What with the ban on advertising, margin-squeezing annual tax increases and enormous legal responsibilities, tobacco retailers and manufacturers have a lot to contend with. If all that were not enough, by the end of the year the Health Improvement and Protection Bill will reach Parliament, bringing with it a possible ban on smoking in enclosed public places.
More legal constraints are certainly not welcome, but if Ireland is anything to go by a ban may not hit England and Wales too hard. According to Chris Ogden, director of trade and industry affairs at the Tobacco Manufacturers’ Association, following an initial decline, tobacco sales in Ireland are returning to their pre-ban levels.

In fact, says Ogden, tobacco retailers’ main concerns are high taxation, smuggling and counterfeit tobacco products.

Recent research by The Tobacco Alliance’s Economic Survey showed that one fifth of corner shops considered closing because of the impact of tobacco smuggling, and one third was also aware of fake cigarettes being sold in their area.

“If the government would listen to us and the retailers and freeze or reduce taxation on tobacco products, then order would be returned to the market and retailers would feel a lot happier about their livelihoods,” says Ogden.

On a positive note, the concerted efforts of the major manufacturers and HM Revenue and Customs are beginning to reverse a four-year growth in cigarette smuggling.

Roll your own (RYO) has certainly fought back - in the 12 months ending June 2005 the segment increased its sales by 9.3% and its volumes by 5% (source: Imperial Tobacco). In fact, the overall category seems to be bearing up under the strain.

“Despite the decline of smoking incidence and a reduction in the average daily consumption, UK tobacco volumes have shown only a very marginal decline over the past 12 months,” says Clare Walker, trade marketing manager for Philip Morris.

Price continues to be the biggest influence on cigarette purchasing trends. “The super low price segment, in which Basic competes, continues to grow in share, now accounting for 39.8% of the category, a growth of 3.4% versus last year. Price-marked packs have played a key role in driving the growth of this segment by providing consumers with a clear price position,” says Walker.

Lambert & Butler King Size continues to dominate the market with 12.6% share of total cigarette sales. Mayfair King Size is growing apace at 9.8% while Richmond Superkings and King Size are up by 7.8% and 7.9% respectively, reflecting the trend toward value for money. “The Richmond brand’s success can be explained by the fact that it’s perfectly positioned for adult smokers looking for value for money while retaining a desire for high quality,” says Iain Watkins, trade communications manager at Imperial Tobacco.

However, premium still accounts for more than 30% of the market. In an effort to square the circle between demand for top brands and desire for a lower price, Gallaher recently launched Benson & Hedges 14s. It’s early days for the new format but the lower price point - particularly with price-marked packs of Benson & Hedges Silver 14s - is likely to grab brand loyalists’ attention.

Using price to shout about tobacco products is one of the few marketing techniques left for the retailer. In the absence of advertising, visibility of product is key and new gantries are appearing to help retailers maximise the impact of established names - as well as new products.

With the use of double-decker cassettes, Gallaher’s recently-launched MaCS unit provides clearer brand standout. The unit increases the visibility of the packs by 50% for the same stockholding, the company explains.

Making sure you stock sufficient quantities of the right brands is as important as ever, says Watkins. “This is where our salesforce can really come into play. As well as highlighting any regional variances in brand popularity for specific areas or locations, there are a number of ‘national’ brands that warrant a large presence on the tobacco unit due to their large-scale popularity.” Fortunately, convenience retailers are proving well able to meet the needs of their tobacco customers and the channel now accounts for 27% of this £12.6bn market.

“C-store retailers have shown they can compete with the grocery multiples when it comes to tobacco, and have claimed a strong share of sales by stocking appropriate ranges, implementing trusted merchandising policies and offering a first-class, more personalised service,” says Watkins.

Retailer view

Mamait Gill

Despite the rise of the value for money segment, premium brands are still key in Mamait Gill’s West Midlands store, Gills Supermarket. “Mayfair and the value end are gaining ground, but Benson & Hedges Gold is one of the brands that is holding its own.” For the cost-conscious, price-marked packs are proving a hit, but although pricing strategies can help offset the impact of annual tax increases on the consumer’s wallet, Mamait says there are other reasons why the UK should bring itself more into line with the rest of Europe’s duty levels. “Taxation gives the smugglers an incentive, and the people who bring in these tobacco products have no qualms about to whom they sell, whereas the shopkeeper has to be on their guard and follow the law. Generally, retailers toe the line but the government is not helping us.”

News in Brief

British American Tobacco United Kingdom (BAT UK) has repackaged its Royals cigarette brand to make it “more relevant” to today’s adult smoker. Available in 20s and 24s, the new packs will be on shelves nationwide from September, supported by on-pack communication, trade pos, a dedicated field trade marketing team, and trade and consumer information lines.

