New tobacco legislation is now in force. Toby Hill looks at the fallout and discovers which products are faring best in the new climate.
After years of rumour, worry, legal wrangling and frantic preparation, the new tobacco legislation has landed. The EU-wide regulation, EUTPDII, limits pack sizes – a 20-stick minimum for cigarettes, and a 30g minimum for roll your own (RYO) products; meanwhile, new plain packaging rules see the UK follow Australia in banning branding on tobacco packets. The vaping market has been affected, too, with restrictions on the strength of liquids and limitations on the size of tanks.
So how can wholesalers prepare for a few months down the line, once the market has settled? How will the legislation affect segments including premium brands, economy products, cigars and e-cigarettes? And what is the market going to look like once these regulatory changes have made their mark?
Better Wholesaling answers these questions with the help of experts drawn from all points in the supply chain.
The most direct impact of EUTPDII for most customers is simple: the increased cost of tobacco. With 10-packs, 17-packs, pricemarking and the jumble of sub-30g RYO pouch sizes all gone, customers are facing a minimum spend of almost £8 to get hold of any tobacco product at all.
“Price will play an increasingly important role in the purchasing decisions of retailers and their customer base, as existing adult smokers seek out ways to reduce their tobacco spend,” says Jeremy Blackburn, head of communications at Japan Tobacco International (JTI). “The value RYO segment, for example, is gaining share of the RYO tobacco category, holding 23% of RYO volume sales.”
Cigarette and cigar companies have responded to this in various ways. Imperial Tobacco has focused on its economy products, particularly in the RYO segment. This has resulted in strong growth for its Gold Leaf brand, which now accounts for almost 11% of the UK RYO market, as well as its GV Bright Yellow brand, which has captured almost 10%.
Scandinavian Tobacco Group (STG) has pushed its Moments brand, which launched five years ago and now accounts for 16% of the miniature cigar market. Packs of miniature cigars can still contain fewer than 20 sticks, and Moments Blue has an RRP of just £3.83 for a pack of 10. On the back of Moments’ success, STG has added a new product to the range, Moments Panatella.
British American Tobacco (BAT), on the other hand, stresses the importance of pricing competitively in the new environment: “Retailers need to balance the need for profitability with consumers’ expectations on value,” says Olga Simonova, business development executive at BAT. “We believe selling at RRP is key to ensuring retailers remain competitive in a plain packaging environment.”
Dealing with the illicit trade
One major concern accompanying the new legislation is the threat of the black market stealing trade from legitimate retailers. According to a study last year by management consultancy KPMG, Australia has witnessed a marked increase in illicit trade since it introduced standardised packaging in 2012 – with black market sales growing by 150% in the first year of its implementation.
Acknowledging the danger, manufacturers are taking steps to counter it. Imperial recently collaborated with the Federation of Wholesale Distributors (FWD) on a new instalment of the Suspect It? Report It! campaign, which drew on evidence from Imperial’s wholesale partners that showed that sudden drops in tobacco sales in-depot can indicate a local spike in illegal sales.
“Wholesalers can be a valuable barometer in terms of detecting increased illicit trade and identifying whether organised criminals may potentially be targeting specific regions or communities,” notes Peter Nelson, anti-illicit trade manager at Imperial. “We can draw on positive examples where wholesalers have reported increased sales performance following sustained enforcement action in an area. Parfetts, for instance, reported substantial improvements in sales of Golden Virginia in the Manchester region following sustained enforcement activity, after originally noticing and reporting a sharp decline in said product.”
Just the cigar
Cigar sales are currently worth £200m in the UK, and manufacturers hope that the legislation could bring new customers to the category.
Cigars are exempt from the restrictions on minimum pack sizes and standardised packaging. “As a result, they can continue being branded beyond the product name and not be the standard green colour,” explains Jens Christiansen, head of marketing and public affairs at STG. “This means that they can still be wrapped and sold individually or indeed in 10-packs.”
The result is that some cigars are now the cheapest options on the shelf, making existing smokers from other categories more likely to consider giving them a go.
One product for wholesalers to consider is STG’s Break Filter Cigarillos, with an RRP of just £5.19 for 17 sticks making it affordable in relation to cigarettes. As a filtered cigarillo, it is also exempt from the plain packaging rules.
“This makes it an even more attractive proposition for wholesalers, as it helps retailers take advantage of existing smokers looking for an affordable smoking alternative,” Christiansen notes.
