The plain packaging legislation that came into force last May transformed the way the tobacco trade looked, eliminating decades of stylish branding. Now we know that along with new EU rules on pack sizes, it has transformed the market, too.
Manufacturers say things are still in flux – 86% of packs sold in 2016 are no longer available, which is forcing smokers to change their habits.
Retailers report that in some cases, it has made shoppers more price-conscious. But Paul Coggins, head of route to market at Imperial Tobacco UK, says that some smokers have become more brand-loyal.
“Since the transition to standardised packaging, adult smokers have certainly become more brand-reliant, either sticking with or returning to the brands they have traditionally relied on to provide a quality smoking experience,” he says.
Some price-sensitive smokers are switching to roll-your-own (RYO) tobacco, with Imperial estimating that around 4% of sales have shifted. But it is not just economy brands that are benefitting: 54% of sales are in the mid-market price tier, while 22% of RYO sales go to Golden Virginia, a premium brand.
New product trends
Now that plain packaging means brands can no longer stand out on the gantry, manufacturers are seeking to build loyalty through product innovation.
For JTI, that means launching capsule products, to take advantage of the growth in a segment that now makes up 13% of cigarette sales.
The company has expanded the Sterling Dual range to include a superking product and Sterling Dual Double Capsule, which contains two flavours (peppermint and spearmint), giving smokers a variety of experiences in one cigarette.
“The capsule value segment has grown considerably in the past year, and we are excited to provide retailers with innovative new products to take advantage of these expanding markets,” says Stephane Berset, JTI’s head of marketing for the UK.
Imperial has launched a range of products with innovative filter technology, such as a filter upgrade to JPS Blue that helps the cigarette retain a perfect shape. It has also created a new ultra-smooth filter for JPS Silver Stream and a menthol inner lining for JPS Green Edge, for a fresher feeling than traditional menthol tips.
“These innovations to the JPS portfolio demonstrate how Imperial is leading the way in the tobacco category, delivering sophisticated product innovation in a post-standardised packaging environment that meets the needs of our consumers and delivers continued profitability to our retailers,” says Imperial brand manager Stephen Phillips.
Innovation in e-cigarettes
E-liquids are taking over the e-cigarette market, with a 45% share of sales that is growing by as much as 39% a year. However, Philip Morris International has also launched another high-tech alternative to smoking.
Called Iqos, the device still uses tobacco rather than the nicotine solution of vaping products. But instead of burning it, Iqos heats it, providing the taste of tobacco with lower levels of harmful ingredients.
Developed with an investment of £3bn, Iqos has so far won 3.7m customers worldwide and has reportedly grabbed 13% of the market in Japan. The tobacco sticks that Iqos uses, Heets, are available in 1,800 stores in the UK.
In e-liquids, manufacturers are catering for an increasingly wide range of tastes. Sales of tobacco flavours are still popular, despite witnessing a fall in sales, with consumers opting for an assortment of fruit or mint flavours.
JTI’s e-liquid brand Logic LQD has also launched a range of products for vapers looking for a milder experience. These contain just 6mg of nicotine.
“We have a dedicated insights team that closely tracks market trends so we can provide retailers with new Logic products that allow them to maximise the profit potential of the category,” says Berset at JTI.
How to improve your range in-depot
When it comes to tobacco, the best way to improve sales is to make everything as easy to find as possible, Imperial says. To that end, the manufacturer recommends ‘brand-blocking’: placing together in a bay all the products from one particular brand’s range.
“Stocking products according to pricing segment – for instance, from sub-economy through to premium – is also a must,” says Coggins at Imperial. Best-selling items could be allocated an entire bay so that availability is constantly maintained.
He advises: “Do not be tempted to premium-price for a quick short-term gain. The savviest wholesalers and convenience store owners ensure their prices are pitched at RRP or below, allowing them to compete with the multiples and prevent customers from looking elsewhere for tobacco.”
