His bosses once asked Black Swan author and (then) options trader Nassim Nicholas Taleb which way he thought the stock-market would go – up or down? He annoyed them by answering, “Both”.
His point was that within any market certain stocks would be going up and others down, and that overall trends should mean little to the smart investor. Taleb specialised in making money from market crashes, for example. There can be great profit in decline.
The same is true of the tobacco category, which has been waning for many years now, but on the other hand is doing fabulously well. Vape (ex-tobacco revenue, if you like) is way up, cigarillos are making great strides and this year larger cigars are back “a la mode”, and looking towards a great Christmas season (as is RYO) – all this while tobacco, meaning traditional FMC (factory-made cigarettes) is in general decline.
According to Alastair Williams, Country Director at Scandinavian Tobacco Group UK, “With annual sales worth around £195m, cigars are a hugely profitable category which typically offer margins three times greater than cigarettes, so it’s worth spending a bit of time to ensure you have the right range to get your tills ringing!”
He makes the important point that your tobacco customers may well be the most loyal that visit your store, so it makes sense to treat them accordingly. “We all know that their associated basket spend can often be significant too, so always keep their brands in stock and don’t give them a reason to shop elsewhere.”
In other words, there is still good profit in tobacco if you know what to stock and how to sell it. Convenience remains the place to go for cigars, and most tobacco products, truth be told – if done right.
Where cigars and tobacco are now
“Trends in the cigar category don’t tend to change very much and for a while now there’s been two very clear ones,” says STG’s Williams. “First, the continued rise in miniature cigars, which now account for over 74 per cent of total cigar sales, and secondly the consistent growth in adult smokers being price-conscious and looking for good quality value-for-money propositions.”
So shrinkage in cigar size but not a shrinking market. The shift will be in demand for certain products rather than an overall drop in demand: “I would only expect the value for money trend to accelerate, so brands like Moments are only likely to grow in importance,” he adds.
Richard Booth, Trading Director for Tobacco at Bestway Wholesale, agrees. “Overall tobacco volumes have declined over recent years and cigars is no exception – the best sellers have been miniatures such as Signature Blue rather than the more traditional panatelas,” he says.
An ever-innovative tobacco industry, schooled in dealing with hostile legislation and restrictions on products and trading, has responded with typical athleticism to recent trends and laws, for example the menthol ban back in May, and the effects of the pandemic lockdown.
Booth notices that one major new development – partly in response to the menthol situation – has been the introduction of cigarillos from JTI, Imperial and STG: “These are essentially smaller cigars that have a filter and also a capsule in the device that gives a menthol flavour. These variations are allowed, as cigars are not affected by the menthol ban, but they have been relatively successful and driven our cigar category sales to well over 100 per cent up since May.”
This proves the soundness of Taleb’s point: some cigarette smokers are abandoning the category and becoming cigar (or cigarillo) smokers instead, and tobacco remains profitable in spite of “decline”.
Of course, the elephant in the room – also arguably a black swan – is the pandemic, which has truly “shaken the box” and upended many elements of habit and demand this year. It has had the paradoxical effect of re-energising the cigar category and other sectors of tobacco. Booth again:
“Firstly, likely due to restricted travel, we have seen strong growth in cigars with the lack of non-UK duty-paid stock entering the country. This is the same as cigarettes and RYO, but the growth has been more dramatic with cigars, perhaps driven by people having more time at home to smoke them.”
We have seen how, even though fewer people now smoke since the lockdown commenced in March, the convenience channel has enjoyed buoyant tobacco sales due to the ending of international travel, which obviously stopped people bringing duty-free cigarettes home with them from their vacations and trips abroad. Again, it is the demand for particular products rather than overall demand that has changed.
“Restrictions on travel due to Covid-19 have reduced the amount of tobacco purchased abroad for consumption in the UK which, in turn, has led to increased domestic sales, allowing retailers to benefit from additional purchases,” confirms Duncan Cunningham, UK Corporate Affairs Director at Imperial Tobacco & blu. He explains how RYO has benefitted from the intersection of travel ban and the search for value (and hence why RYO tobacco is a good product to stock ahead of Christmas demand):
“As a strong travel retail brand, an increasing number of consumers have been buying Golden Virginia Original within UK retail stores,” he says. “As well as increasing its market share within the UK, the volume of Golden Virginia Original sold to consumers in July 2020 was almost 50 per cent higher than before the pandemic in February 2020. We expect this trend to remain as consumers continue to buy in bulk, especially for RYO, given the demand for value currently being seen across the tobacco market.”
