There are several big issues for tobacco as we head into the longest and possibly harshest recession in three centuries (that’s how long they say it has been since the economy last contracted by almost 10 per cent).
The first issue is the recession itself, which will further increase a trend that has been evident for some time now: the flight to value in tobacco, which has reshaped the producers’ offerings along the lines of more value brands that look like the premium lines, and on the smokers’ part, something of a switch from factory-made cigarettes (FMC) to roll-your-own tobacco (RYO), often with a mix and match of the two products – what Imperial Tobacco’s UK Corporate Affairs Director Duncan Cunningham calls a “nicotine portfolio approach”.
The point is that regular cigarette smokers and RYO folks used to be as different as chalk and cheese, but taxation and economic conditions have conspired to bring the tribes closer together.
Then there is the relentless drumbeat of the health lobby and government, warning about diseases from smoking, banning advertising and hiding the product out of sight of customers. What is amazing is that the decline in smoking sales is only about three per cent a year, probably little more than natural wastage as elderly smokers dinch their last cigarette and fewer youngsters embark on the habit.
The other thing that has happened, of course, and contributed to the long-term decline in tobacco sales, is the vape revolution. It has been in full pursuit of tobacco sales for three or four years and last May’s EU-directed menthol cigarette ban (something like 30 per cent of smokers like to strike up minty cigs) was predicted to send waves of smokers into the fragrant arms of pod-mods and e-cigs.
That did indeed happen, to an extent, but it was hampered by the menthol ban being largely unheralded and lost in the lockdown. Pandemic measures meant that most or all vape shops were forced to close down at a critical time – convenience stores were happy to take up the slack – and it gave breathing space for the ingenious workarounds for the “menthol-gap” to embed themselves in the market.
Just because you could no longer manufacture menthol cigarettes, didn’t mean tobacco companies could not manufacture menthol, and cigarettes, and then give customers a means to rejoin the two ingredients at their end, and it’s been great for the accessories market.
But it was also simply the fact that the slippery slope argument is always not really true. It was never the case that tobacco would simply cease, to be replaced by a nation of blissful vapers. The ball rolls downhill only until it meets an obstacle that slows it. In vape’s case the probably the first major obstacle to its adoption came with the poisoning hysteria.
It actually had nothing to do with legal vape products but rather criminal gangs selling narcotics suspended in poisonous liquid (lethal “THC vapes” that “shrink-wrapped” the lungs in molten goop).
Already elements of the health lobby and skittish governments worldwide had been looking sideways at vape, planning either to ban it (“Save the children!”) or to justify swingeing financial imposts on the new products. The cannabis-vape panic gave the anti-vapers all the justification they needed to go on the warpath.
First, flavours were banned, age limits raised and restrictions imposed; then (again helped by the pandemic) shops were forcible closed, especially in the US, or speedily taxed and regulated into bankruptcy.
The UK was spared this extremism because of a very welcome and enlightened public health attitude that appreciated the lower risk associated with vaping: not just PHE but even ASH recommended vaping over smoking. But that didn’t mean tobacco was down and out.
On the contrary, it began to appear that after an initial flurry of smokers going over to the vape side of town and enjoying all the fruity flavours, there remained a large core of smokers who actually like to smoke real tobacco, for the taste of it and the many effects they find worth the risks.
Vape naturally spotted this and came back with nic salts and ever more “smoke-alike” draw effects to replicate the sensation of smoking traditional cigarettes.
But take vaping tech to the extremest point, where it most nearly resembles tobacco, and you end up with … tobacco! That is where we are today, in fact, with the heat-not-burn (HNB) products of the major tobacco companies doing fantastically well among people who are naturally smokers rather than naturally vapers.
Our problem is whether we write about HNB in a Tobacco feature or in an E-cig , Vape and Next Gen feature. Probably both.
