Last year was a momentous one for the tobacco retail trade as all stores went ’dark’ and products were hidden away behind closed doors. This year we are expecting the implementation of the European Union Tobacco Products Directive II (EUTPD II) and with it more draconian changes, not least of all the prospect of plain packaging.

The key new rules under EUTPD are:

Cigarette packs of less than 20 sticks will be banned from sale from May 20, 2017.

Roll-your-own (RYO) tobacco pouches of less than 30g will also be banned from sale from May 20, 2017. From May 20, 2017 products with a ’characterising’ flavour will be banned from sale, with the exception of menthol products which will be banned from May 20, 2020.

Health warnings on cigarette packs and tobacco pouches will feature even more prominently than before. A new system designed to track and trace tobacco products to help combat the illicit trade will also be introduced, but not until May 20, 2019.

Under these changes, Factory Made Cigarettes (FMC) and RYO packaging will contain:

Bigger health warnings.

New combined text and pictorial health warnings. Increased restrictions in relation to how tobacco manufacturers may describe their products.

New security features.

But there is more, as Duncan Cunningham, head of corporate and legal affairs at Imperial Tobacco UK and Ireland, explains: "Essentially, the UK government decided to use a provision within EUTPD II to ’gold plate’ the requirements set out in EUTPD II and formalise the appearance of FMC and RYO packaging in the UK market by introducing the Standardised Packaging of Tobacco Products Regulations 2015. These will introduce (among other things) the following requirements in relation to FMC and RYO packaging, namely:

Traditional branding and design will be forbidden, with all packs olive-green in colour.

The brand and variant name will now only be presented in a certain format which includes the introduction of a standard size and a standard font."

In the UK, the timings for both EUTPD II and standardised packaging run in parallel with one another. This is the timeline as it currently stands:

EUTPD II must be passed into law in the UK at some point before May 19, 2016.

From May 20, 2016 tobacco manufacturers will only be legally allowed to manufacture the new standardised packs incorporating EUTPD II rules. Retailers can, however, still sell current products until May 20, 2017.

However, Cunningham points out that all these dates are ’placeholder’ only: "We won’t know for absolutely certain until the draft EUTPD II regulations which the UK government provided as part of its consultation on EUTPD II are finalised by the UK government and become UK law. Subject to the results of legal challenges, transposition could occur in 2016."

Legal changes

As for those aforementioned legal challenges, Imperial Tobacco, JTI, British American Tobacco and Philip Morris International are all arguing the case that the standard packaging regulations will destroy their valuable property rights and make products indistinguishable from each other.

The companies claim that data from Australia (which introduced plain packaging back in 2012) failed to prove that plain packs actually reduce smoking.

JTI head of communications, Jeremy Blackburn, says: "JTI strongly considers plain packaging is unlawful. JTI and others have repeatedly and consistently said that plain packaging infringes important principles of UK and EU law, and other fundamental rights.

"The legal challenge is about asking the Court to protect our property rights in the context of a measure which, in our view, has not worked in Australia and will not work here."

Cunningham adds: "We also strongly dispute the argument that standardised packaging would contribute to a decline in either tobacco consumption or youth smoking, as the government claims.

In Australia, where similar legislation has been in place for more than two and a half years, all standardised packaging appears to have achieved is to dramatically increase the amount of illicit trade."

A helping hand

Just like in the lead up to last year’s tobacco display ban, the tobacco companies are keen to help retailers plan for these latest changes.

JTI has produced a guide containing key facts and dates relating to the EUTPDII. The document is free and downloadable from www.jtiadvance.co.uk. Blackburn says this is the first step in what will be a continued, pro-active programme of support from the tobacco giant ahead of the legislative changes.

Meanwhile, Imperial Tobacco has launched its ’Partnering for Success’ initiative. This includes the distribution of START packs to retailers. START is an acronym for: Support, Training, Availability, Range and Trust.

Melvin Ruigrok, general manager of Imperial Tobacco UK and Ireland, comments: "Partnering for Success reflects our continuing commitment to working together with the trade to secure the ongoing success of the category in a highly regulated environment. It will also ensure our sales force becomes the go-to source of expertise, authority and reassurance around the EUTPD II and standardised packaging legislation.

"Partnering for Success is all about helping our trade partners navigate any possible changes in the tobacco category. We’ve already started to drive this new platform forward with retailers through initiatives including engagement evenings, information packs and presentations.

"Down the years Imperial Tobacco and the trade have a long history of working together through changing tobacco legislation, ensuring the category remains both a key footfall driver and profit generator. Partnering for Success continues this tradition, and we’re looking forward to revealing more details in the months ahead and continuing to drive the success of the category."

Imperial will continue to update the packs over the next 18 months to ensure retailers have all the latest legislative information and category advice at their fingertips.

START packs are being distributed to retailers by their sales rep. Digital versions can also be downloaded via both Imperial Tobacco’s trade website: www.imperial-trade.co.uk, and its dedicated website for members of its retailer reward scheme Ignite at: www.imperial-ignite.co.uk.

