Tobacco retailers have faced some pretty tough trading conditions over the past few years. The impact of smuggling, reduced margins due to increased taxation, and the constant fear of inadvertently falling foul of the law through underage sales must leave some forecourt operators wondering why they bother with the category.
Then there’s the legislation. Not only is tobacco advertising banned in the media, the High Court’s decision to uphold the UK Tobacco Advertising and Promotion Act’s point of sale regulations has now reduced in-store communication to one sheet of A5 – 30% of which must be a health warning.
Despite all this, tobacco remains a key forecourt category and one that really punches above its weight. Mike Laney, national accounts manager for forecourts at Imperial Tobacco, says: “Typically tobacco has less than two metres of wall space, but delivers over 33% of shop turnover, making it the most effective cash-generating, fast-moving-consumer-goods (FMCG) category on site.”
The company says forecourt tobacco retailing is worth £1.5bn, and the channel is continuing to snaffle up more market share, so that it now accounts for 12.1% of cigarette sales; 10.9% of roll your own (RYO); and 8.5% of cigar sales.
Jeremy Blackburn, trade communications manager at Gallaher, puts the category in perspective: “While fuel accounts for 86% of total sales it only contributes 44% of gross profit, while shop sales make up 14% of total sales and contribute 56% to gross profit. Of shop sales, tobacco is the biggest selling category, outselling confectionery, soft drinks and news combined,” he says.
To continue to make the most of the category, however, it’s important to know your customer base and range accordingly. Tobacco is highly demographically sensitive, and as such both geography and the social profile of the customer base should dictate which brands to stock. The majority of forecourt customers are ABC1s, so premium brands such as Benson & Hedges and Silk Cut have traditionally fared well in the channel.
PREMIUM AND LOW PRICE DOMINATE
“Premium brands perform better in forecourts than in many other outlets and account for 43% of sales in forecourts against 31% in the total UK market,” says Iain Watkins, trade communications manager at Imperial Tobacco. “Within the premium price category Marlboro Gold sells particularly well in forecourts with 10% of sales in this sector compared to 5.5% of sales in the total market.”
Watkins goes on to say that the low-priced sector is also popular with forecourt customers, accounting for nearly 25% of sales in forecourts compared to 22% in the total market. Lambert & Butler King Size, for example, accounts for 12.4% of total cigarette sales but performs even better in the forecourt sector where it’s worth 15.1% of sales. According to Watkins it’s the mid-price and ultra-low-price brands that do not fare so well in the channel. It’s also worth bearing in mind that the forecourt sector over-trades in 20s packs against the total market.
Gallaher, meanwhile, reports that sales of its value for money and mid-priced brands have been very successful, with Mayfair increasing forecourt market share from 10.68% in January 2004 to 11.85% towards the end of last year.
Newcomer Benson & Hedges Silver also increased market share to 2.87% – an impressive performance given that its market entry was so close to the media advertising ban – while premium brands Benson & Hedges Gold and Silk Cut have 11.75% and 6.53% share of the channel respectively.
ROLL YOUR OWN
Paul Bearman, marketing controller of independent forecourt chain Fuelforce confirms that all tobacco segments contribute to the overall performance of the category. “The full range of products across all segments of the category generally does well because our sites have a wide cross-section of the public using them. RYO sales are increasing and small cigars show some small growth,” says Bearman.
In fact RYO is one segment that has, ironically, benefited from the tax-generated price hike in cigarettes. Roll your own has become an attractive alternative to tailor mades – not only are they perceived as cheaper, younger smokers no longer see them as the poor, and often old, man’s alternative to ready mades. Gallaher says the sector has been growing steadily since 1999, with a marked trend towards lighter tobacco brands such as Amber Leaf, which has 12.72% of the market. “The 25g variant has been selling very well within the forecourt sector and supports the overall growth of the brand so can be stocked for further sales growth,” suggests Blackburn.
Meanwhile, Imperial Tobacco, which owns the Golden Virginia and Drum brands, says the most popular pack size is 12.5g which accounts for 66% of sales in forecourts followed by 25g which accounts for 33% of sales.
