The tobacco of tomorrow

In the second Convenience Conversation of 2019, Scottish Grocer invited a group of retailers and brand representatives to Glasgow to discuss the opportunities and challenges posed by the tobacco category. How can stores stay on top of a constantly evolving market?

Representing Clydebank Co-op were Lorraine McKellar of Clydebank Co-op Dalmuir, Tracy McNeil of Clydebank Co-op Kilbowie and Colette Gililand of Clydebank Co-op Hardgate. All three agreed that price point was crucial to their customers

THERE are few categories that have been under more sustained legislative pressure than tobacco.

The last few years have brought plain packaging, gantries going dark, health warnings on packs, EUTPD2 and the impending ban of menthol cigarettes, so there has been a lot for retailers to get their heads around.

With that in mind, Scottish Grocer hosted its second Convenience Conversation of 2019 with the aim of discussing developments and innovation in the tobacco category.

Retailers at the round-table discussion included Mumtaz Ali of Mace Edinburgh, Lorraine McKellar of Clydebank Co-op Dalmuir, Colette Gilliland of Clydebank Co-op Hardgate, Tracy McNeil of Clydebank Co-op Kilbowie, Donna and Bruce Morgan of Best-one @ Brownlies in Biggar and Sunil Sharma of Scotstounhill Post Office.

They were joined by brand representatives Alasdair Blair and Gary Flanagan from Republic Technologies UK, and Jacqueline O’Neil and Duncan Cunningham from Imperial Tobacco.

Republic Technologies UK’s Alasdair Blair said that filter sales were growing every year

Chaired by Scottish Grocer editor Matthew Lynas, proceedings kicked off with a look at current category trends. 

Jacqueline O’Neil, of Imperial Tobacco, said that roll your own (RYO) tobacco was continuing to grow “at the expense of cigarettes,” rising from a 57% market share to 63% this year.

“I think the SKUs and the brands that have been left behind are the mid-sector cigarettes,” she said. “The premium cigarettes have kind of held their own because the people who are smoking premium don’t want to drop down, but the mid-sector has definitely dropped off.”

Tracy McNeil, of Clydebank Co-op Kilbowie, said that price point had been a significant factor in the increased popularity of RYO.

“Because we are in an area where there isn’t a lot of money, people are taking the rolling tobacco because it’s generally cheaper.

“A lot of our sales are coming through Players, Sovereign, Kensitas Club – since they reduced the price – and the Super King which is flying out the door.”

Increasingly price-focused consumers are a phenomenon that has also become apparent to Sunil Sharma, of Lifestyle Express Scotstounhill Post Office & Store.

Sunil Sharma of Scotstounhill Post Office pointed out the importance of having a wide range of tobacco accessories on sale in c-stores

He said that while cigarette consumers may still be brand loyal, in RYO it was price that was the biggest factor.

“I think you are more than often asked the question by consumers of ‘what is your cheapest tobacco?’ 

“You could get relatively unknown brands, or unknown brands to us, and they will still sell if they are cheapest.

“Cigarettes and tobacco are like petrol. People will go down the road for an extra pence saving on their petrol and it is the same with cigarettes.

“If people see that we are 10p more expensive than Tesco, then they will just go to Tesco.”

Turning to the subject of margins, Mumtaz said that tobacco companies should consider offering a 10% margin to retailers to help make ends meet.

Sunil was in agreement. “When you tell a customer you are only making 30p a packet, they don’t believe you. They think if you are selling it for £10 then you must be getting £3 or £4 of that.”

But Bruce Morgan, of Best-one @ Brownlies in Biggar, stressed that it was important to look at the bigger picture.

Participants heard about how the tobacco market has changed in recent years

“The 4-5% margin on normal cigarettes is a bit of a concern, but you’ve got to look at it as a value-add really.

“People who are coming in to buy cigarettes will buy other things while they are there. I’m keen to grow RYO tobacco, because there is more profit.”