Business as usual

Blackburn at JTI says the message for tobacco retailers for the time being is business as usual. He advises retailers to maintain their range and availability so that their stores remain a destination of choice for existing adult smokers. And despite many smokers having given up or having switched to e-cigarettes, there are still many tobacco smokers out there and they are valuable customers. Indeed Him!’s Convenience Tracking Programme (CTP) 2015 reveals that the average spend by a tobacco shopper is £10.57, almost double that of a non-tobacco shopper (£5.45). However, smokers have changed their habits with more and more of them trading down to cheaper offerings, and indications show that the downtrading trend is set to continue.

According to Imperial’s figures, more than 30% of all cigarette packs sold in the UK now stem from the sub-economy price sector a rise of almost 7% over the past year.

The rise in popularity of capsules is another notable trend and Imperial puts this down to the capsule’s ability to ’instantly transform the smoking experience capturing adult smokers’ imaginations’. Capsules’ current share of the FMC market is more than 10%, a rise of almost 2% over the past 12 months, according to Imperial’s estimates.

JTI launched Sovereign Dual last summer. At the time, JTI’s Blackburn, said: "Sovereign Dual will offer choice to existing adult smokers looking for a capsule offering from a brand that has consistently offered credibility, value and quality.

"The capsule segment of the RMC market continues to show strong growth, with both Sterling Dual and B&H Dual two of the top three capsule brands. We expect Sovereign Dual to capitalise on and mirror this success."

Meanwhile, Imperial added Crushball to its Player’s portfolio to capitalise on both the value and capsule trends. The company says that in terms of rrp, Crushball is the best value capsule offering in the market available in both King Size 18s with an rrp of £6.40 (with price-marked packs (PMPs) available at £6.14) and the newer King Size 10s with an rrp of £3.53 (PMPs available at £3.33.)

The firm reports that Crushball has been extremely well received by retailers and customers alike. Andrew Miller, head of field sales at Imperial Tobacco UK, comments: "Both our sub-economy brands continue to perform admirably, with Carlton and Player’s contributing to a current sector share of 40%. Our detailed consumer research helps us develop product lines that remain both relevant and attractive to adult smokers. They also offer retailers the best opportunities to maximise profits, and Crushball is an excellent recent example of this."

A new Ice Capsule variant was added to the L&B Blue line-up last autumn. Available in both King Size 19s and 10s, Ice Capsule is said to combine the taste of a smooth Virginia tobacco blend with a capsule in the filter that releases a cool blast of menthol.

And last December, the latest edition to the JPS FMC family JPS Triple Flow was released with its ’easy draw’ channels. Each cigarette is wrapped in a special paper, designed to actively reduce the amount of smoke emitted which may result in less smell.

The latest addition to the Carlton portfolio is Superkings Menthol 18s. With an rrp of £6.40, these cigarettes are also available in PMPs at only £6.14.

"Menthol currently accounts for over 7% of volume across the FMC market, and this new offering has been designed to cater for the increasing number of downtrading smokers moving into the sub-economy sector," says Miller. "Given the Superkings format is often the preferred choice of menthol smokers, this addition to the Carlton range offers adult smokers a great value menthol cigarette."

In the economy sector, which currently accounts for over 29% of cigarette sales, L&B Blue has continued to sell successfully. L&B Blue Superkings 10s were launched last June, which Miller says reflects the fact that packs of 10 currently account for more than 20% of the economy sector. With an rrp of £3.98 (PMPs available at £3.78), they’re also Imperial’s lowest-priced Lambert & Butler offering to date.

However, despite the increasing sales of value offerings, retailers need to remember that more than one in four packs of cigarettes sold are from the premium and sub-premium price sectors.

Miller says then that the enhanced margins provided by brands such as Davidoff, Embassy and Regal, means they continue to be ’must-stocks’.

JTI’s answer to smokers looking for value was the launch of B&H Blue in a bid to offer ’affordable quality’ from B&H, the most recognisable tobacco brand in the UK (Nielsen data). The line-up was boosted last year with the launch of B&H Blue Superkings in 10s and 18s; and King Size, also in 10s and 18s.

Says Blackburn: "B&H Blue has been growing in all regions of the UK since launch and currently holds a 1.4% share of the value segment."

Roll with it

In the RYO category, Miller says that over the past few years there has been a marked increase in the number of adult smokers who are shopping ’little and often’, and who are also seeking a quality product with a lower out-of-pocket spend. "For instance, currently almost 45% of RYO retail sales in the UK are 12.5g or below. We expect that trend to continue," he says, until of course the smaller-size packs are banned next year.

GV Midnight and GV Sunrise were launched last summer to bolster GV Smooth’s offering in the value sector. The former offers adult smokers a rich, full flavour, while the latter is said to be an ultra-smooth smoke. Meanwhile, GV Smooth 25g including papers (pictured right) now boasts ’Pocket Plus’, a built-in pouch where smokers can keep their accessories in one convenient, on-the-move packaging solution.