In fact, so certain is Imperial Tobacco of smoking’s ultimate non-demise that its new CEO Stefan Bomhard has announced its vape initiatives will now be placed on the back burner, so to speak. Instead, the company will concentrate on consolidating and building up its FMC business, which it clearly believes has a viable future and which still generates 72 per cent of annual profits.
Other tobacco companies are opening the throttle on their HNB programmes (apparently as low-risk as vaping), which look set to displace a significant share of the FMC market without putting to waste the tobacco production common to both. Imperial’s Bomhard recently said that their vape investment would be reallocated towards its HNB brand Pulze, in Europe.
Could HNB emerge as the perfect solution for both the health authorities and the tobacco industry? JTI’s Sales Vice President Ross Hennessy says, “It is predicted that by 2025 there will be nearly one million Heated Tobacco users nationwide and that traditional retail will contribute to two thirds (67 per cent) of this volume.” Expect producers to lay their bets accordingly.
Whatever happens, whether it’s vape or tobacco, pandemic or no pandemic, convenience comes out on top.
Rising RYO and value brands
“Despite an uncertain past 12 months, the tobacco market continues to be one of the biggest and most resilient FMCG categories in the UK, driving footfall and revenue for retailers and convenience stores nationwide,” says Hennessy.
And in the harsh light of the economy, many customers are going to be lighting up on cheaper (or more “value”) tobacco products.
“The tobacco market remains heavily price-driven and this has led to an uplift in consumers switching into RYO, as well as value FMC,” says Cunningham.He is also seeing a rise in dual users buying both RYO and FMC for different occasions, as more shoppers move to that nicotine portfolio approach. “In fact, figures show a quarter of consumers are now dual smokers,” he reveals.“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.”
Hand-rolling tobacco now accounts for 45 per cent of tobacco sales, with Imperial’s internal research showing volume sales are growing by as much as 30 per cent as consumers seek out greater value for money. A lot of RYO tobacco, incidentally, went through duty-free shops but is now crossing the counters of convenience stores.
Imperial launched its Lambert & Butler RYO in November 2019 and has been growing its market share until, in July 2020, it accounted for 4.7 per cent of all sales within the Economy RYO segment.
JTI’s Hennessy says, “With 7.6 million kilograms of rolling tobacco sold in the UK each year, this category offers a significant opportunity to maximise sales.” To remain competitive, he also advises retailers should stock up on Value RYO products, such as JTI’s Sterling Rolling Tobacco, “Which is currently the UK’s fastest growing tobacco brand.”
He adds that smokers are looking for convenience, so 3-in-1 formats are the perfect solution: “Our Sterling 3-in-1 Rolling Tobacco, which recently transitioned from a box to a pouch, offers existing adult smokers the fuss-free and convenient format they want, at the same value price as before.”
Factory Made Cigarettes still account for the majority of tobacco sales, however, with a 55 per cent share of the market, and are experiencing volume growth of 4 per cent YOY, decisively bucking the long-term sector trend line of a three per cent average annual decline.
As in the wider category, interest in value for money with FMC remains important, with many consumers seeking products that offer the lowest out-of-pocket spend, says Cunningham, describing Imperial’s response:
“This has included the repositioning of some of our leading brands into the sub-economy sector, such as L&B Blue and Embassy, which both now offer premium quality and at an affordable price. We also launched a raft of new innovations in the wake of the menthol ban to help retailers provide suitable solutions for ex-menthol shoppers, including Green Filter and JPS Bright.
Imperial Tobacco has now announced a range extension for Embassy Signature with the launch of its new Gold Superkings, a straight swap for Embassy No.1 Red Superkings to help differentiate the new Embassy Signature range from the existing Embassy premium offering, which includes Embassy Filter. Gold Superkings has an MRRP of £9.50 per pack of 20s.