Mumtaz agreed that “you can get more from a RYO smoker, because they are buying accessories with it, and the margin on accessories is a lot better.”

Moving on to accessories, Alasdair Blair of Republic Technologies UK reassured retailers that filter sales were currently “buoyant.”

“The filter market is pretty strong, each year it gets bigger and bigger. We put out OCB Virgin with slim tips, unbleached, which is going well for us.”

Sunil agreed that the accessories market had exploded in recent years, with the days of stocking just one type of paper being long gone.

“There has definitely been an increase in the ‘paper connoisseur.’

“There are a lot more varieties coming to market- we are going to look at doing 10, 12 varieties of paper.

“People will come in specifically because you have a certain type of paper. It used to be that if you had a certain type of cigarette, but now it seems to be paper.”

This was echoed by Tracy, who said that customer demand had forced her to increase her range of papers and filters.

And according to Gary Flanagan, of Republic Technologies UK, this was a pattern that he was seeing “all the time.”

“Nearly every retailer I speak to, their range of accessories has probably doubled in the last six months.

“But then their range in everything is increasing – craft beers, gins, protein products- corner shops these days are more specialised in every market. Thankfully one of them is ours.”

Another change that will soon hit the tobacco category is the ban on menthol cigarettes, due to come into force next May.

While Mumtaz pointed out that up to a fifth of his gantry could be freed up by the changes, Imperial Tobacco’s Duncan Cunningham said that lessons could be learned from other countries that have already enacted a ban.

Jacqueline O’Neil, of Imperial Tobacco, and Scottish Grocer editor Matthew Lynas, discuss the growth of e-cigarettes. According to Jacqueline, c-stores have a “massive opportunity” to capture first-time vapers

But, the impending menthol ban is not the only thing that is shaking up the traditional gantry.

Colette Gilliland, of Clydebank Co-op Hardgate, shared her experiences of using under the counter drawers – in place of a gantry – since her store was first opened last November.

“We have the spirits on the shelves behind the till, and then there are built-in drawers and drawer units underneath.

“It is fantastic actually. At first it was a lot to get used to, but now I think it’s great.

“It just looks like part of the furniture. It is all racked inside so that the cigarettes are sitting upright, facing you. It is much nicer to look at.”

Gary Flanagan of Republic Technologies UK said ranges are growing

Her Clydebank Co-op colleague Tracy added: “It is a lot easier for stock taking as well, isn’t it? With a gantry you can’t really put your hand in, but with the drawers they are immediately visible.”

While customers initially weren’t sure whether cigarettes were on sale – given that the store was newly opened – Colette is confident that the decision to install under the counter drawers had been the right one.

While innovation in gantry design is yet to hit the mainstream, there is one category advancement that tobacco retailers simply cannot ignore.

Vaping continues to be the fastest growing category in the market, and according to the brand representatives present, it shows no sign of slowing down.

Duncan Cunningham, of Imperial Tobacco, said that consumer interest in vaping and e-cigarettes was “huge.”

“It is no secret that sales of vaping products in the UK, in terms of revenue, are nowhere near yet the sales of tobacco.

“In rough numbers, there are 9.5 million smokers in the UK, and probably four million vapers. But of those four million vapers, half of them are dualists, using tobacco products as well.

“The growth of vaping is really exciting, and it is a positive journey.”

According to Duncan’s colleague Jacqueline, this growth could prove to be a particularly lucrative opportunity for convenience store retailers.

“The first purchase for vapes is usually in an independent store. It’s true that consumers may make some repurchases in vape stores rather independent stores, but hardly ever do people go to vape stores for their first purchase.

“You would think that they would, because they have a larger variety, but it is more independents that they would buy it first. So that is a massive opportunity.”

And for retailers looking to move into the vaping category, Duncan was keen to stress that they did not need to start by stocking large, complex devices.

“A ‘hobbyist’ vaper is someone with the big vaping tanks that give out huge plumes of smoke.

