Tobacco legislation changes have now been in effect for six months. Joseph Lee looks at how they have changed the market, and finds out who the winners – and losers – are.
Six months after the ban on branded packaging and smaller packs came into full force on tobacco products, and retailers have begun to feel the effects.
Nevertheless, suppliers stress that much has stayed the same: in the past year, tobacco was still worth £6.6bn to independents and symbol groups served by wholesalers, according to Japan Tobacco International (JTI); of that total, ready-made cigarettes continue to account for £5.6bn (85%).
“There was an element of initial confusion among adult smokers about the new legislation as well as some challenges around price perception,” says Chris Street, head of route to market at Imperial Tobacco. “The most recent feedback now that the market has transitioned to standardised packaging suggests consumers are gradually becoming used to and accepting of the new pack sizes and lack of on-pack branding.”
But just as consumers have had to adapt to the new market, wholesalers must now understand how the changes have affected smokers’ choices if they are to continue to make the most of tobacco sales.
Going through changes
With tobacco products hidden away in gantries and wrapped up in identical, drab packaging, smokers have naturally become more price-sensitive. “Price plays an increasingly important role in the purchasing decisions of retailers and their customer base,” says Andy Stevens, head of sales at JTI. “It is more important than ever to maintain competitive pricing in order to retain retail customers.”
Low-priced cigarettes in the value, super-value and ultra-value segments of the market now make up 66% of the total ready-made cigarette market, according to JTI.
It is a similar story in rolling tobacco: Imperial reports that 54% of roll-your-own (RYO) sales are now value brands. “Many consumers have become more price-conscious than ever before, meaning an increased reliance on the expertise of retailers and their staff when it comes to finding out what products offer the best value for money,” says Street.
The new regulations also meant an end to pricemarked packs for ready-made cigarettes and rolling tobacco. But manufacturers have been advising against taking the opportunity to add margin with higher prices, arguing that the price-sensitivity of smokers means they will take their business elsewhere.
“Pleasingly, an increasing number of retailers are resisting the temptation to premium-price for a quick short-term gain and are instead focusing on the long-term sustainability of their businesses,” says Street. “The savviest wholesalers and convenience store owners ensure their prices are pitched at RRP or below, allowing them to compete with the multiples and preventing
their customers from beginning to look elsewhere for tobacco.”
Despite the rise of value brands, not every smoker simply asks for the cheapest pack available: some premium brands have received a boost now that there are no displays and consumers have to ask for them by name.
“Since the transition to standardised packaging, adult smokers have certainly become more reliant on brand, either sticking with or returning to the brands they traditionally relied on to provide a quality smoking experience,” Street says.
For this reason, wholesalers should not focus on the growth of value brands at the expense of premium packs, which still have a strong following. In RYO tobacco, for instance, Street says that the premium Golden Virginia label commands 22% of the market.
The regulations have also created new opportunities for growth, particularly in cigars, which are not affected by plain packaging or the bans on packs of 10 and pricemarking. According to Scandinavian Tobacco Group, the cigars category is worth £198.5m.
Tony Lyles, field development manager for Ritmeester Cigars, suggests wholesalers can drive growth in the category by promoting products that will encourage smokers to switch.
Ritmeester’s Mini Moods, for example, are available in packs of 10 and feature double filters for a smooth smoke that appeals to customers used to cigarettes. It also offers margins of up to 25%. “With cigars offering better margins for retailers than cigarettes and tobacco, it is vital to keep a good range in stock,” Lyles says.
All these changes mean that expertise in tobacco is more valuable than ever: those wholesalers that can advise retailers and help them guide the choices of smokers are the ones most likely to succeed.
“The introduction of the European Tobacco Products Directive II (EUTPDII) and standardised packaging means wholesalers and convenience store owners now have markedly more responsibility to really understand their tobacco offering, from the broader category to the various sub-sectors and their relative pricing,” says Imperial’s Street.
