Cloudy times

Diarmuid O’Donovan has a friendly smile and some easy banter for everyone who walks into his smart O’Donovans forecourt store in leafy Carrigrohane, in the Republic of Ireland. As the owner of the busy County Cork site for the past 13 years, he knows many customers who pass through his doors and he’ll go out of his way to get to know the ones he doesn’t.

But mention the tobacco display ban to Diarmuid and the easy smile falls from his face and within seconds he’s frowning and shaking his head in frustration.

"I’ve noticed that tobacco sales have dropped off since the ban, and the staff have mentioned it to me too," he says. "The big brands still do okay, but the others just go into a drawer and sit there for months. I’ve dropped Mayfair completely. It’s impossible to launch new brands now. We can’t sell them and we can’t suggest them to customers. You just waste your time taking new brands in; I’m very reluctant to take them. So we just stick with traditional brands."

Diarmuid, who says about a fifth of his shop sales come from the tobacco category, adds that the dispenser units he had in the past for selling cigarettes were "brilliant". But since the display ban he’s had to cover up any tobacco products a move he says looks untidy, could prove costly to some retailers, and that he thinks is stifling sales.

Diarmuid is typical of independent retailers in the Republic of Ireland who feel frustrated about the tobacco display ban, which came into force there last July. Not all retailers have seen tobacco sales drop but just about all see the ban as an extra inconvenience and more unnecessary meddling from government.

Legislation

Meanwhile, at the time of going to press, the UK industry was still waiting to see what the new government would do with the tobacco display ban proposals. Most people agree that the formation of the new coalition government could throw everything up in the air.

The Association of Convenience Stores (ACS) said it was still too early to speculate on future policy changes.

But one thing seems fairly certain the controversial Statutory Instrument Tobacco Advertising and Promotion (Display) (England) Regulations 2010 (SI 2010/445) will still be the subject of a debate in the House of Lords.

The ACS points out that the Tories have said they oppose the ban and want a review. They also want tougher sanctions against the illegal trade and the banning of proxy purchasing. And Conservative peer Earl Howe has called for the regulation behind the ban to be annulled he objected to the proposals, commenting that the evidence was "not convincing".

The Liberal Democrat leadership also opposed the ban as it passed through parliament in 2009, and the party has pledged to review the plans for its introduction. However, any call for a review will probably have to wait until after the first couple of weeks of parliament.

Challenge

The main tobacco companies have warned that, if the proposed tobacco display ban goes ahead, it will be the biggest challenge that retailers face.

Michelle Healy, general manager at British American Tobacco UK, (BAT) says: "The display ban will damage both competition and the livelihoods of tens of thousands of small businesses by imposing high compliance costs on them. Driving the legal trade from public view will also play into the hands of illegal traders. These unwelcome effects are unjustified as there is no credible evidence that it will reduce smoking rates in the UK."

Imperial Tobacco and the other major tobacco companies have been doing their best to fight the legislation which requires cigarettes, cigars, pipe and roll-your-own tobacco to be hidden from view in England, Wales and Northern Ireland from October 2011 in large retail outlets, and October 2013 in smaller outlets.

Last month Imperial Tobacco, Japan Tobacco International (JTI) and BAT announced they were to seek a judicial review of the relevant sections of the Health Act 2009 in which the Labour government was looking to impose the ban.

Ronan Barry, head of corporate and regulatory affairs at BAT UK, says: "One of the key issues we have with the legislation is that it restricts the commercial freedom to communicate a legal product to its legitimate consumers. Consumers are said to have an absolute right to competition between their suppliers and poor legislation which affects this right must be questioned.

"The danger is that without fully understanding the links between legislation and behaviour, public policy can result in serious unintended consequences. For example, display bans hurt small businesses but do nothing to prevent young people from accessing tobacco. Education, a ban on proxy purchasing and tighter control of the illegal trade in tobacco would all make a greater impact."

Imperial Tobacco’s UK public relations manager, Iain Watkins, agrees, adding: "The ban is not going to achieve what the Labour government wanted, it’s not going to stop people smoking. And there’s no evidence from any other country that has the ban that this is the case either. We’re supporting independent retailers by challenging the ban."

In the meantime, Imperial and the other major tobacco companies are continuing to urge retailers to contact their local MPs and highlight how the ban is likely to affect them.

The ACS has warned that the legal proceedings have thrown the tobacco display ban plans for England into confusion and has written to ministers calling on them to delay the planned implementation dates. It states: "The prolonged uncertainty makes it impossible for retailers to prepare for the changeover of thousands of shops to the new regulations."

