Once something of a poor relation within tobacco, Roll Your Own (RYO) is now the biggest market sector by volume. One in three adult smokers now use it and growth is likely to continue as smokers are increasingly drawn in by its value-for-money proposition.
The market is now worth £2bn, and Imperial Tobacco estimates that growth in sales of RYO will be up about 0.5% in 2014 compared with last year.
This growth, UK communications manager Rachael Geake says, will continue to be fuelled by smokers choosing to control their spend by switching from factory-made cigarettes.
The menthol market now accounts for almost 10% of cigarette sales, and while its days may be numbered (new laws in the EUTPD seek to ban it from 2020) for now, sales are climbing - particularly within the value and economy segments of the market.
It’s a fact which has led to a significant amount of new product development so far this year. BAT launched Rothmans Superkings Value Menthol in packs of 19 with an rrp of £6.10 back in May, while Imperial Tobacco extended its Player’s range with Player’s Menthol at the start of the summer. The brand is available in Super King Size 19 packs with an rrp of £6.49. Pricemarked packs are also available for a limited time only, at £6.25.
The latest to join the action is JTI. It is extending its Sovereign range with Sovereign Menthol Superkings, available from early September. The packs of 19 will have an rrp of £6.50, in both pricemarked and non-pricemarked packs.
Developments in capsule cigarette products, which took the tobacco category by storm in 2013, have slowed in 2014, although the category accounts for just over 5% of the total cigarette market, according to Philip Morris (PMI).
The company unleashed Marlboro Ice Blast on to the market late last year. Unlike other capsule products, PMI Marlboro Ice Blast offers a cooling flavour from the start. The taste can be further enhanced by crushing the ‘iceball’ capsule, allowing the adult smoker to experience a more powerful burst of flavour.
The category’s value-for-money credentials means that pricemarking plays a key role and according to JTI head of communications Jeremy Blackburn, pricemarked packs (PMPs) now account for 64.5% volume share of the RYO market in independents and symbols, with volume growing 4% year on year.
“Adult smokers are looking for value, so it’s important that manufacturers and retailers demonstrate that they are getting the best possible choice and value when making their tobacco purchase,” he says. “Pricemarking does exactly this while also driving footfall, customer loyalty and associated purchases.”
Imperial Tobacco’s Geake agrees that PMPs have a vital role to play in achieving a positive price perception and communicating value for money. She points to research which shows that 57% of adult smokers will always buy PMPs if they are available.
However, while adult smokers are clearly all for them, PMPs on RYO tobacco divide opinion among convenience store retailers.
Steve Archer, who owns three Premier stores in and around Stoke on Trent, says that he tries to “stay away from pricemarks as much as possible”. He adds: “Some retailers swear by PMPs, but I’m on the other side of the fence. Ten years ago we decided to stop selling PMPs wherever possible as the margins were just too low. Instead, we decided to round the prices up so that we always achieved a margin of 10%. It was a brave move, but it’s paid off and we haven’t noticed a decline in our sales, and that’s despite the fact that one of our stores is in quite a deprived area and another is in a busy city-centre location with plenty of other stores which adult smokers could buy from.”
He adds: “What I’m finding now, though, is that the manufacturers are launching more and more PMPs, without giving us the option of non-pricemarked stock. It’s irritating as it’s starting to drag my margins down again to about 8%.”
In the Cotswolds, Londis retailer Mike Dorey takes the opposing view. Mike uses strategically-placed PMPs around his shopfloor and on his tobacco gantry to reassure shoppers that they are getting a good deal. “PMPs help increase trust in your brands and in your store, helping to boost footfall and sales,” Mike says. “Trust is so important these days and if a shopper walks into your store and sees competitive pricing, coupled with great availability, they will trust you. Investing in PMPs and promotions will cost you money at first, but in my opinion it’s worth it in the long-run,” he says.
Dennis Williams of Broadway Convenience Stores in Edinburgh is also a PMP fan. “Nearly all of our RYO packs are pricemarked and I wouldn’t do without them. This is a value-driven area and I think that being able to see the PMPs reassures adult smokers that they are getting a good deal.”
So, how will the display ban, set to come into force in small stores in less than eight months, affect PMPs on tobacco? Will they still have a role to play once the shutters come down and adult smokers can’t see the packs on display?
Scandinavian Tobacco Group (STG) head of marketing Alan Graham thinks that they will become more, rather than less, important in the display ban environment.
