Tobacco challenge

Category faces up to new challenges

The ever-resilient tobacco category is bracing itself to face yet further regulatory challenges in the months and years ahead ... and yet its position as the cornerstone of convenience and impulse outlet profitability is not about to change any time soon.

Despite the growing number of display and advertising restrictions placed upon it, the tobacco category still makes up greater than 30% of sales (excluding fuel) in most C&I stores. It goes without saying that, as it plays such an important role in the overall business, it is crucially important for the C&I retailer to manage the tobacco category proactively.

Interesting times ahead

This is particularly the case as display restrictions come into force in some jurisdictions.

Already in place in New South Wales from the beginning of this year, the restrictions will also be rolled out in Western Australia in September and in Victoria at the beginning of next year.

Add to this, calls from the anti-tobacco lobby for plain packaging of tobacco products, and it is clear there are interesting times ahead for the category ... but when hasn't there been?

While the industry believes there will be no discernable impact of display restrictions on total purchases, the effects across all channels is not clear. It would appear that smaller retailers are more at risk of losing sales and profits to supermarkets and tobacconists.

Andrew Matheson from Imperial Tobacco says this is because customers expect a supermarket to stock a big range of tobacco but, in a convenience store, if they don't see their preferred variant, they may assume it is not there.

"Convenience store retailers face a difficult task of ensuring that they present the category effectively whilst complying with the relevant legislation," he said. "This means that in the majority of cases they cannot display every brand, and they also need to make sure that their customers know which categories they do stock."

Stuart Alexander is another major tobacco company anxious to see what effect new restrictions will have on sales. The company's Category Manager – Cigars says that consumers are used to looking in the same area for their product and so, dark market or not, it makes sense to have a consistent approach that allows the consumer to recognise that their desired brand is in stock.

"It also allows retailers to verify stock on hand so quick checks can be made prior to orders being placed," he said. "Retailers need to ensure that they are in the best possible position to maintain their sales."

The key to maintaining sales

Stuart Alexander has identified a number of key ways in which this can be achieved. It says C&I retailer should ensure they:

Understand the legislation and how it impacts their stores

Boast a good range of product that is adequately stocked

Take advantage of promotional activity

Utilise all the tools available (this could be as simple as creating a compliant price board that covers all segments of the tobacco category).

Have product in a consistent layout, whether head office controlled or not.

And, for states that are not yet forced to be covered up, Stuart Alexander says it is a prime time to embed a range and a layout. It says its representatives are able to assist retailers implement a head office controlled planogram or implement a store specific planogram for an independent outlet. They can also provide retailers with POS material that is legislation compliant for all states.

"The consumer is still the time poor shopper who is forever looking to obtain their desired product in the fastest and easiest fashion possible," said the Category Manager, Cigars. "So, ensuring good business practices in a darkening market of visibility should be a priority for retailers."

Other tobacco companies agree.

"Variety of products can capture impulse sales and build basket size, capturing purchases that may normally have occurred elsewhere outside the channel," said Paul Halloran, Trade Marketing Manager for Swedish Match. "Price and product description on the price board is paramount in communicating to the consumer of the product offer available and to any promotional activity that is running."

And Craig Cunningham, Manager Key Accounts Channel-Convenience, Philip Morris Limited (PML), shares the belief that the key disciplines remain the same in a display ban environment. He says retailers should ensure their products are effectively priced; tobacco products are housed in an effective hardware dispensing unit; out of stocks are avoided by ensuring staff check the unit and refill regularly; and permitted methods of providing brand and price information should be used, for example, price tickets or price boards.

The issue of plain packaging

However, he remains concerned by calls for the introduction of 'plain packaging' of tobacco products in Australia, a measure which has not been implemented anywhere in the world and that PML believes would be an extreme and disproportionate measure.

"There is no evidence to support the claim that plain packaging reduces smoking prevalence," Mr Cunningham said. "Plain packaging will unnecessarily impact retailers who are already facing significant regulatory burden, in particular those implementing store changes to comply with new tobacco display bans."

Obviously, packaging is an important means of differentiating products and allows adult smokers to easily identify their preferred brand. It also increases industry competition by providing a means for new and existing products to have their own identity. Mr Cunningham therefore believes that plain packaging would probably result in competing on price alone.

"Lower prices and lower margins are not good for business and do not advance public health objectives," he said.

The challenges then are immense, but all is not lost for the C&I operator trying to maximise his or her tobacco sales in still uncertain economic times.

And the good news …

So, some good news. The convenience channel generally works on higher margins, so consumers make the price trade off for greater convenience. Due to the higher margins, you generally find consumers that purchase in convenience stores are less price sensitive, and tend to have a stronger skew to premium brands.

