With the ever-increasing duty on tobacco said to be fuelling a boom in counterfeit products and forcing consumers to down-trade to cheaper brands, retailers, manufacturers and smokers alike were hoping Gordon Brown would give them a break. However, the Budget in March saw yet another rise, this time of 9p on a packet of 20 cigarettes.
But despite the continuing tough trading environment for the category, more than 50 billion duty-paid cigarettes were sold through retail outlets last year.
Total sales of tobacco were worth £12.8bn last year - a 2.2% increase in value despite a slight decline in volume. Again, this was fuelled by duty increases driving up prices.
Yet repeated government attempts to discourage smoking seem, so far at least, to have had minimal impact, with around 30% of UK adults still indulging in the habit - a figure which has remained largely unchanged for the past six years, according to Iain Watkins, trade communications manager at Imperial Tobacco. "On a forecourt, bearing in mind that the majority of visitors will be adults, by the law of averages one in four people who visits your store is going to be a smoker," he adds.
Smokers remain extremely important to forecourt retailers, says Watkins, as not only did 12% of total cigarette sales go through the channel in 2005, but these customers will also have brought additional basket spend with them. "On average, tobacco sales deliver around a third of a forecourt’s total turnover, making it one of the most prolific cash-generating categories in the store," he says.
The IGD’s latest report, Convenience Retailing 2006, supports this claim. It finds that tobacco is by far the strongest-selling category in company-managed forecourts, where it accounts for 30.4% of sales - its highest level within the entire convenience sector.
While declining site numbers saw forecourts’ share of cigarette sales dip slightly last year, Mike Laney, Imperial’s national account manager for forecourts, says the sector has nothing to fear. "When we look at individual retailer operations, their share is holding up," he says. "Research shows that shoppers are most concerned with speed, friendliness of service and acceptable prices. If retailers provide these and have the brands available and merchandised correctly then they have nothing to worry about."
While price increases have seen the value or economy sectors of the category continue to grow in most outlets, forecourts are still performing very strongly in the more profitable premium sector.
"Forecourts have traditionally been a stronghold for premium-priced cigarettes," says Iain Watkins. "Brands such as Embassy No.1 and Marlboro continue to do well."
Jeremy Blackburn, trade communications manager for Gallaher, adds: "AC Nielsen figures show that 47% of forecourt sales are of premium cigarettes, which is well above the national average of 39.2%. The cheapest price sector accounts for only 0.6%, against a national average of 5.8%.
"One in five cigarette sales on key oil company forecourts will be a Benson & Hedges branded product," he adds. "That’s significant when you look at the rest of the market."
In February, B&H Superkings were redesigned and modernised to form the B&H 100s range, completing the development of a distinctive metallic umbrella for the whole brand house.
Meanwhile a new 14-pack format for B&H Gold and Silver, launched in October last year, is said to have already achieved a 1% share of total sales in major oil company sites. The new pack size was designed to lure back those smokers who had down-traded by putting the two B&H brands back into their price ranges.
"The look of the pack helps - it looks like a 20s pack with the back sliced off, not like a 10s pack," says Blackburn. "Also, the average cigarette consumption per day is around 14. If people chose to smoke 14s then there’s an opportunity for more regular visits to your store and the other associated purchases that might go with that."
But while the 14s pack is proving a success, the traditional 10s pack has recently come under attack in Scotland. The Scottish Executive is said to have been looking at evidence that suggests underage smokers are more likely to buy packs of 10 and is therefore considering a ban.
Jeremy Blackburn says that such action would unfairly discriminate against adult smokers who have legitimate reasons for buying smaller packs. "Obviously we believe children shouldn’t smoke, but we also strongly disagree with the implication that retailers are selling cigarettes to children irresponsibly. The vast majority of retailers fully understand their obligations when it comes to selling age-restricted products."
While 20s are by far the most popular pack size on forecourts, 10s packs accounted for almost 25% of sales last year.
