market coped with the latest bout of major upheaval for retailers and their customers?

So far, so good

Perhaps unsurprisingly, the short answer is ‘very well’. Retailers are nothing if not resilient and determined, as Imperial Tobacco UK Head of Field Sales Andrew Miller rightfully points out: “Despite the significant legislative changes in May, the tobacco category continues to prove both its resilience and continuing relevance as a vital part of UK retailers’ offerings. Anecdotal evidence from our retailers in the independent channel suggests that those who price competitively – either at, or below, RSP – continue to enjoy the loyalty and custom of their tobacco-purchasing shoppers, plus robust sales.”

Miller’s accepts that in a category like tobacco, change is the only constant. But he remains committed to working with retailers to continually find the best way forward. He explains: “Legislative change is likely to remain a feature of the industry, but by ‘partnering for success’ with our retailers via initiatives including our START packs, trade engagement evenings and ignite membership incentives Imperial’s future confidence in the tobacco category is as strong as ever.”

There’s a similar realistic-yet-upbeat message coming from JTI. A spokesperson for the company told SLR: “Now more than ever, thanks to the roll out of EUTPD2 legislation, getting the tobacco category right is paramount in driving incremental sales for local retailers. The restrictions enforced by the legislation have created tighter boundaries on the landscape making it a harder product to promote. But it remains integral to the success aof convenience retail as a sales and footfall driver.”

The reality, says JTI, is that retailers who follow best practice category management will continue to profit from tobacco – and the company echoes the message that retailers now more than ever should make it a priority to keep up-to-date and utilise the vast support resources available to them to continue making money from the category.

Cigar market overview

According to IRI MarketPlace Data to April 2017, cigars are currently worth £199.8m and STG UK is leading the way in the category, accounting for eight of the top 16 brands (as highlighted below) and over half of the entire category with a 51.7% market share. STG UK has a number of leading brands within its portfolio, most notably Café Crème which is the No.1 cigar brand in the UK, accounting for 37% of cigar sales making it a must stock for any tobacco retailer. Henri Wintermans Half Corona should be another big focus as it holds the position of the No.1 selling cigar in the Medium/Large sector in terms of volume and is also the sixth best-selling cigar overall in terms of value sales.

Cigar opportunity

Although cigarette manufacturers have been hit hard by EUTPD2, cigars makers view the legislation in a more positive light, and seek to capitalise on the unique position they now enjoy on tobacco gantries across Scotland.

Jens Christiansen, Head of Marketing & Public Affairs at Scandinavian Tobacco Group UK (STG UK), says: “With the EUTPD2 restrictions now in place, the tobacco category is bracing itself for the potential impact of the changes but, only time will tell what the actual effect on sales may be. While all eyes are now watching for how the tobacco category may change as result of EUTPD2, cigars still benefit from being exempt from the restrictions around minimum pack sizes and standardised packaging. As a result, cigars can continue being branded beyond the product name, not be the standard green colour, or be restricted to a minimum pack size, meaning they can still be wrapped and sold individually or indeed in 10 packs.

“This means some cigars are now the cheapest option available on shelf, which may see them attract existing smokers from other categories. While still available in 10 packs, cigars will mitigate the drop in footfall from cigarettes going to minimum 20 packs, as well as giving a higher margin than cigarettes.

“They will also benefit from much greater visibility than cigarettes due to their exemption from the Plain Packaging legislation. This presents a massive opportunity for tobacco retailers to use this to their advantage by stocking a good range of cigars, in all size segments, as some smokers look to switch to a value alternative to cigarettes, or indeed just a cheaper out of pocket price.”

IRI MarketPlace data to April 2017 shows that STG UK brands account for over half of the entire cigar category, including the No.1 cigar in the UK, Café Crème. This means STG UK is well-positioned to help retailers take advantage of this opportunity.