“But although they are the type of vapers you see pictures of in the media, the reality is that they only make up about 5-10% of the overall category.

“The majority of people are using a single device, or the pod devices.

Donna Morgan of Best-one Brownlies, Biggar believes it makes it harder for retailers if they don’t report illicit behaviour

“Two years ago, if you wanted to vape you had to go for a big device. But now the batteries in the pod devices have improved, so you get a much better experience.”

While Mumtaz said that many of his customers preferred the ease and cleanliness of pods, Jacqueline pointed out that they also offer nearly double the profit margin of open liquid vapes estimating £5.60 a week for a pod smoker, compared to £2.60 on an open device.

Vaping is evidently a profitable category. But actually getting started in the market can prove confusing, according to Sunil, with the advice that is available often being “inconsistent.”

“I think I’ve learned a lot more about vaping here than what I knew before. But there are so many products out there, and there is not a one stop shop that tells you about how they interact,” he said.

This concern was shared by Mumtaz, who said he wasn’t sure of how long a pod would last for an average customer, or how many puffs of a vape equal would one cigarette.

Colette felt similarly. “If a customer was to walk into my shop and say: ‘I smoke ten or twenty a day, but I want to change to vaping, what would you recommend?’    

“Right now, I simply wouldn’t have the confidence to suggest products.”

With Tracy also suggesting that retailers needed greater training on vape products, Sunil questioned if interactive displays might be the answer.

Brexit was key for Imperial Tobacco’s Duncan Cunningham

“I would like to have a brochure we can hand out, or a tablet that we could use to show customers ‘there’s your products.’

“I’ve got a friend down south who actually went to the expense of training himself and his staff on vape products- and he has increased his sales by threefold.

“They know what they are selling and they are confident. There is a systematic approach, someone comes in moaning about how expensive cigarettes are, so a staff member asks ‘have you tried vaping? and then they start explaining it.

“They are actively pushing it, because they really understand it- and the margins are better.”

Duncan acknowledged that tobacco firms could do more to help retailers navigate the vaping category.  And, in a bid to further that cause, he offered some insight in how people get introduced to the category.

“There are lots of different reasons why people vape,” he said.

“For some it is because it is seen as a less harmful alternative to smoking, for others it is cost, or the smell, or the greater choice of vaping options. Those tend to be the four main reasons.

“If they are switching from tobacco, people will typically start with a stronger nicotine vape, on either a tobacco or a menthol.

“But then over the course of maybe 12 months, we typically see them decrease the nicotine strength and experiment with a wider range of flavours.

“And I think that is something that the vape category does very well. It keeps engaging the consumers in new experiences.

“Our sense is that it presents people with a viable alternative to smoking.”

Mumtaz Ali, of Mace Edinburgh, said he wants to be able to better advise vapers

Yet, despite vaping being touted as a better alternative to smoking, it still faces legislative and advertising restrictions.

Duncan highlighted the somewhat bizarre situation where vaping can be advertised on things like bus shelters and billboards, but not in newspapers or online.

“I think there is a good opportunity, with Brexit, for vaping regulations to be separated out from tobacco regulations.

“If the UK leaves the EU then that would provide a very strong opportunity for the vaping regulations to be separated out from the tobacco regulations.”

With thoughts turning to legislation, Scottish Grocer editor Matthew Lynas asked how people had approached the problem of illicit tobacco.

Sunil said that he had customers explicitly ask him whether he sold under the counter cigarettes, while Mumtaz said he had customers who buy their accessories from him and – he suspects – illicit tobacco from elsewhere.

Donna Morgan, of Best-one @Brownlies in Biggar, said that retailers had to play their part in cracking down on illicit.

“We quite often report to Crimestoppers things that we have seen on Facebook.

“And we should report, as retailers. It makes it harder for us if we don’t report.

“Something might not happen, but we’ve got to be trying to do something.”