Scandinavian Tobacco Group (ST Group) agrees that the planned legislation is the biggest hurdle currently facing retailers, and it has serious concerns about the illegal trade in tobacco. It states: "The ’dark market’ legislation will have a major impact on retailers who not only have to absorb the cost of updating their store, but will also suffer from lost revenue as adult smokers will increasingly find it more difficult to make an informed choice and purchase their desired brand. Lawmakers claim the dark market will help battle against under-age smokers, ST Group subsidiaries in regions such as Canada and Ireland can testify that the legislation has had little or no impact on reducing this number."

Watkins adds that businesses in countries that have the ban, such as Iceland, have suffered. He says: "Since the ban was imposed in Iceland, one in three independent stores have shut down but consumption has stayed the same. All that’s happened is that people have turned to the illicit trade for their tobacco. Smuggling has gone up in Canada too. There’s a pattern and the UK government needs to recognise that."

Black Market

Back in Ireland, the growth in the illicit trade is all too apparent and has become a real worry for retailers and the industry in general. According to Deirdre Healy, John Player’s corporate affairs manager for Ireland, more people are now buying cigarettes on the street, and there are other worrying trends emerging.

After the ban was imposed in Ireland on July 1 last year, the industry became aware of handwritten notes offering counterfeit versions of top-selling brands for little more than half the legitimate price, being dropped through letterboxes. The notes, which are growing in number, offer a variety of tobacco products with a name and mobile phone number to contact for the delivery.

Healy says: "This is a real problem. It’s due to a combination of the display ban, the recession and the high prices for tobacco in Ireland. Criminals are moving into cigarette smuggling where the penalties are not so great in comparison to other crimes but the profits can be very high. And this is a huge loss to the legitimate chain especially when you think of the amount of duty not paid to the government.

"In addition, if nearly a third of your market is in the illegitimate channel, the government can’t deliver its health objectives. What we need is much more enforcement and for judges to give stricter penalties, and for the Department of Health to first acknowledge that there is a problem."

Retailer Diarmuid adds: "The price of cigarettes has jumped about 25% in the past three years. It’s about 8.5 euros for a packet of standard cigarettes now compared to five euros on the black market. Price is a big factor. They’re a lot cheaper if you don’t buy the legal ones and that encourages the black market hugely."

Retailer John O’Driscoll, who runs Highland Lodge Service Station, also in County Cork, confirms that the black market is a growing problem. Although John says his tobacco sales haven’t been affected by the ban still accounting for 27% of his overall sales he’s concerned about where the market is heading.

He explains: "There’s a feeling that the black market is increasing. People actually ask for products on the black market when they come into the shop. It’s a real worry."

Trends

The tobacco companies say all this should indeed worry the forecourt sector in the UK, especially as tobacco sales are still vital to most independent retailers. According to the Him Convenience Tracking Programme (CTP) 2010, cigarette shoppers visit a forecourt three times a week on average, compared to 2.3 times a week for the average forecourt shopper. In addition, Him says 35% of forecourt shoppers smoke more than the UK average of about 20%, according to government figures.

So what are the main trends among cigarette buyers? One notable development is the continued increase in popularity of cheaper products. According to Imperial Tobacco’s latest UK Tobacco Category Overview, published last month, the economy-priced cigarette sector showed strong growth in 2009 increasing by 42.6% to £1.4bn. This compares to the value-priced sector which grew by 0.6%, and premium-priced, mid-priced and standard-priced which all saw sales fall the most significant being the mid-price sector which fell 10.9%.

However, in forecourts premium-priced cigarettes still sell really well. According to Imperial’s report, premium-priced cigarettes accounted for more than 35% of sales in multiple forecourts last year. When you compare this to premium-priced’s 20% share in multiple c-stores, you can see just how well they perform.

The report says the best-selling economy-priced cigarette in the multiple forecourts channel is Sterling Superkings, with 22.4% of the market. And the fastest growing cigarette in this sector is JPS king size blue, which jumped from having a 0.2% share of the market in 2008 to 16% in 2009.

Imperial’s Watkins explains: "Customers are still down-trading. So the value in economy brands is where the profits are. There’s been a trend here for about six years, with adult smokers trading down and then going into roll-your-own (RYO). In addition, there are more than four million smokers who smoke RYO during the week and cigarettes at the weekend. It’s a way of giving themselves a treat."