The tobacco category is arguably one of the most brand loyal categories within a convenience store. According to Morgan Research data released in 2008, some 34.9% of convenience channel consumers went to another shop when their product was not available. Therefore, stocking a variety of tobacco products to ensure customer demand is met is critical to maintaining business.

And despite all of the change and uncertainty, the Tailor Made Cigarette (TMC) category is relatively stable within the convenience channel, with a sales increase of 0.14% (MAT to November 2009 – Aztec CO Database).

And the news is even better within the Roll Your Own segment. Indeed, the real growth area across the industry and also within the convenience channel is RYO, with an increase of 5.13% on the November MAT. There are a number of potential reasons for the growth in RYO, with perceived value for money being a contributing factor.

Imperial Tobacco has a strong presence in both the RYO and Papers categories, and says that, as the industry moves to a more regulated and price sensitive era, it fully understands the importance of volume and profitability to the convenience retailer.

"Although TMC makes up the majority of sales volume, categories like RYO and Accessories also offer great opportunities to increase sales value," said Imperial Tobacco's Andrew Matheson. "Retailers need to therefore ensure that all categories are visible to the consumer so that, even through their preferred brand may not be visible, if they know the retailer stocks some RYO and cigars, they may ask."

Imperial is responsible for Peter Stuyvesant, Horizon and JPS in the TMC category, Champion Ruby in RYO, and the Tally-Ho brand in the RYO accessories department. Tally-Ho has just been given a new look across its entire papers, filters, tubes and rolling machines range. It has also launched an innovative "Duo Pack" which includes a five Pack of Tally-Ho papers and a box of Ultra Slim Filters into selected convenience accounts.

Stuart Alexander also boasts an impressive range. It is the registered distributor of brands including Café Crème, Old Port, Schimmelpenninck, King Edward, Old Holborn, and Ranch filters.

"The portfolio of products provides for all consumers needs within the segment," said Stuart Alexander's Category Manager, Cigars. "We also have a premium range of wet cigars."

Swedish Match produces the market-leading Willem II brand, which includes the popular Wee Willem and Amanda cigars, and says the current trend is towards filtered cigars.

"This segment has grown significantly in recent years and Swedish Match is launching a new brand of little cigar called 'Salsa'," said the company's Paul Halloran. "This will provide an extremely competitive offering in this sub category within cigars."

Mr Halloran says its leading brands, such as Willem II, are targeted at medium and higher socio-economic areas.

For its part, PML says its strength lies in a profitable portfolio mix in terms of price, brand equity and innovation. This includes brands such as Longbeach, Peter Jackson, Choice, GT, Australia's leading menthol brand Alpine, and the world's number one selling cigarette brand, Marlboro.

Craig Cunningham says PML continues to provide adult smokers with relevant, differentiated products and, in line with that objective, it has recently launched variants including Longbeach Slims, Marlboro Gold Advance, and Marlboro Fresh Chill and Ice Chill.

Know your customers & get the range right

"Smokers purchasing cigarettes at a convenience store, such as 7-Eleven and petrol stations, are more likely to purchase premium brands," said Mr Cunningham. "The majority of our consumers still purchase from a supermarket as many smokers prefer to do their household shopping where they can also purchase their cigarettes."

It seems then that tobacco consumers generally tend to make their purchases across a range of outlets covering different channels. The main brands in the category will be found in all outlets, indicating that they have a fairly diverse consumer base. The main differences found across channels are that there tends to be a greater skew to value brands in discount channels such as supermarkets and specialist tobacconists. This is mainly due to the fact that these outlets work on lower margins and therefore people who have price as a main factor in their purchase decision will shop in these stores, and these consumers tend to purchase more value brands.

Clearly, it is vitally important for convenience and impulse retailers to stock the right products for their store, particularly as they cannot possibly carry every SKU on the market. The balancing act is then to carry products that turn over and therefore generate profit, while at the same time making sure they can satisfy the needs of most consumers that purchase tobacco products from their store.

It all adds up to the need for retailers to have a good knowledge of their customer base, plus a good understanding of what is happening across the total market, not necessarily just the convenience channel. If the retailer gets the product range right, it means the outlet can generate maximum margin from a category that only takes up a small amount of store space.

The convenience and impulse outlet landscape has changed significantly in the last few years and will continue to do so as different factors play a role ... and vigilance is critical.

"The current economic climate is having an impact on consumer's disposable income and as such they are looking more closely at how they spend this," said Imperial Tobacco's Andrew Matheson. "This could potentially impact C-Stores as consumers have a perception of their prices being higher than other channels ... C-Store retailers need to be aware of this and ensure their offer remains relevant to consumers."

We know also that all tobacco retailers are subject to state specific display legislation, and it is therefore vital that they keep abreast of all the requirements in their state. It's a complicated business but, if retailers take the time and effort to get it right, they can grow their tobacco sales ... despite any challenges that may lie ahead.