“Demand for value is shaping shopper behaviour as consumers continue to seek out greater value from the products they buy,” adds Chris Street, Market Manager UK at Imperial Tobacco. “This is a trend we expect to continue and even accelerate as a result of the pandemic, so offering products like Embassy Signature that deliver premium features and exceptional value should be a big focus for retailers in 2021.”
Another interesting side-effect of the pandemic conditions over the past year has been the rise in popularity of cigars and especially cigarillos.
They were of course unaffected by the menthol ban, which applied only to FMC and RYO, meaning that the popularity of rolled-leaf tobacco products was boosted by refugee smokers looking for a menthol replacement after May 20.
Also, of course, people have been working a lot from home, meaning that they can smoke in more places and do not have to duck outside for a fast five-minute fag-break – WFH is an environment much more conducive to the slower and more aromatic cigarillo and cigar.
“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 Alastair Williams, Country Director at Scandinavian Tobacco Group UK. “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. And with the current economic forecast not looking too rosy, I would only expect the value-for-money trend to accelerate, so brands like Moments are only likely to grow in importance.”
“With a current market share of 32.2 per cent, cigarillos are the fastest-growing cigar sector , and now worth circa £5 million a month,” says Hennessy.
Big cigars, like big ships, manoeuvre slowly in the market, but there is an uptick in sales alongside cigarillos and good future prospects.
“With annual sales worth just under £200m, 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!” says STG’s Williams.
Miniature cigars might account for very nearly three quarters of all sales, but medium and large cigars are currently enjoying something of a rebound, albeit from a fairly small base, growing by over 10 per cent in volume and nearly 14 per cent in value versus the same time last year.
“To make the most of this growth, retailers should stock up on products such as Sterling Dual Capsule Leaf Wrapped,” recommends Hennessy, “a king-size cigarillo containing a mentholated Virginia blend tobacco and capsule filter that when crushed releases a peppermint flavour. Available in packs of 10’s with an RRP of £4.50, it is the No.1 cigarillo brand, with a 92.3 per cent share of the UK cigarillo market.
“Overall, Scandinavian Tobacco Group is by far the biggest player,” adds Williams, “responsible for nearly 55 per cent of total sales, and our brands account for five of the top ten best sellers. Signature is the best-selling brand in the UK and responsible for one in every three cigars sold.”
JTI’s Sterling brand is also doing sterling work in the market, and this month JTI is launching a significant NPD. “Due to the success of the brand, we’ve just announced the launch of a 20s format, rolling out across selected wholesalers now and across all channels nationally in the coming weeks,” Hennessy announces.
The Sterling Dual Capsule Leaf Wrapped is now available in a 20s format – an extension to the already successful king size cigarillo product. It will follow the same stick configuration as the 10s, with a mentholated Virginia blend tobacco and capsule filter that when crushed releases a peppermint flavour.
“It is clear that adult smokers are still looking for new alternatives and choice following the ‘Characterising Flavour Ban’ last year,” says Hennessy. “We are committed to bringing retailers products that respond to current trends and resonate with existing adult smokers. The Sterling Dual Capsule Leaf Wrapped 10s range has gone from strength to strength since its launch, so we’re pleased to be giving retailers even more choice for their customers. “
JTI recommends retailers continue to stock the 10s, alongside the new 20s, in order to offer choice and profit from this growing category.
“It’s miniatures which are the engine room of the category, so it’s important convenience retailers get this segment right. By far the biggest player here is our Signature range, which is ably supported by our Moments brand, now the fastest growing miniature cigar in the UK, which offers a good quality smoke at a cheaper price. You also need to consider brands in both the Small and Medium / Large segments to ensure you are covering your bases, so make sure you include the top-selling brands from each segment as a minimum.“
STG recently announced a name change to its big 2020 product launch transitioning the Signature filter cigarillo brand into Signature Action to maintain consistency within the global brand portfolio. “We are keen to stress that only the name of the product is changing and the cigar itself will remain the same,” says Williams.“It still offers adult smokers the same smooth and enjoyable smoking experience and will continue to play an important role in our market leading Signature brand portfolio.”