“Adult smokers will only be able to see a very limited portion of the gantry each time the shutters are opened to retrieve a product or upon a requested display, so the manufacturers will want to ensure that what customers do see stands out,” he says.
“With shelf-edge labelling set to be much smaller and subject to strict rules, the pricemarks on the packs look like becoming even more significant, particularly on RYO where the packs are larger than cigarettes, meaning that markings are also bigger and clearer,” he says.
STG offers both pricemarked and non price-marked stock for its Salsa RYO brand. However, 80% of its sales of 12.5g packs to retailers are PMPs.
Convenient combi packs growing in popularity
The popularity of ‘combi’ packs, which combine all of the RYO smoker’s chief needs in one handy box or pouch, are on the increase.
In fact, according to Imperial Tobacco, 62% of RYO tobacco shoppers prefer their tobacco to come with papers, helping to explain the uplift in sales of its 8g GV Smooth Handy Packs and behind the decision to include papers in packs of Golden Virginia Classic and GV Smooth.
BAT’s Pall Mall brand recently launched new 20g packs with papers inside. “Pall Mall RYO is BAT’s prize fighter,” says Pall Mall brand executive Fiona Biggs. “Adult smokers are looking for great value. Tobacco retailers are looking for a strong return. And growth in the 20-25g segment is driven by papers in pouch offerings. So when we were considering ways to upgrade Pall Mall 20g we decided to offer an upgrade that would give wholesalers and retailers more of an opportunity to cash in on this growth phenomenon.”
Another product that unifies both the trend towards smaller packs and combi products is JTI’s Amber Leaf ‘3 in 1’. The 10g combi pack was launched nationally at the end of last year and contains 30 filters, 50 papers and a 10g mini pouch of tobacco in a crush-proof box for an rrp of £3.45.
Plain packaging legislation, which the government is currently deliberating over following the closure of the final consultation earlier this month, would sound the death knell for PMPs. But for now it looks as though the mechanic will continue to play a key role.
Readers might be surprised to learn just how much work goes in to setting the actual price points. It’s certainly not just a case of manufacturers going a few pence lower than their nearest competitors, although the latter does invariably play a role.
Choosing a price point is something of an art form, it seems. Clearly, taxes, production costs, and margins come into the mix, but there’s also quite a bit of psychology involved, too, BAT acting head of business development Richard Wood says. “Number psychology is a serious thing,” he explains. “There are some numbers out there that people generally like, and others which for almost subliminal reasons they don’t, and if you can it’s best to avoid those.”
According to a recent global online survey by The Guardian of more than 30,000 people, the world’s favourite number is seven, followed by three and eight.
“Equally,” Wood adds, “there is a ‘pain threshold’ that customers simply don’t want to cross, and as manufacturers we need to be aware of what that is and work to find the right balance.”
Despite the growing popularity of pound shops, adult smokers seem to have a preference for price points that sit just below, or just above, round pound prices. Wood says: “If you look at a tobacco gantry the majority of products feature prices either just below or just above the round pound, such as Pall Mall RYO 10g for £3.09.
“It’s no different from house or car prices,” he adds. “How often do you see a house on the market for £1m? It’s more likely to be something like £999,950. The perception is that it’s cheaper, and therefore better value.”
However, as tobacco taxes and price pressures continue to mount, achieving that perfect price point is becoming increasingly challenging. Cue the veritable explosion in smaller pack sizes which has been seen so far this year. Smaller pack sizes command smaller price points, and while new laws contained in the European Tobacco Products Directive (EUTPD) will ban the sale of all RYO packs under 30g from 2016, for now manufacturers are using petite pouches as a way of keeping price points in check, as well as tapping into the little and often shopping trend that shoppers are demonstrating in all categories, including tobacco.
JTI’s Blackburn explains: “There is a trend towards smaller pack sizes of less than 12.5g which now account for 5.4% of the RYO market. This has grown considerably from last year when the market share for these pack sizes was 1.5%.”
Responding to adult smokers’ preference for smaller pack sizes at a lower price point, JTI this month introduced its new Amber Leaf Signature Blend in a small 10g pack with a price point of £3.65.
Move to downsizing
In addition to new products in smaller pack sizes, the manufacturers have also been working on downsizing existing packs in a bid to attain lower price points. Earlier this summer Imperial Tobacco decided to scrap its 12.5g pack size of JPS RYO in favour of a smaller 9g pack which can command an rrp of £2.99. The company had already created Gold Leaf in a 9g pack at the end of 2013, enabling adult smokers to make 22 hand-rolled cigarettes for £2.95.
