Turning the Tobacco Tide

Source from:  awmanet.org by Lisa White 03/17/2008

Despite the increasing taxes and restrictions, this category remains buoyed by new and innovative product launches Although the tobacco industry has undergone many changes over the years, it is still the bread and butter of convenience stores. The tobacco industry is not that different from other consumer product segments. "In general, there is the same proliferation of choices and different angles in terms of target markets," says Bill Greiwe, CEO at Cheyenne International in Grover, NC. According to Dan Custred, director of national accounts for Louisville, KY-based National Tobacco Company, there are approximately 45 million smokers in this country, 6.7 million smokeless consumers and 1.8 million adults who are chewers of loose-leaf tobacco. "Still, the bottom line is that federal and state taxes in this industry are revenue drivers and will continue to increase as the government tries to bridge budgetary gaps. This will be an ongoing factor we have to contend with from both a marketing and promotion perspective," he says. Higher cigarette taxes, consumer education and anti-smoking programs funded by the Master Settlement Agreement and state initiatives, as well as recent smoking restrictions in public places, have combined to reduce the number of smokers. "The biggest trend in this segment is that fewer consumers are smoking cigarettes and those that do are smoking less frequently," says John Geoghegan, marketing director for Kretek International, based in Moorpark, CA. He notes that the number of cigarettes sold and consumed in the U.S. have declined from around 450 billion to 350 billion in the last several years. However, there is good news. The current climate has produced more interest in smokeless tobacco products. In addition, although Americans may be smoking less, they are looking for the quality and variety offered by specialty and OTP products. The rising taxes also have given a boost to the value-priced cigarette segment, which is becoming more prevalent in c-stores. And, even with the industry's advertising restrictions, companies have become more creative in their brand development and product promotions. In the following pages, Distribution Channels provides insight into the top trends driving the tobacco category, which is currently repositioning to accommodate the needs of its consumers. Smokeless grows Proof of the burgeoning smokeless category is the recent entry by tobacco giants Phillip Morris USA and R.J. Reynolds Tobacco Company (RJR). According to Ed Chrupcala, director of category development at Stamford, CT-based U.S. Smokeless Tobacco Company, through the third quarter of 2007, category unit volume of smokeless was up 9.9 percent, compared with growth of 11.3 percent the year prior and 7.4 percent in 2005. "We are experiencing very strong growth in this category, which has increased approximately 30 percent over the last five years" he says. Much of this growth is attributed to the higher percentage of smokers becoming smokeless tobacco users than in years past. "This is because there are different forms and flavors of smokeless tobacco that weren't available years ago," Chrupcala explains. Last year, U.S. Smokeless introduced three new Copenhagen products geared for consumers that wanted an alternative to fine-cut tobacco. The company's Copenhagen Smooth, Hickory and Straight Flavored lines debuted last September, and Skoal Edge in a wintergreen flavor will be launched in 2008. David Howard, spokesperson for RJR, headquartered in Winston-Salem, NC, says his company believes there is opportunity in alternative tobacco products. "Our test-marketing of Camel Snus, a smoke-free tobacco product that does not require spitting, is our first product offering in this category. Results to-date have been positive," he says. National Tobacco's newest entrant into the smokeless category is Danish import Oliver Twist, which is made of tightly-rolled tobacco bits that are available in six flavor pocket packs. In addition, its Stoker brand is now also available as a moist snuff product sold in a value-sized, 12-oz. tub that also features a refillable can inside. Specialty & OTP With smoking occasions becoming more limited due to increasing state restrictions, consumers are looking to further enhance their smoking experience with specialty products. "While the overall cigarette volume is declining, specialty and imported cigarettes are increasing," says Geoghegan. "What we are seeing is movement toward more variety and a broader choice of imported products." He adds that natural and organic also have grown, along with little cigars. The recent growth in little cigars is not only due to the lower taxes on OTP products, but more to the flavors and different blends available. "There used to be three brands of little cigars on the c-store counter. Now there are 10," Geoghegan notes. Kretek debuted its Premium One little cigar in 2007. "People are interested in having alternatives," says Greiwe. "Little cigar smoking has done more for enjoyment on a social level as opposed to cigarettes. It's about entertainment value. It's not something used in the same way or seen in the same light as cigarettes." Brion Gillett, vice president of chain accounts at Altadis USA, headquartered in Ft. Lauderdale, FL, concurs that flavored cigar sales have been strong, in addition to single-stick cigar sales. The company reports that its new SLS by Phillies has been well received. Another growing segment is hookah tobacco. Used mainly by male Middle Easterners in the past, hookah use has become more widespread as part of the shift in smoking habits. Many are discovering the shared smoking experience of hookah. It's also an alternative for smokers cutting down on their cigarette use, Geoghegan says. "We've seen strong interest in our Rosetta brand of hookah tobacco, which we introduced last August," he says. Others in the industry note that there has been more acceptance by c-stores toward upgrading the tobacco category. According to Laurence Sherman, executive vice president of domestic sales/retail and marketing for New York, NY-based Nat Sherman, these retailers are seeking more variety and luxury brands. Why? Because although people are smoking less, they are being more selective in what they are smoking. To address more discriminating