A combination of factors including the economic turndown and higher taxation has led many adult smokers to choose RYO, a trend that’s forecast to continue. Watkins says the appeal of RYO is not only that it is much cheaper but that it is also easier to control. With an average pouch containing enough tobacco for about 30 cigarettes, it’s a way of controlling expenditure and consumption.

ST Group goes as far as describing the RYO category as "the silent hero of the tobacco market". The company says it is currently experiencing a year-on-year sales uplift of 16% with annual volume at 4,087 tonnes as adult smokers look for a cheaper alternative to factory-made cigarettes.

According to the UK Tobacco Category Overview, the top-selling RYO tobacco in the UK is Golden Virginia green with 40.3% of sales in 2009, followed by Amber Leaf with 26.6% and Cutters Choice with 9.5%.

Watkins says cigars are still very important to retailers, despite sales dropping by 3.8% to £333m in 2009. He adds: "Because of the smoking ban in public places, cigars have taken a bit of a hit. People don’t want to stand outside for the time it takes to smoke a cigar. But as we head towards the summer, people are happier to stand outside, so cigars may see an upturn again."

According to ST Group, miniature cigars continue to drive growth in the UK cigar sector. Its Café Crème brand is the market leader in the miniature sector with over 60% of sales.

ST Group UK trade marketing and communications manager, Alastair Williams, says: "Miniature cigars continue to drive growth and much of that is due to the continued success of the Café Crème family and other imported cigars. We feel the stylish tins reflect the brand’s worldwide status and heritage, and help make the Café Crème family absolutely integral to every retailer’s tobacco gantry."

Williams adds that space on the tobacco gantry is at a premium for cigars, making innovation in the cigar category a rarity. Last year the company launched Café Crème Express, which are smaller than traditional miniature cigars and aimed at smokers who are time poor and venue restricted. They are also aimed at smokers who buy cigars on impulse.

Finally, don’t forget smoking papers and accessories. Swan says it is number one in the UK filter market with a share of 85.5% and is also at the forefront of filter innovation with products such as Smooth, the UK’s first carbon filter Pop-A-Tip filter, which is in triple digit growth.

Republic Technologies, which distributes Swan products, advises retailers that another essential product is the menthol filter, which now accounts for over 9% of all filter sales. It adds that its Swan Combi is also proving extremely popular. The Combi offers value and convenience because its pocket-sized design contains 50 papers and 50 filters.

Swan marketing manager, Mark Alldred, says: "We want to help retailers make the most of this high-growth category. We’ve conducted rigorous in-store testing over the past few months that has demonstrated that by offering the right range and the right choice of brands merchandised correctly, retailers can significantly increase sales over 30% in some instances."

Brand News

l Swan has become the new sponsor of the British Superbikes’ Honda Team. The company says it has seen sales grow across the board for the past two years through its relationship with the British Superbikes (BSB) Championships. Swan marketing manager, Mark Alldred, says: "We are very excited to be involved with BSB again this year and thrilled to be the title sponsor of the Swan Honda Team. BSB is one of the most prestigious motorbike racing series in the world and a perfect platform to reach our core consumers and raise awareness of the Swan brand."

l Marlboro has added a new variant to its Marlboro Bright Leaf line up. The Marlboro Bright Leaf platinum 7mg cigarette is made using a particular type of Virginia blend tobacco designed to give it an even smoother taste than Marlboro Bright Leaf original. The rrp is £5.70 for a pack of 20 and £2.95 for a pack of 10, 9% lower than the rrp of regular Marlboro. "Marlboro Bright Leaf platinum like regular Marlboro Bright Leaf has been created to suit the palate of British adult smokers but in particular offers an even smoother taste," says Zoe Smith. "Positioned in the mid-range price bracket, Marlboro Bright Leaf Platinum is a Marlboro unlike any other, offering the quality you expect from a Marlboro at a highly competitive price."

l The Smokeless Cigarette Company is promoting its Similar cigarettes in the UK market. Its UK distributor, Notar, says a Similar cigarette looks, feels and is ’smoked’ like a normal cigarette, but is odourless and smokeless, meaning it can be smoked anywhere. According to NotarUK, Similar contains none of the tar or tobacco found in real cigarettes. Available in packs of 10 each cigarette is said to be the equivalent of two to three traditional cigarettes it has a rrp of £6. Similar comes in two flavours: American Blend lights and Virginia Blend lights.

l JTI has given its Benson & Hedges packs a new edge. The company says the move, due to be completed this month, is the next stage in the development of the brand following its redesign last year. And the new bevel-edged packs aim to provide adult smokers with a more premium, modern design, while the product itself remains unchanged. Jeremy Blackburn, JTI head of communications, says: "The new bevel-edged packs and their premium design reflect the brand’s status, and ensures that Benson & Hedges continues to meet the requirements of today’s adult smokers."