The Xmas factor
Traditionally, Yuletide means cigars. It is the time of year when men (mainly) – often via the relatives buying presents for them – decide to relax and enjoy a little bit of luxury. Cigars are a premium product – a longer, richer, more thoughtful smoke than an ordinary cigarette, and a product that suits an indulgent occasion, such as Christmas.
“Christmas is on the way and cigars, in common with many other categories, will experience a spike in sales during the festive season,” says Ross Hennessy, Sales Vice President at JTI UK. “According to IRI data, sales of cigars increased 10 per cent[last] December compared to the previous month, while medium and large cigars grew sales 20 per cent.”
Cigars go well with the bottles of premium-brand spirits finding their way into Dad’s Christmas stocking, and an overall image of masculinity, with overtones of cut-glass and notes of leather, fits perfectly with the ineffable aroma of fine cigar smoke.
And remember, somehow cigars stay partly free of the health-taint that is helping to shrink the cigarette market. And being luxury treats, cigars can survive at a higher price-point even when the market is searching for value elsewhere.
Duncan Cunningham sees Christmas 2020 as a great opportunity for independent retailers, because of people staying close to home and looking forward to treating themselves with purchases to compensate for a restricted social calendar.
“As we prepare for a Christmas like no other before, retailers may be in a strong position to benefit,” he explains. “As a result of the pandemic, we’ve seen more consumers choosing to shop locally in convenience stores and in some instances, bulk-buying tobacco. With potential for a second national lockdown, or local lockdown measures being implemented across the nation, this is a trend that is likely to continue throughout the traditional festive season.”
He says it is very important to be ready for the festive season: “In order to prepare for the increased demand, retailers must maintain stock levels at all times, especially of best-selling lines, to avoid disappointing customers and missing out on sales.”
Hennessey additionally reminds us that Christmas is an exceptional period for tobacco, and particularly cigar sales, each Christmas-time, and that this year might be a bit special.
“The cigar category continues to be a key seasonal driver,” he stresses. “Every year, cigar sales follow a very similar pattern, with a spike in volume during the summer monthsand in December. In December 2019, for example, cigar sales volume increased by 6.9 per cent versus the prior month.”
He recommends the same action as does Duncan Cunningham.“Christmas is the perfect time to stock up to take full advantage of this profit opportunity,” says Hennessy.“Retailers should look to stock brands such as Sterling Dual Capsule Leaf Wrapped, which is the number one cigarillo brand, with a 97.9 per cent share of the UK cigarillo market.”
“Certainly, in the run-up to Christmas we know that cigar sales go up, so it’s really important for retailers to get their range right so they can enjoy those extra sales and rewarding profit margins,” says Alistair Williams, but points out that larger cigars are also having their time to shine:
“As we approach the festive period it tends to be larger Cigars that people will gravitate towards as a bit of a Christmas treat when they are in celebratory mood and typically have more time to enjoy it. To satisfy consumers who are looking to ‘trade up’, make sure you have brands like our Henri Wintermans Half Corona in stock as it is the UK’s best-selling medium/large cigar, and a real festive favourite.”
STG’s Alastair Williams made it clear why taking your merchandising of the tobacco category – especially at Christmas – can be a vital element of revenue uplift (and not just over the holiday, but year-round).
His point, that 260m cigars were purchased in the last twelve months,again shows thata drop in sales is not necessarily a decline in the category.
For example, although miniature cigars account for very nearly three quarters of all current cigar sales, medium and large cigars “are currently enjoying something of a renaissance, growing by over 3 per cent in volume terms versus the same time last year,” says Williams.
Call it the pandemic bonus, with WFH execs happily puffing on stogies in their back gardens under the summer sun, G&T in hand.Williams points out that in the UK overall, Scandinavian Tobacco Group is by far the biggest player, responsible for nearly 55 per cent of total sales: “Our brands account for five of the top ten best sellers. Signature is the best-selling brand in the UK and is the brand behind one of every three cigars sold.”
