Endless challenge

Tobacco faces up to its biggest battle yet

Even for a category as used to facing severe regulations on its marketing and display as tobacco is, recent Government announcements on yet more restrictions came as something of a body blow to the category.

The Federal Government declared a tobacco excise rate increase of 25% that came into effect at the end of April, and it has also said plain packaging will be introduced for tobacco products, effective from July 2012.

This on top of the fact that all eight states and territories in Australia have already moved to ban point of sale tobacco display.

Of course, the tobacco industry as a whole has not taken the latest announcements lying down and it argues that Australia is already one of the most advanced countries in the world in terms of tobacco regulation.

The long term outlook

But what about the humble C&I outlet operator who depends heavily on the sales generated by this most important of categories?

"Retailers and retail groups have publicly expressed their concerns about the serious impact plain packaging would have on retail businesses," said Chris Argent, Director of Corporate Affairs at Philip Morris Limited (PML).

He warns that the proposed measures will "further impact small businesses who are already being hit hard from tobacco display bans, which have imposed high costs to adjust fixtures and storage areas."

And he also slams the Government over the abrupt increase in tobacco excise which he said "created chaos, confusion and unnecessary angst."

"The only thing that will come out of this is the demise of small businesses as their cash flow becomes unworkable with 50% to 60% of their stock value already tied up in tobacco products," he said.

Stuart Alexander is equally concerned about the significant increase of the excise payable on tobacco products across all segments of the category.

"The effects are still being determined," said Stuart Alexander's Brand Manager – Cigars. "Although I am sure that store owners will already have a handle on the effect it may have had on their store's turnover!"

Onus on the retailer

Stuart Alexander says that, more than ever, the onus is on retailers to ensure that they and their staff know and understand the requirements of all legislation as it applies to their store. It says they should check the state government websites for a copy of the legislation that applies to their state.

Katrina Barker, Trade Marketing Manager at Swedish Match, says that while the rules differ in each state and change every few months, the major issue for retailers is to ensure they fully utilise the limited space to their best advantage.

"A successful retailer will keep a variety of tobacco across the categories to show consumers the range they carry," she said. "Rather than filling up the one or three square metres with just cigarettes, I would highly recommend they include at least the top two cigars, one pipe tobacco and one or two RYO brands in the display space."

While she says C&I operators have to manage the best they can while working within the various laws and regulations, the prospect of blank packaging is a major concern to her.

"Packaging is extremely important," she said. "As we cannot directly promote to consumers, the best way to provide any sort of information about the product is via packaging."

It's a point picked up on by Andrew Matheson, the National Business Manager at Imperial Tobacco.

"Packaging is an important means of differentiating products and allows adult smokers to easily identify their preferred brand," he said. "It also increases industry competition by providing a means for new and existing products to have their own identity."

He says the Government's plan to introduce plain packaging for cigarettes in 2012 will harm Imperial Tobacco's brands and infringe on its intellectual property rights.

"Plain packaging has not been introduced in any country in the world," he said. "Plain packaging also takes away the ability and rights of consumers to identify our brands from competitors and to readily choose and enjoy smoking a legal product."

He further claims that the introduction of this legislation will mean that all tobacco products will be available in the same generic plain packaging, which will lead to a significant increase in counterfeit products, currently estimated at around 12% of the Australian market.

It's fair to say then that the tobacco industry as a whole is not smitten with the latest moves to clamp down on the packaging and display of tobacco products.

As Chris Argent from Philip Morris Limited says: "While PML supports evidence-based, effective regulation of tobacco products based on the principle of harm reduction, we do not support regulation that hinders our ability to compete in the legitimate tobacco market."

Impact on Convenience

But where does it leave the C&I outlet which, like it or not, pretty much depends on the profits from tobacco sales to stay afloat?

Some tobacco companies argue that, if plain packaging laws do come into effect, the prospect of dozens of different cigarette packets all looking the same will almost certainly lead to customer dissatisfaction.

Having different distinguishable brands effectively allows adult smokers to identify and select the product they wish to purchase. By reducing differentiation between products, plain packaging may force tobacco companies to compete on price alone for share of market. It is argued that this won't achieve public health objectives, and ultimately won't be good for government revenue … and it certainly won't be good for a C&I outlet's profit level.

It's an important point and one that underlines the fact that these are indeed 'interesting times' for C&I outlets. Anything that has a significant impact on tobacco sales is going to have a significant impact on every C&I operator's bottom line.

The 25% excise tax increase mandated by the government certainly means the convenience channel enters challenging territory in terms of gross profit margins.

"Although the channel has historically been higher in terms of margins versus other channels, the emotional dollar thresholds for many key brands is reaching up to and over $20 per packet," said PML's Craig Cunningham. "Convenience retailers will need to keep abreast of emerging trends in terms of potential down trading to lower segment products or smaller pack sizes, in order to ensure they stay competitive."

In terms of the state specific display restrictions that are constantly being adjusted, the impact across all channels is not clear but it would seem likely that smaller retailers are more at risk of losing sales and profits than supermarkets and tobacconists.

This is because customers expect a supermarket to stock a big range but, in a convenience store, if they don't see their preferred variant they may assume it is not there.

So what can the C&I outlet operator do?

What to do?

"Convenience store retailers face a difficult task of ensuring that they present the category effectively whilst complying with the relevant legislation," said Imperial Tobacco's Andrew Matheson. "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."

According to Aztec, Tailor Made Cigarettes (TMC) represent 95.75% of sales, Roll Your Own (RYO) represents 3.55% and cigars represent 0.7% of the tobacco category. Given space is limited due to the display restrictions in most states, it is important to strike the right balance of representation within the tobacco category.