Speaking of boats, we can add the floating effect of rising tides and report on the increasing popularity of another cigar brand, Backwoods Cigars.
Tangy gifts, who have been a smokeware wholesaler for nearly 30 years, tells us that US brand Backwoods Cigars are popular at the moment and come in a range of flavours including Original, Honey, Vanilla and Rum.
Backwoods’ USP is a simple one – to use only 100 per cent natural tobacco, a novel idea for a flavoured cigar company. This means that their products do not include added flavourings or chemicals, “just great tobacco”.
“Backwoods cigars were introduced nationally in 1981 and were an overnight success. Their unique structure and look, with a frayed end, tapered body and unfinished head, had great appeal to cigar smokers, who identified the cigar’s image with the cowboy smoke from America’s wild west. The rustically designed airtight foil pouch, added to that look and, importantly maintained the cigar’s high moisture level.”
If you are thinking of extending your cigar range, Backwoods must certainly worth a look.
The accessories department – tips and filters, papers, flavour cards (and of course lighters etc)– is alive at the moment, what with all the innovation and NPD surrounding new tech and menthol bans, not to mention the migration to loose tobacco.
“This increasing consumer shift towards RYO products presents new sales opportunities for tobacco-related accessories,” says Duncan Cunningham.“In order to tap into this trend and take advantage of the incremental sales on offer, retailers should make sure they’re fully stocked at all times of filters, papers, lighters and other flavour-related innovations like Rizla Flavour Cards and Rizla Polar Blast Crushball filters, to cater for the rising number of consumers buying into the RYO segment.”
Republic Tech’s Gavin Anderson agrees: “Filters continue to be the category’s strongest performer, with sales rising 10 per cent year-on-year, now worth more than £75 million and growing three times faster than the total accessories market.
He adds that many people are now shopping more frequently at stores local to home, avoiding large numbers of shoppers in supermarkets, and this is helping to maintain the strong performance of tobacco accessories in convenience.
“Market growth has also been accelerated by the record number of consumers turning to roll-your-own products, recognising the quality and affordability they deliver, as cost-conscious shoppers look for greater value for money in both tobacco and accessories,” he says.
The menthol ban has released onto the market the flavour card NPDs which have proven amazingly popular – giving autonomy back to users is just the ticket, it seems.
“We launched our Rizla Flavour Infusions range at the end of 2019,”says Cunningham,and it has been extremely well received by both the trade and consumers. “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.”
Republic Technologies has this month launched its own Flavour Fusion Cards, a new sub-category for the company. They will enable consumers to create their own level of flavour in a packet of cigarettes or roll-your-own tobacco in just 30 minutes and will come in two variants, Fresh Burst and Menthol (RRP: 39p per card). Each outer contains 25 individual cards.
“Following the change in legislation last May, we have seen a significant number of consumers looking for flavour alternatives to menthol cigarettes,” says Anderson.“The iconic Swan brand is a beacon within the tobacco accessories category and is synonymous with quality and value. Our Swan Fresh Burst Crushball filter is already the best performing menthol capsule filter in the market, less than one year after launch, and we’re confident that this latest product innovation will enable retailers to drive sales within their tobacco accessories fixture,”
He says that environmental considerations continue to influence shoppers, with increasing demand for more natural products, reduced packaging and removal of single-use plastics, resulting in Republic Technologies increasing its focus on environmentally friendly NPD.
“This has led to a surge in demand for category-boosting products such as OCB Virgin Slim and OCB Virgin Slim & Tips, which are unbleached papers, with OCB natural gum which is sustainably sourced from African Acacia trees. Both are available in a slim vertical shelf ready box, enabling c-store retailers to manage display space more efficiently,” Anderson points out.