The rise of the e-cig
While the tobacco market is being reshaped by new regulations, a whole new market is opening up in e-cigarettes. It is rapidly growing, but the wholesale channel has played only a small part in it so far. According to JTI, sales of vaping products reached £158m last year, but only £6m of those sales went through wholesalers.
For many independent retailers, e-cigarettes are still a mystery, with owners and managers looking to wholesalers for guidance.
“In order to maximise sales, wholesalers must be knowledgeable about the various devices available, their USPs and how they work – therefore, staff education and training is a must,” says Stephane Berset, head of marketing at JTI.
The company has recently retrained its sales team to ensure they can advise wholesalers on market trends and effective merchandising.
There are signs that the e-cigarette market is maturing, too: as EUTPDII puts some small players out of business, the market is consolidating around some big brands and becoming easier to navigate.
“The market has been and is still going through lots of changes because of EUTPDII,” says Sophie Hogg, head of next generation products at Imperial. “Some brands have disappeared from the market altogether, whilst others have been reinvented. The introduction of tighter regulations has forced manufacturers to take a fresh look at what they are making and selling. The result may be fewer brands, but higher quality products and better safety across the market, which should in turn instil further consumer confidence in vaping products and drive retail sales.”
Although wholesalers have so far captured only a small proportion of sales, Imperial says there is a “huge opportunity” for wholesalers and convenience stores to seize the initiative.
“Recent consumer research has identified that for new vapers, the convenience channel is their first port of call, over the supermarkets,” says Hogg. “The best way to tap into this and encourage vapers to shop in a store is to upskill staff and educate them about the category and the different products available.”
The products to focus on are vapes with refillable tanks. According to research from TNS Global earlier this year, these account for 80% of devices used.
Vapers also tend to prefer lower-nicotine e-liquids, with 58% choosing refills with 12mg/ml or less of nicotine.
Fruit and mint flavours are most popular, being used by 58% of vapers. Tobacco flavour, once the preferred choice, fell to third place in the last year.
If independent retailers supplied by wholesalers are to gain market share, they need to have specialist e-cigarette shops in their sights, with 36% of vapers buying their refills there.
Matt Tisdall, head of sales at Philip Morris International, says wholesalers can help by creating a dedicated area of the depot for e-cigarettes, with clear displays and grouping of products by type.
“It does not need to be in the tobacco room – these can be sited in areas of higher footfall to generate the impulse purchase opportunity,” he says.
“Keep it simple, focus on a core range that is most suitable and applicable to your retail customers. Be aware of what your retailers want to achieve from the category and ensure your range is suitable for their needs.”
“Some retailers say they are losing £1,000 a week in tobacco sales, but for us, it has been around £500. Sovereign, B&H Blue and JPS Players are some of the brands that have held up well – the value brands.
“Quite a lot of customers have moved over to e-cigarettes, but we could do with more advice and training about them. There are so many systems and brands it is hard to know what to stock.”
Harj Gill, The Windmill Select & Save, Birmingham
“Sales have definitely gone down, especially because 10s are not available. Big brands like Marlboro Lights are holding up and so are the cheaper ones, but it is the middle ground that is having trouble. E-cigarettes are doing well for us, especially because the margins are good, with 40% on the liquids.”
Raj Dhillon, Westcombe Park Food and Wine, London
“We have consolidated our tobacco range: in one of our stores, we removed the gantry and put the tobacco under the counter. But we have improved our range of e-cigarettes and sales are increasingly slightly. It is ranging advice that we need for e-cigarettes. It is a confusing market – JTI has its own brand, Imperial has its brand, but what we do not know is which ones people are actually buying.”
Dean Holborn, Holborns, Redhill, Surrey
“I think they were hoping that everyone was wrong about the effect on the market, but it has had an impact. It is probably more than 50% of sales now that are value tobacco. The margin is about 4%, maybe. So really, although it does bring the turnover up, as far as actually making money, it is diminishing. The category will eventually erode.”
Harry Goraya, Nisa Local, Northfleet, Kent