consumers, Nat Sherman has launched its Natural cigarette line in a king size. Also available in ultra and menthol varieties, this product is free of additives and chemicals. Consumers are trending toward more individualized products, as opposed to mass marketed cigarettes, notes Josh Kesselman, spokesperson for HBI International in Vancouver, BC, Canada. "Consumers want to associate with these items. They are not satisfied with mainstream products," he says. To address this trend, HBI recently launched a new line of flavored cigarillos that is rolled in one continuous sheet rather than spiral wrapped," Kesselman explains. "Because of this design, it offers better burning and increased flavor." Consumers migrating toward specialty products also have given the blunt market a boost. "Blunts are increasing quicker than any other tobacco segment," Kesselman says. "The trend in flavor also is continuing with RYO products. Just like their cocktails, consumers are looking for exotic and unique flavors." HBI's Bluntzilla blunt line debuted in 2007. Rolling paper flavors have expanded in recent years, as well. Bambu Sales, located in Westbury, NY, introduced nine flavors recently, including vanilla, chocolate, strawberry, peach, grape, mint, coconut, cherry, and banana, according to Sarah Saiger, part owner. A focus on value Higher taxes have taken a toll on the tobacco segment, but have been a boon to value-priced products. "In today's environment, adult smokers more than ever are looking for the best value," says Steve Shipe, vice president of sales and marketing services for Liggett Vector Brands, headquartered in Morrisville, NC. "Value doesn't necessarily mean the cheapest price; it means getting the best possible cigarette at the best possible price." To address this market, HBI recently launched a low-cost cigarette paper in a 1¼-in. size. "Due to the current economy, there is a segment of the market that is price-, rather than brand-, driven," Kesselman says. "Those switching to RYO because it's cheaper will buy a cheaper paper." Like RYO, MYO or make-your-own cigarettes have increased in popularity on the c-store front. "The c-store channel has expressed more interested in selling our MYO products," says Steve Sandman, vice president of sales and marketing at Glenview, IL-based Republic Tobacco. "As taxes increase, this alternative has become more appealing economically for consumers." Republic's Top and Gambler brands include a Light Pouch and 100MM cigarette tubes. "When consumers decide that premade cigarettes are cost prohibitive, they will seek out alternatives, such as MYO," Sandman says. More c-stores also are taking on fourth-tier price value cigarettes, according to David Redmond, president of Carolina Tobacco Company, located in Portland, OR. "Stores realize that, if they don't carry price value brands, their competitors will," he says. The company's fourth-tier brand, Roger, has benefitted from increased sales due to tax increases. "Price increases don't promote the notion that smokers should stop smoking," Redmond says. "Rather, this motivates them to try another lower-priced brand that is similar to the one they are used to smoking." Post stamping also is helping to keep costs in check on the retailer side. According to Steven Stomel, president of Tax-Right in Hammonton, NJ, more stamping agents are converting to post stamping. "The benefits include a reduction in inventory investments and a reduction in labor," he says. Creative marketing, merchandising To better position themselves against the growing number of competitors, companies have developed innovative marketing techniques. One example is Phillip Morris, which has enhanced its effective Retail Leaders Merchandising Program. "We offer this program to our retail accounts to assist in merchandising our products," says Greg Mathe, spokesperson. The program is based on the principals of category management and focuses on positioning, merchandising and space allocation. There are five levels, which offer flexibility and choice for both small and retailers of all types of store channels. The program's highest level connects retailers with adult smokers by signing store smoking customers up for Phillip Morris' mailing list. "These consumers then receive coupons and special offers that reference the store's name. This helps better leverage a store's loyalty program," Mathe explains. In addition to two new smokeless products, Phillip Morris recently introduced more than 10 new cigarette line extensions in the last year. The lighter category continues to grow in the convenience store class of trade. According to research firm Information Resources, Inc., as of the 52 weeks ending December 17, 2007, disposable pocket lighter category sales grew 10 percent versus the prior period. This growth was driven primarily by branded products. BIC Corporation in Milford, CT, targets its lighters to consumer demand, says Jeff Smith, national customer development manager. For example, the company offers numerous lighter lines, including an Auto Collector Series, the Daytona 500 50th Anniversary Collector Series, a Special Edition Astrology Series and a Traditional Tattoo line. The company's newest Favorites Series is a collection of 12 unique designs that were selected by consumers on BIC Lighter's consumer website. Another innovative concept is the Sweepstakes Lighter by New License, based in Lancaster, PA. "As the lighter is used, the butane level drops and a code is visible. Consumers log onto our website and enter the code to win valuable prizes, including cash prizes of up to $100,000, televisions, cameras and other awards," says Tracy Longnecker, director of marketing. Because consumers enter their name and contact information, the data can be used for marketing purposes by New License and their retail customers. "If a chain wanted to offer their own private label lighter, they could retain this information for their own marketing use, for a survey, etc.," Longnecker says. In another promotion, to provide more visibility for its new rolling paper lines, Bambu Sales employed a truck wrapped in Bambu papers to do giveaways at 300 college campuses in 2007. According to R.J. Reynolds' Howard, the tobacco segment will continue to prosper for retailers who have good communication with their adult tobacco consumers, effective promotions and the right products. Enditem