“We’ve also seen increased interest in Premium Paper & Tips formats, such as OCB Virgin Slim & Tips, OCB Premium Slim & Tips and OCB Organic Hemp Slim & Tips, with the sub-category now worth nearly £14m and growing at 80 per cent year-on-year,” he adds, revealing the effects of the move to RYO.
Although not strictly a tobacco product, Tangy Gifts offers a Real Leaf smoking blend which is both nicotine-free and has no aftertaste. “At this time of year, with many people giving up things like tobacco and moving to alternative forms of smoking, this is a great natural product with a smooth texture and no nasty chemicals,” they say, which might suit consumers who like to smoke and can’t face vape.
“Since 2012 Real Leaf has become a global leader in the tobacco substitute industry delivering some of the best handcrafted tobacco-free herbal blends to people around the world,” says Tangy. “With a delicate texture and unique aroma, the real Leaf nicotine-free blend includes red raspberry leaves, marshmallow root, damiana and mullein. It is truly designed to make your smoking experience cleaner and far more enjoyable.
Tangy is also a leading supplier of flavour cards – beyond menthol now, with flavours such as Ice Cherry, Blueberry Mint as well “Our most popular brands are Aroma King, Rizla and Instahit,” they say.
Convenience comes out ahead
Imperial’s Cunningham says that 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 smaller stores to benefit from additional purchases. “As a strong travel retail brand, an increasing number of consumers have been buying Golden Virginia Original within UK retail stores,” he explains.“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.
It’s not only Golden Virginia. The vast majority of this wider duty-paid domestic sales increase will be over the counters of convenience stores, and Cunningham predicts that the pandemic changes are here to stay, at least in the medium term.
“As we enter the first half of 2021 under similar circumstances to last year, retailers may continue to be in a strong position to benefit,” he says.“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 a third national lockdown currently being implemented across the nation, this is a trend that is likely to continue through to spring. 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.”
This is where customer service comes in. It has a particularly crucial role to play at present, given the in-store pandemic restrictions. “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. 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,” says Cunningham.
STG’s Alastair Williams agrees that sales can be pumped up and safeguarded by offering a personalised service. “I think in general talking to your customers is key, particularly with your tobacco customers, who may well be the most loyal you have, 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.”
“Ultimately,” concludes Cunningham , “we’d recommend stocking as broad a range as space allows and then fine tuning this in the weeks and months that follow according to customer feedback and sales. The retailers who can remain agile, will be in the best position to cater for their customers and grow their nicotine sales as a result.”
Cunningham suggests doing simple things to drive sales, such as using small countertop unit for tobacco-related accessories, especially if it is well organised and fully-stocked. Making sure it is positioned in a well-lit part of the counter will also help increase visibility of products even further.
Republic Tech’s Gavin Anderson says that these are golden times for tobacco in convenience, despite the vape wave and ever-increasing regulation. Sales in the convenience channel are now worth over £230 million (making up more than three quarters of the tracked total tobacco accessories market), up 3.1 per cent year-on-year:
“Driven by category-boosting NPD and consumers spending more time at home, with less day-to-day restrictions on tobacco use, the UK’s tobacco accessories market continues to deliver a really strong performance.”
He advises that Republic Technologies is supporting its Swan Filters and OCB Slim & Tips ranges with space-efficient counter display units (CDUs).
The Swan CDU holds five packs of each Swan menthol variant and enables retailers to showcase the breadth and choice in menthol from the UK’s No.1 filter brand, featuring Menthol Extra Slim, Cool Menthol Extra Slim, Cool Burst Crushball and Fresh Burst Crushball.
In addition, Republic is rolling out an OCB counter display unit, with a CDU which contains 10 booklets of each of the three OCB Slim & Tips products: OCB Virgin, OCB Premium and OCB Organic Hemp.
“The display units not only enable convenience retailers to showcase the very latest tobacco accessories NPD, creating awareness and driving impulse purchase, they also enable retailers to signpost the tobacco category,” concludes Anderson.