Cash in: Tobacco - Sticking around

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Despite a barrage of challenges, cigarette sales through convenience stores grew last year, but how will they fare in 2011? Gaelle Walker investigates

Given the sheer weight of regulatory and economic challenges bearing down on the UK tobacco market, you’d be forgiven for expecting sales to fall dramatically. Forgiven, yes, but as every convenience retailer knows, the UK’s tobacco category is standing its ground rather well, and at a market value of £12bn generates a lot of cash.

In fact, the weak pound and subsequent fall in foreign travel, married with HMRC’s more aggressive stance on the illicit trade, has led to many convenience store retailers recording higher tobacco sales in 2011.

Despite the seemingly unstoppable growth of Roll Your Own brands, which soared by a further 18% in the 12 months to December 2010, cigarettes continue to dominate the UK tobacco category, and sales of cigarettes through UK convenience stores actually grew by more than 3% in 2010 to reach more than £6.3bn (AC Nielsen).

The category’s lower-priced cigarette brands continue to be the engines of growth, and data for the 12 months to December 2010 reveals that sales of economy-priced brands including JTI’s Sterling and Imperial’s JPS King Size Blue, rrp £4.93, increased by 50%. According to Imperial Tobacco UK communications manager Iain Watkins, retailers should expect little change to this pattern in 2011.

“It is likely that the growth in economy brands will continue this year,” he says. “Tobacco shoppers are increasingly price-conscious and will be looking for value for money while retaining their preference for high-quality brands.”

Despite of or perhaps because of the VAT rise, the end of 2010 saw no let up in the number of pricemarked packs (PMPs) being launched onto the market.

Virtually all of British American Tobacco UK’s (BAT UK) lower-priced brands, including Pall Mall and Royals, are available in PMPs, and last November Imperial made its flagship standard-priced brand Lambert & Butler King Size available in PMPs, flashed at £5.85 for 20 and £2.99 for 10.

“PMPs will become more important in 2011 as shoppers continue to ensure that they get the best value for money,” says BAT UK and Ireland brand manager Henri Lewis. “Retailers who stock PMPs encourage customer loyalty as they know they are getting the best possible price for the product.”

However, while manufacturers and shoppers still appear to have a soft spot for PMPs, many retailers still need convincing that it’s right for them.

A recent straw poll of c-store readers revealed a noteworthy amount of bad feeling towards the brash and bold price flashes because of the “inadequate” margins that they offered. Of the six retailers we spoke to only two said they were happy to stock PMPs. A further two refused point blank to stock them at all, while the remaining pair said they stocked them begrudgingly.

Armin Ahemtagic, manager at Nisa Local in Houghton Regis, Bedfordshire, agreed that while switching to PMPs for certain brands had helped to boost sales, he was forced to sell high volumes in order to achieve the same margins that he would on non-PMPs because the “margin was not there”. He says it is a challenge he does not relish.

Fellow Nisa retailer Pat Patel of Nisa Local in Hemel Hempstead has recently expelled PMPs from his gantry altogether. “I no longer stock PMPs because of their poor margins, plus they do not make a big difference to sales,” he says.

Also anti-PMPs is Manchester Spar retailer Paul Stone. “As a business we do not stock PMPs on principle as the margins are so terrible,” he says.

Paul’s top-selling cigarette brand is Marlboro Lights, which he sells with a 13% margin at £6.82, helping him to make a 76p profit on a pack of 20. “Because we trade 24 hours a day and are right in the city centre we do charge a significant premium over manufacturers’ recommended price. That’s why our margins are so high and why I am so against PMPs,” he explains.

Clearly, these views are not representative of the entire retail trade many still believe that the footfall generated and secondary purchases prompted by PMPs are a fair trade off for smaller margins and wouldn’t be without them but they’re thought provoking nonetheless. 

Read more:
Cash in: Tobacco - Premium cigarettes
Cash in: Tobacco - What the retailers say

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