Meanwhile, at Imperial the latest product development has seen two new additions to the best-selling Lambert & Butler brand - Superkings and King Size Smooth. L&B King Size is currently the nation’s number one cigarette brand and the top seller in forecourts, with a 14.6% share of sales. Imperial expects the two new lines to help L&B become the UK’s first £2bn FMCG brand.
The launch of the new lines has, again, been influenced by the trend for smokers to down-trade to cheaper products. Both aim to fill gaps in the market and appeal to smokers looking for high-quality but lower-priced alternatives, without having to settle for products in the very cheapest price sectors. This in turn means better margins for retailers.
Mike Laney explains: "Until now there hasn’t been a Superkings variant in the standard-price sector. Anyone in the mid-price sector who was looking to save money by down-trading had no alternative but to buy value or economy brands. The L&B range offers consumers the opportunity to move into the standard price sector instead, which protects category value for the retailer."
Laney expects the launch to attract back some of those Superkings smokers who have already down-traded into the cheaper price sectors. Similarly, the Smooth range is aimed at smokers who prefer a milder blend but are looking for a lower-priced product.
At the beginning of the year, Imperial also launched branded economy range, Windsor Blue. While higher-priced products dominate in the forecourt market, Mike Laney believes brands like Windsor Blue provide an opportunity for sites to increase footfall by providing a quality offering for smokers who are looking for value for money. "It’s not so much about down-trading existing customers - premium consumers are unlikely to down-trade that far - but it’s opening up more opportunities for additional purchases by attracting new consumers," he says.
Gallaher’s Sterling brand also fits into the cheapest-price sector. First launched in the multiples in 2001, the brand was made available to all channels in January.
Economy brand Mayfair has also performed very strongly over the past year and has continued to be the UK’s fastest-growing cigarette brand. In forecourts, Mayfair King Size is the fourth best seller and increased its share by 7.5% last year.
Meanwhile, British American Tobacco’s value brand, Royals, is now available in a new pricemarked pack, following its redesign last year.
Indeed, as price has become more important, such packs have increasingly been used to communicate value to the consumer - a strategy that seems to be working well. Recent research conducted by HIM found that 37% of consumers thought that price-marked packs actually meant that the product was cheaper than usual, while 30% said the price was the same.
Roll Your Own (RYO) was the fastest-growing sector in the tobacco category in 2005, up by 12% year-on-year. There are now some five million RYO smokers in the UK and the majority of those entering the category are ’dualists’ - people who smoke RYO as well as factory-made cigarettes. Forecourts accounted for 11.2% of total RYO sales last year - an increase of almost 2% on the previous year.
While the demand for better value for money is behind much of this growth, Gallaher’s Jeremy Blackburn believes the increased choice of products has also helped. "Traditionally there were only two or three RYO brands on people’s shelves. Now that’s stretched to at least five or six different varieties," he says.
Gallaher has been encouraging smokers to give one of its RYO products a try with the launch of a 99p 6g trial pack of Old Holborn Yellow. The product comes with a ’peanut card’ style merchandising solution to ensure increased visibility.
When it comes to merchandising, RYO is an area where some retailers could do better, says Blackburn. "It has often been neglected - either pushed to the side or the bottom of the gantry or merchandised poorly. It is essential that retailers give customers plenty of choice and they stock the most popular brands prominently to help customers easily identify them. As more smokers turn to RYO, retailers should also make sure they stock up on the growing pack format, 25g."
In forecourts 50g packs of tobacco (across all brands) increased their share of sales to 6.4% in 2005 - up from 1.6% in 2004 - while 25g packs now account for almost 34% of sales. However, the traditional 12.5g pack still accounts for 60% of sales.
For Imperial, its best-selling Golden Virginia brand is said to have made significant distribution gains in the 50g size. "It’s a higher cash purchase so retailers make more profit on a pack sale," says Mike Laney. "But obviously there are local market trends, which retailers should monitor - they need to see if smokers are prepared to trade up because it is a significant purchase."
For those looking for smaller sizes, Imperial recently launched Golden Virginia in a new 14g cigarette-style box pack, containing two separate 7g blocks of tobacco.