In addition to stealing consumers from the tailor-made sector, RYO also has another attraction – accessories. Martin Hulse, business unit controller for convenience at Swedish Match, says they offer impressive margins: “Forecourt retailers really can benefit from the profit margins of up to 70%
in RYO papers and accessories, compared to just 7% in tailor made,” he says.
Imperial Tobacco’s Rizla brand maintains its position as the number one cigarette paper, but Swedish Match is capitalising on the shift to RYO with a new rolling paper, Styx, and a Styx Combi pack – a combination of 50 papers and 50 filters in a pocket size flip-top pack. “Extensive research among the increasing number of 18-25 year-old users revealed they were looking not only for a fresh, stylish and effective alternative to existing papers, but also they were frustrated with paper and filters running out at different times and the inconvenience of loose products,” explains Hulse.
Hulse urges retailers to take advantage of the boom in RYO by ensuring they stock a comprehensive range of filters and lighters too. “One in three RYO smokers now uses a filter tip,” says Hulse. “Lighter sales are growing across all segments of the market. Consumers will trade up and purchase more profitable quality lighters if you stock a good range and display them well, using counter-top display stands if possible,” he adds.
Accessories also have another attraction in that they are not subject to the same stringent marketing controls that saw the tobacco manufacturers scurrying around the country towards the end of 2004, frantically removing existing advertising from gantry fascias in time for the deadline. Both Imperial Tobacco and Gallaher have now completed this gargantuan task, but the restriction will leave a massive gap, not only on the gantry, but in the industry’s marketing armoury.
Mark Wilson, group operations manager at the Fraser Group agrees with the manufacturers’ assertion that the pos restrictions are unlikely to have a detrimental effect on sales. “I believe our customers have already made their mind up prior to coming into the site to purchase their tobacco,” he says.
However, the industry does admit it will be harder to communicate with customers in the future. This will clearly pose challenges, especially in terms of new brand launches as future marketing will be confined to such areas as packaging. This makes good merchandising and intelligent ranging which is sensitive to consumer shopping habits more important than ever. Says Bearman: “We have always done it this way and the pos regulation changes won’t alter that. It’s the impact of the fixture, planogram and full availability that matters,” he says.
Wilson at the Fraser group, whose gantries are supplied by Imperial, says the company will continue to work in partnership with the supplier to devise the ultimate ranging and merchandising solution. It provides Imperial with regular reports which then generate planograms for each outlet based on throughput. “This is a much better and unbiased approach than the old days when tobacco companies used to give premium space to their own brands,” he says.
With the forecourt consumers’ skew towards premium brands, these should be stocked at eye level for ease of identification, and out of stocks should be avoided at all costs, says Blackburn. “By not having sufficient stocks of the biggest selling brands, outlets not only lose out on the sale of the tobacco itself, but also the associated purchases,” he says.
Watkins agrees: “Forty nine percent of adult cigarette smokers will leave a store without buying anything if their brand is not on the tobacco unit, so it is vital that forecourt retailers take the regionality of some brands into account and ensure their tobacco category offering is appropriate to smokers of all product groups.”
Then there’s the gantry itself – a one time key marketing tool. “I think Gallaher’s attempts to fill the gap on the gantry are better than Imperial’s. Imperial has a small sticker positioned in the middle of the header of no more than 20cm, where Gallaher has put a professional in-fill into the whole header,” observes Wilson.
It’s likely that such solutions are a stop-gap while the manufacturers decide exactly what to do with what was prime advertising space in store. Although they remain tight-lipped about the possibility, there have been reports that they are considering selling the gantry space for secondary advertising to, for example, soft drinks companies. Should they go down that path, could retailers expect a cut of the profits? Says Wilson: “Any secondary advertising on site has always been done on a revenue share basis and I would expect Imperial to take the same route.”
For the time being, tobacco will continue to be a major generator of revenue and a super footfall driver in the forecourt retailing channel. But with the government’s recent announcement of a planned ban on smoking in public places, including restaurants and pubs that sell food, tobacco consumers will be under increasing pressure to kick the habit. In some ways, the industry is moving in ever decreasing circles.
However, Wilson at the Fraser Group remains optimistic, believing much of the category’s fortunes remain in the hands of forecourt retailers and their supply partners.
“It depends on each outlet as to how the customer will view the store. If investment has been made and the offer is strong then I would expect to see sales grow marginally, but not fall,” he says.