And while the accessories market is covered by EUTPD2, it’s worth noting that the category is actually in growth, as highlighted by Gavin Anderson, General Sales Manager for Republic Technologies (UK): “Despite sweeping changes in the market, Scotland’s tobacco accessories category, worth over £25.7m [IRI, May 2017], remains in growth.

“NPD is driving category growth, with consumer demand such as that for slimmer filters making an impact.”

Top performing cigar brands
BRAND SHARE % MAT TY VALUE (£m) MAT TY
Café Crème Blue 4% £35
Hamlet Miniatures 9% £17.9
Hamlet 7% £37.2
Moments Blue 4% £11.2
Café Crème 2% £14.3
Classic 6% £22.6
Royal Dutch Miniatures 1% £6.8
Café Crème Arome Filter 6% £7.1
Royal Dutch Miniature Blue 5% £3.9
HW Half Corona 2% £12.7
Moments Original 7% £0.8

Price continues to be a major focus for shoppers and Jens Christiansen, Head of Marketing & Public Affairs at Scandinavian Tobacco Group UK, expects the value for money trend to gain even further momentum. He says: “With the Small Cigar segment worth £78.5m, but showing 15.4% decline in volume sales YOY, we believe with the right product there is a huge opportunity to capitalise on this demand for value and drive growth back into the category.”

STG’s Moments brand has already seen significant success in the Miniatures segment with its value for money positioning and in only five years has become the fastest growing cigar brand in the UK, accounting for a 15.7% market share of Miniatures.

Products such as Break Filter Cigarillos have also been setting the trend in the value for money arena by offering a range price marked at just £5.19 for 17 sticks. In addition, Break’s unique positioning as a filtered cigarillo means that the range is exempt from the changes that have been brought in under standardised packaging. This makes it an even more attractive proposition for retailers to take advantage of existing smokers looking for an affordable smoking alternative.

Christiansen encourages retailers to focus on top-sellers from each segment in their range so that they don’t miss out on sales. As the No.1 cigar brand in the UK, Café Crème Blue accounts for 22.4% of cigar sales single-handedly, making it a valuable asset for any tobacco retailer.

Also topping the cigar sales chart is Moments Blue, which is ranked fourth best-selling overall and continues be the fastest growing cigar brand in the UK. Priced at £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 in the category: trusted brands and value for money.

STG UK is also set to reinvigorate the Small Cigar segment with its latest new product launch, Moments Panatella, available in packs of five with an RSP of £4.20, making it the cheapest product on shelf within the Small Cigar segment.

Reason for optimism

So it seems there’s plenty of reasons for retailers to remain positive and optimistic about the category – but that has to be backed up by effort and commitment to the category, possibly more so than ever before.

And while it’s tempting to examine other creative tobacco gantry options, the major players are enthusiastically urging retailers to maintain the status quo and leave the category more or less as it was before May 2017.

A JTI spokesperson advises: “We recommend that retailers don’t make any snap decisions about changing the position of tobacco and diminishing brand range and stockholding – those retailers who continue to invest in the category will reap the rewards. Tobacco should still be kept in an area where there is easy access to maintain the best level of service and retailers should ensure their gantries are easy to navigate in a post TPD2 environment. Multiple facings of best sellers will help maintain the space and ensure customer needs are met. With staff accustomed to where stock is currently merchandised, JTI also recommends that retailers maintain their current planograms to avoid confusion.”

This is important, says JTI, when it comes to maintaining range and availability at all times. The spokesperson explains: “Doing so is of vital importance to ensure that retailers become a destination store of choice as existing adult smokers and vapers will expect their brands to be readily available. Research tells us that almost 27% [Ipsos, Q3 2016] of existing adult smokers choose to buy elsewhere if their brand is unavailable. Therefore, it’s vital that retailers maintain full availability and range to ensure they do not lose out on sales. Now that 10s are no longer available, we predict that sales of 20s will increase, so keeping range and availability 24/7 is key. Multiple facings of 20s packs on your gantry will help to make sure you can meet your customers’ needs.”