At the moment, traditional retail channels are only responsible for 16% of e-cigarette sales, which means that there is plenty of room for growth in a total UK vaping market estimated to be worth more than £1bn.
“To do this, many retailers will need to upskill and become e-vapour category experts. Together, wholesalers and manufacturers should strive to achieve this. Initially, this could be as simple as increasing the visibility of e-vapour in‑depot and generating buzz around the category,” says Sophie Hogg, head of next generation products at Imperial.
To help get more footfall into depots where e-cigarettes are sold, Hogg suggests wholesalers should hold competitions, taster events or ‘lunch and learn’ sessions, at which expert staff can brief retailers about the vaping market.
Events like these can help to generate positive word of mouth among local retailers, foster existing customers’ loyalty and entice potential new trade, she says.
Facing challenges in tobacco
When it comes to the illicit trade in tobacco products, the message from suppliers to the government is: we told you so. Imperial suggests that the rise in illicit tobacco sales the industry predicted would result from plain packaging regulations and restrictions on pack size has indeed come to pass.
HMRC’s own figures bear this out: the gap between the tobacco duty collected and the estimated amount due has risen to an all-time high of £2.4bn.
“The government’s failure to address this growing issue continues to harm honest UK retailers,” says James Hall, Imperial’s anti-illicit trade manager.
What manufacturers would like to see is either the regulations loosened or duty reduced, so illicit tobacco is less attractive. Since neither of those seem likely, they are instead focusing on awareness campaigns, such as Imperial’s ‘Suspect it? Report it!’
Imperial is also working with wholesalers including Bestway and Booker to co-host events and gather retailers together so they can share information about potential illegal sales. “These were attended by many local retailers and resulted in fruitful new intelligence leads relating to the potential sale of illegal tobacco in the locality,” says Hall.
head of marketing and public affairs, Scandinavian Tobacco Group UK
“Worth £197m, the cigars category presents a significant sales opportunity for tobacco stockists. Cigars still benefit from being exempt from the restrictions on minimum pack sizes and standardised packaging, so they can still be branded beyond the product name and wrapped and sold individually or in 10-packs. This means some cigars are now the cheapest options available on the shelf, which may attract smokers from other categories.
“Price continues to be a major focus for shoppers, especially in the tobacco category, and we expect the value-for-money trend to gain even further momentum now the EU’s tobacco products directive’s restrictions are in place. With the small-cigar segment worth £76m, we believe there is a huge opportunity to capitalise on this demand for value and drive growth back into the category with the right product. The miniatures segment is dominating the value-for-money category, as consumers continue to seek quicker-smoking cigars.”
“Since Palmer & Harvey went, we lack a wholesaler. I am part of Costcutter, and it has helped. But I am a specialist tobacconist, and I need a delivered wholesaler. Sure, someone can get us Benson & Hedges, but can they get Senior Service, or American Spirit Yellow and Blue?”
David Worsfold, Farrants, Cobham, Surrey
“I shop with Blakemore and Booker – both of them recently have had quantity deals on cigarettes, which is great to see as it lets us make just that little bit extra on margin. We have had bulk-buy deals of cigarettes on different brands with both of them recently. I do make the most of that and stock up so that we are helping to support that pricing.”
Jacqui Bailey, Spar London Road Bakery, Boston, Lincolnshire
“With things like e-cigarettes, it is a broad marketplace and one size does not fit all. What we tend to find is if we take a Blu dispenser, it is only for its products; it is the same with the others. I think we would all be better off if there was a display option that made it cost-effective to stock them from all the major manufacturers.”
Dean Holborn, Holborn’s, Redhill, Surrey
“What I am seeing is that the £10 price point is critical these days. But I also think customers want the cheapest product on the market more than the £10 price point. They are not brand-loyal any more – because of plain packaging, they are more price-loyal.”
Shaid Hussain, Good News, Burton-on-Trent, Staffordshire