Top 10 RYO in the UK by house
1. Amber Leaf
2. GV Green
3. Cutters Choice
4. Gold Leaf
5. GV yellow
7. JPS RYO
8. Pall Mall RYO
9. Old Holborn
10. Sterling Rolling
Source: JTI Nielsen Market Track year to May 2014
BAT hasn’t shied away from the action either. Its Pall Mall RYO brand is now available in a 10g pack, with an rrp of £3.09, while its recently refreshed Cutters Choice brand has just moved from a 12.5g pack down to a 10g pack with an rrp of £3.43 across all three variants.
Smaller pack sizes are also proving popular with adult smokers who would like to trial a new RYO brand, or are newly switching from factory-made cigarettes into RYO and don’t want to invest in a larger pack size first off, reports retailer Ralf Patel of ‘The Look-In’ in Woodmansterne, Surrey.
“Smaller pack sizes are also ideal for smokers who are looking to cut down their tobacco consumption, or who are keeping their spending in check, so I think it’s ludicrous that they are to be banned from 2016. This misguided measure will simply force people to buy larger pack sizes, and in so doing will just prompt them to smoke more; it’s madness.”
He concedes that deciding which of the smaller packs to stock is posing more of a problem as more brands get mini versions. “The past year has seen an explosion of new smaller pack sizes and I can’t possibly stock them all as I don’t have the space on the gantry.”
Steve says that the proliferation of pack sizes is proving a challenge for him, too. “The manufacturers can launch as many as they like, but I’ll only sell the top-selling three as I simply don’t have the space on the gantry for any more.
“My Imperial sales representative was asking why I wasn’t stocking the 8g GV Smooth Handy Pack and I told him ‘I don’t have the space and it’s not profitable enough for me. I want my margins to be a percentage of a bigger price, not a smaller one, so if my customers are happy buying the 12.5g pack, which they are, why give them a smaller option?’.”
STG head of marketing Alan Graham says that both its Salsa and and Natural American Spirit RYO brands are available in 12.5g packs but that it was unlikely to ever go smaller. “There are just so many different pack sizes on the market now; some with papers, some without, and some with papers and filters. However, we’ve decided to stick with the 12.5g pack size and focus on the gram for gram price, rather than the price point, which is what many of the other tobacco companies are going for. We won’t be going any lower than that.”
Best practice in action
Imperial Tobacco’s retail development executive Ian Hammett (right) and Sheffield retailer Steve Kidder (left) have been working together to improve ranging and sales at Steve’s Costcutter store in advance of the tobacco display ban next April.
The store introduced several new economy-priced cigarette brands including Players and Richmond and invested in pricemarked packs which were previously not stocked.
Together, these two measures, along with a keener focus on availability, have helped to boost the range and change the perception among local adult smokers that the store was “too expensive”, Steve says.
The figures speak for themselves. From 1 June to 31 August last year, Steve sold £47,000-worth of tobacco products. However, following Imperial’s help, from September to December, sales were up to £61,000. During this same period Steve’s availability of key tobacco SKUs also jumped, increasing from 57% to 96%.
Steve is now working hard to maintain standards in the run-up to the tobacco display ban. “I’m hoping to get everything remerchandised soon so that tobacco products are in the right place when the doors go on. Getting it right now and being totally prepared is key,” he asserts.
Good news, thinks Dennis. “The array of smaller pack sizes is starting to get a bit much. We don’t have the space to stock them all, and in any case, just how much lower can they go? It’s getting a bit ridiculous, really. Where’s it going to end, a 5g pack? Let’s hope not!”
However, with a ban on packs of less than 25g looming, should retailers be thinking about delisting smaller packs altogether and getting adult smokers used to purchasing the larger pouches? No, says Graham. “Our figures show that 80% of pack sizes purchased are under 30g so it would be a very brave retailer who decided to start taking smaller pack sizes out now,” he asserts.
A cut above
While RYO tobacco undoubtedly remains a strong value proposition, various investments from the UK’s major manufacturers have also helped the category to boost its quality credentials.
BAT’s Woods explains: “For a long time RYO was an option for adult smokers who were interested in price. Today, RYO is an option for adult smokers who are interested in both price and taste.
“Tobacco prices are just going to keep on going up and up, so we have to give adult smokers something more and we can do that by focusing on quality. That’s why we’ve invested so heavily in the Cutters Choice brand and the introduction of The Exquisite Blend,” he adds.