Imperial is encouraging retailers to take a different approach by adopting ‘one brand, one shelf’ approach to merchandising – and also highlights the increasing importance of pricing competitively. ‘RSP or below’ is, in fact, the mantra from all the major manufacturers.

Price and value

With a consumer focus on price seemingly more important than ever, it’s no surprise that the lower price sector – which includes Value, Super Value and Ultra Value segments – now holds a 64% [Nielsen, Mar 2017] volume share of the total factory-made cigarette market – and that share is growing, driven largely by growth in the purchase of sub-economy (the lowest-priced) tobacco products.

Overall, sub-economy products enjoy the largest FMC sector share with 42% of all cigarette sales in May 2017, according to Imperial Tobacco estimates.

Clearly, however, retailers should ensure they maintain a good selection of brands across all price segments to cater for the needs of their existing adult smoker customers and remain a destination of choice. Premium lines still represent a significant part of the market and enjoy strong loyalty, while delivering premium cash profits for retailers too.

RYO

It’s a similar story in the RYO market with the Value RYO segment gaining share, now holding 22.8% of RYO volume sales [Nielsen, Jul 2016] as existing adult smokers seek out ways to reduce their tobacco spend.

A JTI spokeperson advises retailers to focus on larger packs to drive bigger basket spends while increasing the value proposition for cash-conscious shoppers. He said: “Larger packs, such as 50g, can provide existing adult smokers with the option of improved value for money which can be attributed to the growth of Amber Leaf and Sterling. With the current trend towards value set to continue, larger RYO packs are expected to become increasingly popular.”

Recent trends in the RYO market have also seen an increase in popularity for box formats. Having increased sales value by 7.1% year on year, sales now account for 31.3% of RYO pack sales [Nielsen, Nov 2016].

To take advantage of this trend, JTI advises retailers to stock both pouch and box variants of RYO brands, where available, to maximise sales to existing adult smokers who are looking to purchase their brand of choice in their preferred format.

Accessories to success

“Accessories have traditionally delivered high margins to retailers, so we’d advise them to stock a wide range,” says Imperial Tobacco’s Andrew Miller. Imperial’s papers brand Rizla has recently released a new variant – named Natura – in the independent channel. Natura is a new approach to papers and tips crafted from hemp, designed to provide adult smokers with an authentic smoking experience.

Rizla Natura papers are available now in both Regular and King Size variants containing 50 and 32 papers. They retail for 27p and 75p per pack respectively. Meanwhile, Natura Tips retail at 74p for a pack of 120.

Republic Technologies’ Gavin Anderson says his company is also evolving to help retailers meet current consumer demands. He comments: “Recognising the need for greater choice, we have launched Swan Ultra Slim, the thinnest-ever Swan filter and a premium quality product aimed at smokers looking for a smoother taste while reducing the amount that they smoke for health or financial reasons.”

The company also reacted to an increase in environmental concerns among shoppers with the launch of its first ‘Eco’ filter, the most environmentally-friendly Swan product ever. The Swan Extra Slim Eco Filters are biodegradable, featuring a naturally-coloured filter and unbleached paper wrap. Each pack contains 120 filter tips at an RSP of £1.03, with 20 packs per outer.

New for 2017 are Swan Kingsize Cigarette Tubes and tubing machines that allow consumers to make cigarettes with ease, with packs available featuring both 100 and 200 tubes in both Standard and Menthol variants. RSPs range from 99p to £2.50 for the tubes, and £3.64 for the tubing machine.

Accessories merchandising tips from Republic Technologies
  • Stock a broad range of products: filters, papers, matches and lighters.
  • Carry the latest NPD to tap into changing shopper needs.
  • Space saving packs such as ZIG-ZAG King Size vertical packs (50% space saving compared to traditional King Size packs) and Poppell 45 packs help retailers to merchandise more effectively.
  • Be sure to stock a core range of papers (Green, Blue and Silver in both standard and King Size variants) plus other options such as Unbleached and flavoured and make sure you have multipacks available.

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