BIC has launched a retailer awareness campaign on the dangers of selling lighters that do not meet international safety standards. According to the company, few retailers are aware of their obligations under the ISO 9994 and many do not realise that failure to comply can result in a fine of up to £5,000. Among the company’s recommendations are that retailers request a copy of the manufacturer’s technical reports and compliance certificate; ensure lighters display suitable warnings; and make sure the manufacturer’s or distributor’s name is clearly visible on the lighter. A recent study found that almost all lighters imported from non-EU countries fail to comply with the standard.

Premium European rolling paper manufacturer OCB is making a push into the UK retail market. The company, which says it has already seen a 15-fold rise in value of its UK sales in the past two years, trades on the ultra light weight and high quality of the papers. The brand has also recently undergone a packaging makeover with the use of black and silver hologram packaging. The product is available in six formats, with an rrp for OCB Premium regular of around 50p.

The major manufacturers are united with HM Revenue and Customs and Trading Standards in their fight against smuggled and counterfeit product entering the UK market. Retailers can play their part by keeping government agencies informed if they suspect any illegal tobacco trading in their area by phoning HM Revenue and Customs on 0800 595 000 or Crime-stoppers on 0800 555 111.

ROLLED GOLD

Few things arouse passions as quickly as the sight - and smell - of someone firing up a big, fat cigar. Love them or loathe them, if cigars aren’t gracing your gantry you’ll be missing out on a slice of the £465m market for mainstream cigars and products that offer bigger margins than the average packet of cigarettes.
Sales of mainstream brands declined by 6.3% between the end of June 2004 and June 2005 (source: Imperial Tobacco), but with both multiple and independent convenience stores commanding 14.6% and 24.8% (source: Imperial Tobacco) of the cigar market respectively, it’s still a crucial segment for the channel.

PREMIUM
While sales of mass market cigars are in decline, Simon Chase, of UK premium cigar importer Hunters & Frankau, says sales of premium hand-made cigars are increasing in line with the economy.
“We estimate the premium cigar market to consist of around 3.5 million units per year with a retail value, including VAT, of approximately £27m,” he says.
And he believes constraints on cigar smoking in restaurants and hotels will open opportunities for the convenience channel to grow its share of this niche market. With prices ranging from £5 to £40 per cigar, and margins of between 30 and 35%, fine cigar retailing is well worth looking into.

Chase suggests starting with a range in cedar-lined, aluminium tubes which preserve condition and prevent damage. A range of six sizes and brands in tubes, including a display cabinet, could start at around £275. More expensive, un-tubed products require a humidor and a single unit can cost around £1,000 - but if handled properly stock can last up to 30 years so it’s an investment worth making. For new entrants into premium cigar retailing, Hunters & Frankau also offers comprehensive training courses.

TAKE CARE
Shailesh Patel, who has been selling fine cigars from his north London newsagents Jans of Cockfosters for more than eight years, agrees good husbandry is essential. “You should not allow cigars to be handled by anyone unless they are buying them. People who smoke cigars are very fussy, they don’t like anyone to handle their cigars - it’s like food,” he says.

He started with mainstream cigars and progressed to larger smokes as demand rose. Such is his success that next January he’s planning to install a walk-in humidor at a cost of around £14,000. For him, fine cigar retailing is another way of differentiating his offer from the major multiples. “Retailing is becoming so cluttered, you’ve got to have a niche or you can’t survive.” But, he warns, “it’s a market you have to build up over time; you can’t just start doing cigars and expect the customers to flood in”.

Most of Shailesh’s custom is generated by word of mouth, but there are ways to flag up the offering in store. “It is legal to display the fact that Havana Cigars are on sale,” says Chase. “Customer events such as tastings, with expert speakers, can be held and can develop into clubs. Everything has to be paid for, of course, as free sampling is banned.”

LEGISLATION - WHERE WE ARE NOW
The next piece of anti-smoking legislation, in the form of the Health Improvement and Protection Bill, is likely to reach Parliament before the end of the year. Following an initial consultation period the proposals are:

By the end of 2006, all central government departments and the NHS will be smoke-free

By the end of 2007, all enclosed public places and workplaces, other than licensed premises (and those specifically exempted) will, subject to legislation, be smoke-free

By the end of 2008, arrangements for licensed premises will be in place.

The Bill will apply to England and Wales, although Wales will be free to decide its own policy on public-place smoking. Northern Ireland is still deciding whether to impose a partial or complete ban on smoking in public places and in Scotland a ban comes into force in March 2006.

Source: The Tobacco Manufacturers’ Association

Key facts

Tobacco is a key footfall driver - 56% of tobacco shoppers buy from a c-store once a day

Smokers shop more frequently in c-stores than non-smokers, and, on average, cigarette customers visit convenience stores 4.4 times a week compared with 3.6 time for non-smokers

Smokers spend more in convenience stores - an average of £8.25 per visit compared with £5.26 for non-smokers

Around 50% of cigarette purchasers buy three or more products per visit.

Source: Gallaher Tobacco Category Guide

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