l JTI has also unveiled a contemporary new look for its flagship RYO tobacco offering, Amber Leaf. Among the changes, the newly-designed 12.5g flip-top pack features an embossed leaf and logo design while the new pouches will also carry the updated look.

l Marlboro has introduced a new look and name for its premium-priced Gold range. Zoe Smith, Philip Morris marketing manager UK & Ireland, says: "Marlboro brands have always moved with the times and it is time for Marlboro Gold to evolve and become more contemporary. This is the thinking behind the new pack design and name change the new look Marlboro Gold original exudes quality and style. This is part of a series of exciting new developments for Marlboro products during 2010 which are all about ensuring that we keep our brand relevant and refreshed."

l British American Tobacco UK (BAT) has introduced a new pack design for its premium Vogue Signature packs. Both the bleue and menthe variants will feature the new design which combines a white background embossed with a metallic purple logo and a new inner foil. Both variants will also have a ’pearl’ in either bleue or grass green on the top of the pack. BAT UK premium brand manager, Hinesh Patel, says: "We updated the Vogue pack to a new design in order to stay relevant to our adult consumers. The addition of the ’pearl’ means customers can easily recognise their chosen variant."

l BAT has also launched a limited-edition pack design for Royals. Available until mid August, packs feature the new design of the trademark red, white and blue Royals flag covering the entire pack on the red variant, and a light blue, dark blue and white Royals flag covering the blue pack.

l B&H rolling tobacco now has 25g packs available in half outers (five x 25g). JTI’s Jeremy Blackburn says: "JTI has listened to feedback from retailers and has decided to make its B&H RYO 25g packs available in half outers. This is a great opportunity for retailers to extend their RYO offering, provide their customers with more choice, and cash in on the growth of the RYO sector."

Advice on merchandising

l Review your tobacco range regularly.

l Know your local customer base according to Imperial Tobacco, about 60% of a typical tobacco retailer’s turnover comes from within a half-mile radius.

l Engagement with customers is key. Scandinavian Tobacco Group says retailers must continue to bring shoppers up to date on products and legislation so they are aware of their rights and are kept informed.

l Avoid out-of-stocks according to Japan Tobacco International, research shows that adult smokers will go elsewhere if their brand of choice is not available.

l Remember that tobacco is very regional what sells in Wales may not sell in London.

l Keep to your recommended planogram.

l Rotate stock regularly so that older stock is sold first.

l Educate staff. Ensure they know exactly what the dark market is and what actions they must take to ensure compliance.

l Keep the gantry clean and free of rubbish at all times and do not stack products on top of each other this looks untidy and causes damage to packs

l Stock cigars, cigarettes, pipe tobacco and RYO brands that are popular with customers and will deliver satisfaction and loyalty.

l Stock a balanced assortment of quality imported cigars as they stimulate the tobacco category and drive incremental sales and impulse purchase.

l ST Group advises investing in effective category management: Brand Block imported cigars and double-face the miniature segment leaders.

Shopping habits

71% of cigarette shoppers at forecourts buy packs of 20s

26% buy packs of 10s

40% of forecourt shoppers asked by researchers recalled looking at the tobacco gantry

79% of cigarette shoppers at forecourts recalled seeing the gantry

(Source: him! Convenience Tracking Programme (CTP) 2010)

Scotland, Wales and Northern Ireland:

The Scottish government is currently having a three-month consultation on the tobacco display ban regulations. Imperial Tobacco has urged retailers and all other interested parties to make their views known by responding to the Scottish consultation before the July 20 deadline. Key proposed regulations, include:

l Limiting display during a sale to an area approximately the size of a cigarette packet.

l Temporary, incidental display to be allowed while stocktaking, staff training, pricing and refurbishment are taking place for no longer than necessary to undertake the activities.

l A fixed penalty of £200 for people who buy, or attempt to buy, tobacco products for under 18s.

l A fixed penalty of £200 for retailers, rising by £200 for every offence committed within a one-year period.

l Display will be allowed in cash and carry and duty-free premises as long as it’s in an area where only tobacco products are for sale and which is not visible from other parts of the store.

Welsh retailers also have a chance to challenge proposals to the display ban following the Welsh Assembly government launching its draft regulations in April. These are the same as in England, with the same time frames.

Northern Ireland has yet to publish its draft regulations, although, according to the ACS, they are expected to be the same as for England.