The pack is said to be particularly appealing to ’dualists’, who prefer a square box to a pouch. The innovative design ensures the tobacco remains fresher for longer and it can also be used to hold rolling papers, filter tips and a lighter once one of the blocks has been removed. Imperial reckons the new design will also enhance the brand’s presence on the gantry.
The increasing popularity of RYO means retailers can make the most of the accessories that go with it, which can offer profit margins of at least 50%. For example, nearly one in three smokers who enter the RYO sector uses filter tips.
Mike Laney says retailers need to be aware of the link between RYO and accessories purchases and merchandise them together where they can be easily seen. "All too often the tobacco will be on the main unit and then somewhere off to the side will be everything else - filter tips, papers, rolling machines, lighters and matches - all jumbled together," he says. "Display is very important, the customer needs to be able to see that all of these things are sold. If people can’t easily see what they want, they often won’t ask and will go elsewhere and take the rest of their purchases with them."
Imperial’s Rizla brand accounts for more than three quarters of rolling paper sales in the UK and Rizla Regular Green has a share of over 45% in forecourts. Thinner, premium quality rolling papers have also grown in popularity over the past few years. Rizla King Size Slim Silver was launched in response to this trend and its sales on forecourts grew by 37% in 2005, making it the third best seller.
While Rizla dominates the market in rolling papers, Zig Zag is another brand making an impact - the company says it sold more than 28 million booklets in the first three months of 2006. This is without the brand being sold in the multiple grocers, meaning smaller retailers can have a point of difference.
While 85% of Zig Zag’s sales have been of the green standard size booklets, the company claims to have the largest range of all the suppliers within the category, with six standard variants and five king-size variants as well as rolls and rips. It also offers smokers four types of filter tips, including a menthol variant.
While flavoured tips will never be huge sellers, Zig Zag’s commercial director Andrew Armstrong, says they can attract very loyal trade from those who do use them.
Specialist manufacturer OCB has just launched the Top range of flavoured papers, which come in vanilla, strawberry and peach variants. Justin Rudd says the range particularly appeals to women. OCB is also looking to increase distribution of its premium range in forecourts.
Although the cigar sector saw an overall decline in 2005, there are still 600,000 cigar smokers in the UK and forecourts actually increased their share of sales by 4.7%.
Imperial’s Mike Laney says he has seen a general increase in the standard of display and ranges that are available across the sector.
However, he adds that retailers do need to think carefully about what they stock. "In the UK there are over 300 cigar brands but the top 10 accounts for around 90% of sales," he says. "It is therefore vital that forecourt retailers stock an appropriate range suited to meet the preferences of local cigar smokers."
The cigar market is clearly segmented into three size sectors - miniature, small and large. While the small sector accounted for 53% of total sales last year, miniature cigars have been performing strongly and are expected to continue to increase their share to 47% by 2008.
Mike Laney believes some of this growth has come from another ’dualling’ trend among smokers - this time between miniature cigars and cigarettes. There has also been an increase in the number of women who smoke miniature cigars.
Gallaher has invested heavily in Hamlet Miniatures over the past year. "We’ve made a full range available in tins and the format has been very popular," explains Jeremy Blackburn. "It’s also about choice - we’ve extended from just offering Hamlet Miniatures to having Smooth, Fine Aroma and Filters. This has helped drive the category as well."
Launched in April 2005, the Smooth variant has performed particularly well and sales are continuing to grow.
Finally, Imperial has just updated the presentation of its Panama small cigar brand. As well as a new pack design, the cigars inside are now individually foil-wrapped to enhance the overall packaging and help to maintain freshness.
In conclusion, when it comes to the tobacco category the message to forecourt retailers is simple - don’t give up just yet, there are plenty more sales to come.
TOP TEN BEST-SELLING CIGARETTES IN FORECOURTS
1. Lambert & Butler King Size
2. Benson & Hedges Gold
3. Marlboro Gold King Size
4. Mayfair King Size
5. Silk Cut Purple
6. Benson & Hedges Silver
7. Royals King Size Red
8. Embassy No1
9. Richmond Superkings
10. Richmond King Size
Source RAL: March 2006