Vaping into the future
Even before the legislative changes placed extra pressure on traditional tobacco products, pushing up minimum prices and stripping them of the power of branding, the UK vaping market was going from strength to strength. “Over the past two years, the vaping category has shown remarkable growth, increasing by 36.9%, reflecting the 2m existing adult vapers in the UK,” says JTI’s Blackburn.
Manufacturers anticipate that the legislative changes will provide an extra boost to the industry – and not just as a side-effect of the regulatory assault on traditional tobacco products.
“EUTPDII should have a positive impact on the vaping category in the long-term,” says Jennifer Roberts, VP customer marketing at Blu UK. “The tightening up of the lower quality production of e-liquids in particular should improve quality and safety across the market.”
Another advantage she highlights is that the legislation should result in more consistent range distribution, particularly in the convenience market.
“The vaping category is still very fragmented and overall brand distribution is still relatively low for most brands,” she says. “One of the biggest complaints by consumers, seen in our recent research, is that availability of the brand or product they like is very poor, and this often leads to frustration. Wholesalers need to ensure they stock the top vaping brands to ensure their customers can stock up on the right products for their shoppers.”
Roberts also recommends that wholesalers promote e-cigarette and vaping products in-depot, providing a vital link between manufacturers and retailers, who may be uncertain which new products to try in-store.
“Apart from ensuring the stock they sell is compliant, there are very few restrictions on how the category is sold in-depot,” Roberts says. “Wholesalers can merchandise the category wherever they want – it doesn’t need to be kept in the tobacco room.”
Cash & carries can put up as much point-of-sale material relating to e-cigarettes as they like in and around the depot, although there are obvious restrictions on content: for example, no targeting of children and no inclusion of elements that could be construed as promoting tobacco products.
While advertising of e-cigarettes is prohibited on websites accessible to the general public, if retailers have to log in to view certain pages of a wholesaler’s website, adverts are allowed on those pages. However, other pages and open sites are still permitted to include factual information about products, factual ‘how to’ videos and range/price lists.
E-cigarette manufacturers note that the independent trade is particularly well-placed to make their products a success in their stores.
“The interaction that convenience and independent retailers have with their customers is a huge positive for consumers,” says Blu’s Roberts. Indeed, recent consumer research commissioned by Blu showed that convenience stores – rather than supermarkets – are the first port of call for new vapers.
To make the most of what she refers to as a “huge opportunity”, Roberts recommends ensuring staff can provide informed advice to their customers, introducing newcomers to the category and discussing product launches with those who are already knowledgeable.
“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,” Roberts says. “So, our advice to wholesalers is to offer advice and information to help retailers ensure they know their range, understand the basics of the devices they stock and who they are aimed at.”
An important area on which wholesalers and retailers should brush up their knowledge is tank systems and e-liquid refills. Half of all sales are now through open system products, up from 40% in the previous year. Sales of e-liquid refills also reflect this shift towards open systems, with value sales up 50% year-on‑year.
“These types of ‘open devices’ are customisable, allowing adult consumers more choice in their flavours and nicotine strengths,” says BAT’s Simonova.
While the legislative changes are now in effect, wholesalers still have some work to do to ensure a smooth transition that minimises impact on sales and turnover.
“Despite the best efforts of tobacco manufacturers and retailers alike, some smokers still aren’t fully up to speed around the new legislation,” says Chris Street, head of route to market at Imperial.
He recommends that wholesalers and retailers continue to draw on Imperial’s ‘Partnering for Success’ platform, as well as customer information cards that the manufacturer has distributed.
Imperial is also working to swap out all unsold branded packs in the independent trade, issuing new standardised packs by way of replacement on a value basis, a process that began on 22 May. Wholesalers should bear in mind that the swap-out is capped.
Shifts in the composition of the tobacco market in the wake of the legislative changes are already becoming visible. A trend towards consolidation is apparent, as the restrictions and costs of meeting EUTPDII mean that some small suppliers will struggle to keep their heads above the water. This is reflected in sales figures, which show that the share of the market held by the top five brands has been increasing over the past few months. This also suggests that contrary to some expectations, brand loyalty has remained important to customers as the changes have come into effect.
“Many consumers remain loyal to well-known brands they can trust as these provide reassurance in terms of the quality and perceived value of the product,” notes STG’s Christiansen.
A shake-up of the tobacco market is inevitable as such dramatic regulatory changes lock into place. But the fundamentals of the market look set to stay the same as they’ve ever been. The King is dead – long live the King!