The key is in the merchandising, which among other things naturally means having sufficient stock, enticingly displayed, and with the right range to attract the broadest cross-section of category customers, while concentrating on the best-selling brands.
But the craftsmanship of selling fine tobacco goes deeper. JTI’s Ross Hennessy advises that knowledge is key: “To maximise sales,” he says, “retailers must be knowledgeable about the cigar category and the different brands they stock – making staff education and training a must.”
It’s no good if you know your onions, but when you are out of the store, none of your staff does.
Hennessy recommends the website JTIAdvance.co.uk, which provides retailers with key category insights, news on product developments, and up-to-date industry and legislative information, is constantly updated and can provide regular training to suit the busy schedule of retailers. “JTI’s extensive UK sales force also provides expertise on the latest trends and sales data to help retailers maximise the profit opportunity the category holds,” he adds.
“There are various ways to train staff,” says Imperial’s Cunningham.“First and foremost, it’s essential they know what products are stocked in store and where they are positioned on the gantry, so they easily find them. This is especially key for best-selling lines so they can always keep an eye on stock levels to avoid running out. This should also be a focus for any accessories, such as Rizla Flavour Infusions and lighters, so they know to upsell where possible.”
He recommends Imperial’s Ignite app, which allows retailers to keep up to date with the latest news, information and training opportunities to help them perform at maximum efficiency. It includes a wide range of tools and advice, including incentive articles, downloadable POS, product information and top tips on how to increase sales in store.
STG’s Williams stresses that it is the personal touch which can make cigar sales burn brightly,“By offering a personal service and talking to their customers. Make sure you are always in stock of the brands your regular cigar smoking customers prefer, but also at this time of year you may find that cigarette smokers are actually very open to trying cigars and are willing to consider switching given a recommendation from store staff. To make the most of this opportunity, education is key! It’s worth investing in upskilling yourself and your staff to develop a greater understanding on the different cigars available in each segment, and what type of consumer they are most suited for.”
Hennessy agrees that communicating with customers is vital, and says this is where independents enjoy an advantage over nearby supermarkets: “Being knowledgeable about their cigar and cigarillo product range means they can answer questions from their existing adult smokers and in turn, improve customer experience and maximise sales in the category.”
Duncan Cunningham emphasises the element of personal treatment that independents can offer. “Customer service has a particularly crucial role to play at present, given the in-store restrictions in place as part of the Covid-19 pandemic,” he says.
“Many consumers won’t wish to handle products, such as lighters, flavour cards or other accessories, in order to look at them before they buy and may also be inclined not to ask questions at the till point to avoid queues building up behind them, which can be intimidating. With this in mind, retailers need to be prepared to proactively offer them advice at the till point and help shoppers feel at ease by providing knowledgeable answers to their questions that really showcase their understanding of the category.”
Knowledge and reassurance – along with the personal touch – will prove to be the Christmas success story.
But just because it is Christmas, that doesn’t mean customers are throwing fivers away: they are still looking for value, especially this year.
“Price remains a key factor for existing adult smokers when choosing where to shop for cigars and cigarillos, so retailers should look to remain competitive by selling at the RRP or below to help drive sales,” says Hennessy.
“The tobacco market remains heavily price driven and this has led to an uplift in consumers switching into Roll Your Own (RYO), as well as value Factory Made Cigarettes (FMC),” points out Cunningham. “Retailers must be well-equipped with a strong product range across all categories in order to cater for this trend and keep one eye on their sales so they can adapt their range to meet the needs of their customers.”
“We would also advise retailers to monitor current trends in their area,” adds Hennessy,“ensuring that they are stocking a consolidated range that meets the demands of existing adult smokers. Through stocking a full range and recognising which brands are proving particularly popular, retailers can maintain good availability at all times and provide a successful cigar and cigarillo offering to their customers. Research has also shown that nearly a third of smokers will choose to buy elsewhere if their preferred brand is unavailable. As a result, retailers must maintain good availability across their range. If they don’t, they could be in danger of losing sales.”
Trends and NPDs
The tobacco category appears to be working well in adjusting to new conditions and changing consumer demands.
Value considerations and the FMC-to-cigarillo switch are working their way through the development process of new products. First the FMC response:
“As value continues to be the main purchase driver in Tobacco, we have launched an enhanced offering for our L&B Blue FMC range, with a new Superkings variant that lasts 35% longer,” says Imperial’s Duncan Cunningham.