Player’s Red Volume tobacco hit retailers’ shelves last November. Miller says it’s a ’versatile blend’ that appeals to adult smokers who roll their own or use a cigarette maker. "The volume-boosting technology works in conjunction with our new tobacco blend to provide consumers with unbeatable value for money." It is available in three sizes: an 8g trial pack, 20g pouch plus a 50g can at rrps of £2.59, £6.52 (both including papers) and £16.20 respectively.

"While smaller packs tend to be more prevalent in independent stores it’s important for retailers not to discount stocking larger sizes either," says Miller. "With more than one in five packs of RYO tobacco sold being the 50g variant, larger offerings are becoming increasingly relevant as they offer adult smokers excellent value for money."

Finally, another trend among smokers is ’dualling’ where they smoke RYO cigarettes during the week but switch to cigarettes at the weekend. "An adult smoker whose brand of choice is JPS, for instance, may switch between the lower-cost JPS RYO and for instance JPS Silv er cigarettes for special occasions," says Miller.

Amber success

Amber Leaf is the number one roll-your-own (RYO) brand in every region of the UK, according to Nielsen data.
Now in its 25th year, Amber Leaf has sold the equivalent of 5.5 billion cigarette sticks in the past year, equating to four packs per second. It also holds a 37.6% share of the RYO market and has three out of the top five-selling tobacco SKUs in its portfolio.
JTI head of communications, Jeremy Blackburn, comments: "Amber Leaf continues to perform phenomenally well thanks to product innovations which are in tune with market trends.
Product innovations such as Amber Leaf 3in1 and Amber Leaf Signature Blend, our organic tobacco offering, have ensured Amber Leaf remains the number one tobacco RYO brand in all regions and a must-stock for all retailers."
The Amber Leaf range includes Amber Leaf Blonde, Amber Leaf Signature Blend and Amber Leaf Original, available in a range of pack sizes: 10g, 12.5g, 20g 25g, 50g and a 3in1 variation.

Rise of the illicit trade

Most experts concur that standardised packaging is a ’gift’ for organised crime and believe the problem of illegal tobacco will only escalate if introduced to the UK. That’s according to Peter Nelson, anti-illicit trade manager at Imperial Tobacco UK.
"Organised criminal groups will have identified this legislation as a huge opportunity to increase their ’market share’," he says. "Australia has according to a KPMG report witnessed a 3% rise in the illicit tobacco trade since the introduction of standardised packaging in December 2012.
"Meanwhile, another KPMG report Project Sun highlights the continued problem with illicit trade in tobacco across the EU, stating that counterfeit and contraband consumption in the UK rose to 14.9% in 2014 (versus 10.2% in 2013). Although HMRC estimates are more conservative, both reports indicate the overall trend is increasing again. That’s worrying, especially if standardised packaging becomes a reality in the UK."
Nelson says Imperial Tobacco’s anti-illicit trade (AIT) team is doing its utmost to educate retailers about the threat of illicit tobacco. "As our nationwide ’Suspect It? Report It!’ campaign contends, illicit tobacco is not a victimless crime but a shared problem for government, the industry and society as a whole. By working together and sharing intelligence, we can make a real difference to the welfare of honest, hard-working retailers who provide a valuable service on our high streets and contribute to the quality of our communities.
"Retailers who suspect illegal tobacco is being sold in their area, or possess any information relating to the illicit tobacco trade should contact either HMRC on the customs hotline (0800 59 5000) or their local trading standards department. Alternatively, they should speak to their designated tobacco sales representative who will pass the information on via their AIT team, so action may be taken by law enforcement agencies."

Retailer view

David Menhams, HKS Sandringham, Leicester:
"Sandringham was a new-build for the company so the decision was taken that to coincide with the display ban, tobacco products would be dispensed from a vending system. This meant valuable display space behind the counter could be used for spirits as we sell a lot of these.
"However, we had to make sure customers knew we were still selling cigarettes and tobacco so there is a sign behind the counter saying ’Tobacco sold here’.
"Customers come up to the counter and ask for certain cigarettes and the member of staff selects the product from a screen and the machine then dispenses it from below where the spirits now sit.
"At the moment the system is separate to the main till but it will be integrated into it.
"Our customers are used to it and we do a roaring trade in tobacco. We still get a lot of people who just come to us for fuel and cigarettes.
"We do get people who come in and ask for 10 or 20 of ’whatever’s cheapest’ but we also do a good trade in the more premium lines such as Embassy and Marlboro.
"The extra space behind the till also meant we had more room to display e-cigarettes.
"Regarding the next changes in the law, I don’t think plain packaging will affect us much as staff aren’t looking for different coloured packets from our shelves; they are just looking for the name. But as for banning 10s packets, I think that could cause some disruption as people who buy 10s will have to spend more on bigger packs."

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