The tobacco used to make up this new rich-tasting blend originates from a variety of extreme soils including Southern Brazil and Mozambique, to give it a unique character. That it provides retailers with a 15% margin is also helping to boost its popularity with retailers and, according to Woods, a growing number are now stocking the full Cutters Choice range.
“The new launch and associated packaging refreshes were an investment for BAT, but we are confident that it will pay off as adult smokers start to look beyond price towards quality and heritage,” Woods adds.
According to STG’s Graham, quality will become even more important once we are in a full display ban environment. “Once the display ban is enforced there are three product areas which will continue to thrive: trusted brands; value products; and niche quality products such as Natural American Spirit (NAS).
He says: “NAS isn’t pricemarked as price tends not to matter to the adult smokers who buy it. These tend to be wealthy urbanites, the type of people who buy organic fruit and vegetables and are into recycling. The additive-free factor is, of course, a big driver of sales, but so is the fact it’s also a premium tobacco. You won’t find bits of stalk or black eyes in a pack of NAS; it rolls and smokes really well and that is helping to boost sales. The brand is particularly strong in London, where it’s actually the eighth biggest-selling brand.”
Other new laws contained in the European Products Directive (EUTPD) will ban manufacturers from using words such as ‘natural’ or ‘additive free’. While admitting that this poses a challenge for a brand with ‘natural’ in its name, Graham isn’t too worried. He comments: “The adult smokers who buy into the NAS brand are fully aware of its additive-free credentials. The market itself is performing very well and even the worst performing areas of the country are still recording growth of 21% while in our best performing areas such as London sales are growing by 60%.
“The brand’s quality credentials have a lot to do with this and a lot of that growth is coming through independents and symbol stores.”
UK cigarette market
While RYO tobacco sales account for the largest volume share of the total tobacco category, when it comes to value cigarettes still command the lion’s share.
According to JTI data, the total tobacco market was worth £15.4bn in 2013, with cigarettes accounting for just over £13.1bn of that. Premium priced cigarettes, such as B&H Gold and Silk Cut, account for 19.8% volume share of the UK cigarette market, sub-premium for 14% and mid-priced 20.8%.
Value and economy priced brands continue to dominate the cigarette segment with a 45.3% share, but much of 2014’s significant new product development has so far been concentrated within the value and economy-priced cigarette segments.
While limited-edition packs and packaging refreshes have come thick and fast, a sizeable proportion of this NPD has been menthol-oriented, so expect to have to do more re-shuffling on the tobacco shelves in the coming months.
Sign of the times
JTI has expanded its Amber Leaf RYO range to include a new premium variant. Amber Leaf Signature Blend is available now in a 10g ‘3 in 1’ crushproof box (rrp £3.65) and a 20g pouch with papers (rrp £6.99). Standard and pricemarked packs are also available. It is billed as the first organically grown tobacco leaf RYO product to be sold in Europe. JTI head of communications Jeremy Blackburn said: “Amber Leaf Signature Blend is a unique proposition. Its addition to the house will enhance the range and strengthen the brand. Furthermore, retailers will benefit from a 13% POR.”
Sterling RYO freshens up
From September, Sterling RYO will feature a refreshed, modernised look along with a reduced price point and smaller 9g pack size.
PMI amps up Chesterfield support
Philip Morris introduced limited-edition ‘festival’ packaging for its Chesterfield and Marlboro Gold Original brands this summer. The new packaging was designed to celebrate the summer music festival season, a key sales period for tobacco.
Life’s a beach for BAT’s Pall Mall
BAT is also opting for limited-edition pack designs this summer, featuring on its Pall Mall capsule cigarette range. The packs depict beach-themed printed film designs. Packs are available pricemarked at £6.49 for 19 and non-pricemarked in 10s and 19s.
Amber Leaf gets a hot summer look
JTI unveiled some limited-edition packs for Amber Leaf earlier this month. The packs, which are still available, feature a letterpress design on 12.5g crush-proof boxes, as well as 10g, 25g and 50g pouches. The packs were created with the help of a top letterpress artist to “reinforce Amber Leaf’s quality and craftsmanship credentials,” according to JTI.
Small but mighty
Imperial Tobacco has launched a mini 9g pouch of JPS RYO, enabling smokers to make 22 hand-rolled cigarettes for less than £3. The new packs, which are also available pricemarked, have an rrp of £2.99, “perfect for smokers looking to reduce their outlay on tobacco, control consumption or trying the brand for the first time”.