He reveals that the Sub Economy FMC share has grown a further 2.2 per cent YOY, with Superkings accounting for 37 per cent of the volume in this sector. “Our new Superkings variant taps into this trend and offers adult smokers the same high-quality tobacco blend L&B Blue is known for, at the same RRP for a pack of 20, but lasts 35 per cent longer with an increased puff count that equates to an extra seven sticks per pack.”
The new variant, available now, is a direct replacement for the existing L&B Blue Real Blue Superkings SKU. And Imperial has now released its New Crush variants for two of its leading brands, L&B Blue and JPS Players, designed specifically with ex-crushball consumers in mindin the wake of the menthol ban.
Also available now, the New Crush variants will benefit from various new product features developed to appeal to former crushball smokers. These include a unique filter that delivers a cooling sensation during smoking, as well as a white-tipped firm filter that retains its shape and structure until the end of the smoke.
Both JPS Players and L&B New Crush variants will be available to buy in packs of 20 cigarettes at an MRRP of £9.30, with 10 packs per outer.
“Since the arrival of the menthol ban, former crushball consumers have been trialling different options before settling on their product of choice but many are yet to find the right product to suit their nicotine needs,” said Chris Street, Market Manager UK at Imperial Tobacco. “Our New Crush variants have been designed specifically with these consumers in mind, providing all the familiar features without the crushball, from two of our leading brands.”(Imperial launched a leaf-wrapped Crushball Cigarillo variant of its JPS Players brand in August.)
Over at JTI, Ross Hennessy describes the menthol-related migration to cigarillos and the company’s NPD response, with its Sterling Dual Capsule Leaf Wrapped cigarillo. “It is a king-size cigarillo containing a mentholated Virginia Blend tobacco. The filter includes a capsule that when crushed releases a peppermint flavour. Available in packs of 10s with an RRP of £4.50, it is the UK’s No.1 cigarillo brand, with a97.9 per cent share of the UK cigarillo market.” He adds thatin an updated formulation, the cigarillo is produced with a mentholated stick and has a new tipping design.
Cigarette smokers are growing used to the new cigarillo space. “Over the past few months, shoppers have become more educated on what cigarillos are and have become more open to trying them. We find that the value price point of Sterling Dual Capsule Leaf Wrapped especially appeals to shoppers,” testifies Jey Sivapalan of 1 Stop Go Local in Derby.
“We find it is especially popular with value-seeking customers. We are expecting to see a further rise in sales ahead of the festive period,” added Akshay Patel of Londis Towpath in Croydon.
STGis also offering a new cigarillo NPD, as Alistair Williams explains: “Launched back in February, the new arrival to join the Signature brand family is a filter cigarillo coming in a convenient and stylish pack of ten, with a low out of pocket price of just £4.95. The key product feature is that it has an acetate filter containing a peppermint capsule under a lasered marker. In addition, a carefully selected blend of Virginia tobacco and a light real leaf Ecuadorian wrapper deliver a smooth taste,” he says.
If one effect of lockdown and menthol ban was the move to value brands of FMCs, and another to cigarillos, another was the increase in RYO tobacco, as Cunningham describes, with the segment expanding its market share to now account for a massive 45 per cent of tobacco sales.Recent data shows volume sales are growing by an impressive 30 per cent as consumers seek out greater value for money.
“In line with this growing demand for value, sales in the Economy RYO segment are also rising and Imperial is well positioned to help retailers tap into this trend with more brands in the economy segment than any other tobacco manufacturer,” Cunningham says.“Since its launch in November 2019, Lambert & Butler RYO has been growing its share and, in July 2020, it accounted for 4.7 per cent of all sales within the Economy RYO segment making it a must-stock product line for retailers.”
He points out that this increasing consumer shift towards RYO products presents new sales opportunities for tobacco-related accessories. That means retailers should make sure they’re fully stocked at all times with filters, papers, lighters and other flavour-related innovations to cater for the rising number of consumers buying into the RYO segment, such as Rizla Polar Blast Crushball filters and Rizla Flavour Cards: “Latest figures show they are flying off the shelves and currently selling around 900,000 packs per week as consumers look to recreate the menthol experience.”