Although TMC make up the majority of sales volume, categories like RYO and cigars are nonetheless crucial to a C&I operator and offer great opportunities to increase sales value.

"Retailers need to therefore ensure that all categories are visible to the consumer so that even though their preferred brand may not be visible, if they know the retailer stocks some RYO and cigars, they may ask," said Imperial Tobacco's Mr Matheson. "The range needs to be continuously reviewed to keep up with consumer trends and to reflect changes in the local area."

Clearly, making sure the total range is right for the store is, in a display restricted environment, more critical than ever. And, with an average 20 SKUs for each major brand and only room for about 85 facings in the one-square-metre displays, the challenge is then what to display. Most retailers are putting big brands on display, which is tempting for a retailer because this is where the majority of their turnover is coming from.

"However, you do need to have some means of communication across your range to show which brands and pack sizes are available, particularly for the smaller selling brands," said Mr Matheson. "The biggest impact has been on RYO tobacco and rolling papers when these are included in the restrictions ... therefore if you stock RYO product, you need to have some way of communicating this to the consumer."

Stuart Alexander agrees that while legislation is forcing products to be shrouded from general view to consumers, retail outlets still need to be aware of the top selling SKUs and to keep adequate stock weight and preferably have products displayed as per an agreed planogram.

Stuart Alexander says this will assist in a number of ways;

Quick convenient service of consumers, which is why they shop in the channel

Easier for staff to determine required stock weight for days trading.

Quick and easy verification for staff to determine what stock is required to be ordered

Easier for staff to locate stock now that legislation requires all stock be non visible.

"Legislation implemented or being proposed by most state governments that will significantly restricts the visible display of all tobacco products is well underway, and retailers should be aware that Stuart Alexander has available to all outlets display units that are compliant to the new legislation," said the company's Brand Manager - Cigars.

"For states that are not yet totally restricted in the visibility of tobacco products, now is the time to ensure that your outlet is known to consumers as a destination for tobacco products and the range that you have available to them across all segments of the category."

Price board to inform customers

Another tool available to retailers to communicate with their consumers is a pricing board.

"No matter which state legislation that an outlet is operating under, the use of a pricing board can be an effective tool to inform consumers of the product range kept in an outlet," said the Brand Manager - Cigars. "A price board that is compliant to the new legislation will advise consumers that shop in the convenience channel that their product is still available."

Outlets should display an array of pricing from across the three segments of the category; TMC, RYO and Cigars. Obviously, failure to keep consumers informed of the available range in store can easily lead to lost sales.

For its part, Swedish Match emphasises that the key to tobacco sales success is to ensure a broad mix is displayed in the limited space.

"We keep a daily eye on current market trends and shifts in consumer purchases," said the company's Katrina Barker. "By utilising market data from Price Waterhouse, Nielsen and Aztec, we can provide retailers with the right mix of products to carry. It's simply a matter of ensuring your store ranges and, more importantly, displays the top selling SKUs within each category."

Swedish Match has range of display options available to suit different outlets.

"We are also working with some of the major groups to build custom displays within their stores that comply with current government regulations," said Ms Barker. "As branding is not allowed to enhance displays, the best display you can have is simply a neat display that carries a range of tobacco products."

She says that ensuring the display is dust and clutter free is another way to maximise visibility.

As previously stated, having a range of RYO, TMC and cigars is important … as is understanding your customer base. The profile of a typical tobacco smoker differs depending on the type of tobacco product.

"Retailers must have a good knowledge of their customer base, plus a good understanding of what is happening across the total market, not necessarily only in the convenience channel," said Imperial's Andrew Matheson. "If the retailer gets the product range right, it means that they can generate maximum margin from a category that only takes up a small amount of store space, but can generate more than 30% of profit for their store."

Product range in tobacco is then, of course, crucial and while some display and packaging challenges are already here and more doubtless lay ahead, the tobacco companies are still working hard to supply the product that customers want now.

Stuart Alexander continues to find great success as the authorised distributors of brands including Café Crème, Old Port, Schimmelpenninck, King Edward, Old Holborn, and Ranch filters. It also has a premium range of wet cigars.

For its part, Imperial Tobacco says the recently launched JPS continues to perform well in the convenience channel, along with other leading TMC brands like Peter Stuyvesant and Horizon. The company has just launched Horizon 40s across the market, which it says could be increasingly relevant given the recent excise increase. In the RYO category, Imperial Tobacco's Champion Ruby continues to perform extremely well as does its Tally-Ho brand of papers, filters, tubes and rolling machines.

Swedish Match, which boasts the hugely popular Willem II cigar, is very excited about its newly launched Salsa small cigars, which are available in Original, Black Sherry, and Vanilla flavours. The company has also just launched is Bali Shag roll your own tobacco, which is available in Virginia Red, Halfzware Blue and Nature variants. Its special tobacco rolling mats are another promotional strategy it is using to enhance awareness of Bali Shag in the trade.

PML is equally excited that it is in the process of introducing a new Peter Jackson brand pack design. It says customers will notice a bold new shield and a metallic finish, but the cigarette itself will remain unchanged.

The company says it has a broad portfolio of products that caters for various consumer tastes and preferences. It points to choice as an example of a product that is tailored for the value conscious consumer and Marlboro Gold Advance as one that appeals to the more stylish smoker typically seeking 'cutting edge pack design', and a 'smooth smoking experience'.

Life then in the tobacco category goes on despite the wide battles that surround current and possible future restrictions on its sale and display. All the convenience and impulse outlet operator can do in the meantime is work within the applicable rules and restrictions to maximise the sales from this most important of categories. The future will have to look after itself.