Affordable Indulgence

Superpremium smokes attract a high-loyalty, lower-frequency consumer.

By  Samantha Oller, Senior Editor/Special Projects Coordinator

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The man had a thick Ukrainian accent. His clothes were impeccable. And his excitement that this Shell station carried his favorite superpremium brand of cigarettes, Commonwealth Brands’ Davidoff, was obvious.

“He was so happy I had them,” recalls John Archer, co-owner of Shell Food Mart, located in the affluent Chicago suburb of Hinsdale, Ill. Indeed, the one-store operation has a largerthan- average superpremium selection of 15 SKUs, including four Davidoff SKUs, the entire Santa Fe Natural American Spirit (NAS) line, and labels from Dunhill and Nat Sherman.

And yet, despite the space allocated, the superpremium segment is less about making money off cartons for the retailer—although the margin is typically higher than for premium.

“You’re not going to make tons of money,” says Archer, who may sell 30 cartons of NAS each week, but for other superpremium brands may only sell a few cartons each month. Rather, it’s about creating differentiation and cementing customer loyalty. “It’s definitely a niche,” says Archer. “If a customer smokes those and sees we have them, then they will start coming regularly to buy them. … If you find your customer, and you give them a fair price, you can keep them coming back.”

While it’s tough to find hard data on the superpremium segment—definitions of what constitute “superpremium” include price point, tobacco quality and the consumer’s aspirations— it is estimated at only 1.5% to 2% of the entire cigarette category.

With that in mind, the segment has largely been owned by tobacco shops and independent c-stores, says Laurence Sherman, executive vice president of sales and marketing for Nat Sherman Inc., New York, whose superpremium lineup includes Nat Sherman Originals, NY Cut, Naturals, Hint, Classics and MCDs.

“When you pull out a pack of Nat Shermans, it says a lot about who you are,” says Sherman, citing the product family’s 100% natural tobacco blend, high-quality paper and unique shoulder- box packaging. “It says you care to be a little bit different, you understand quality, and that you’re willing to spend more to get something a little bit better. It’s more about why the person is buying it, and hopefully it’s for the enjoyment, that they taste the difference.”

That price difference, in the case of Nat Sherman’s lineup, runs about $1 to $1.50 per pack; however, as Sherman points out, the margin can be run up to 35% per pack, compared to the industry average of 15.7%, according to preliminary numbers from the NACS State of the Industry Report of 2009 Data.

Further compounding the niche aspect of superpremium is its main consumer: the “occasional smoker,” one who picks up a pack of these distinctive brands to savor or celebrate a special event. Indeed, Nat Sherman’s tagline is “smoke less, smoke better.”

“The economics of this industry are so large,” Sherman says, “that you can be successful when you play in the niches.”

FINDING A NICHE

It seems counterintuitive that, at a time when large federal and state excise tax increases have made smoking an increasingly expensive habit, the most high-end packs would enjoy volume increases. But that is exactly the dynamic playing out as “the middle” of the category is squeezed, interviewees say.

According to John Mayer, national manager of cigarettes and tobacco for McLane Co., Temple, Texas, shipments from Nat Sherman and Santa Fe Natural Tobacco’s Natural American Spirit in particular are outperforming the category.

“That’s kind of an interesting situation to be in; you’re talking about no real heavy discounting that’s going on by either of those two companies, but yet they’re able to sustain some type of significant growth in the category in the face of everything that’s going on [within the category as it relates to cost],” he says. For his part, Mayer suspects that a relatively narrow price gap and the generally high cost of cigarettes have put superpremium within reach for more smokers. “If you’re going to pay that much for cigarettes, what’s the problem with moving up occasionally—or maybe on a regular basis—to buying what would be considered … an ultrapremium cigarette?” he asks.

Santa Fe Natural Tobacco Co. (SFNTC), a Santa Fe, N.M.-based subsidiary of Reynolds American Inc., has perhaps the largest superpremium brand in the channel by volume sales with the NAS family. While other superpremium manufacturers may argue with the brand’s classification within the segment, citing that it does not have the same luxury or international panache as the competition, it’s tough to ignore its growth. In a first-quarter 2010 earnings report, Reynolds CEO Susan Ivey cited “double- digit” volume and earnings growth for the company’s Santa Fe subsidiary during the quarter.

 According to Mintel International’s April 2010 cigarettes report, NAS has enjoyed among the greatest growth of all cigarette brands, although it accounts for less than 1% of the overall cigarette market. The research firm chalks up the brand’s success to its “organic” and “natural” marketing.

This is despite the fact that Santa Fe has had to stress that “no additives” and “organic” does not necessarily mean that NAS is safer to smoke. From SFNTC’s perspective, the superpremium appeal lies in the product’s quality. “Although NAS tends to cost a little more, it is made with only premium, whole-leaf, additive-free, natural tobacco, and our cigarettes contain, on average, up to 25% more tobacco than other king-size cigarettes,” says Colin Uffindell, vice president of trade and consumer marketing for SFNTC, via e-mail.

Giving the company a foothold in locally grown product, SFNTC later this year will introduce a line of cigarettes made with 100% U.S.-grown tobacco.

SFNTC also distributes Dunhill International in the United States. This superpremium brand, which is owned by British American Tobacco and manufactured in Switzerland, is also marketed as “all-natural” and “additive-free.” Uffindell says NAS and Dunhill’s growth rate has increased over the past two years, although he could not cite a figure.

A DISTINCTIVE CROWD

Rick Di Donato, national vice president of sales for JTI USA, Teaneck, N.J., says via e-mail that the company has seen growth of its Export ‘A’ superpremium brand, showing “that there remains a dedicated niche of adult smokers who continue to choose superpremium brands.” “The superpremium consumer is an individual who wants to be recognized as distinctive—someone who leads, and does not follow the ‘mainstream,’ ” Di Donato says. “Superpremium consumers are not price-sensitive; they are willing to pay more for an exclusive product, regardless of their income level.”

That said, even superpremium smokers have reacted to the increases in federal and state excise taxes, and the recession. Di Donato says JTI has seen a “very slight decline in a few specific markets that have been harder hit by the current economy,” although overall, the superpremium segment “remains very strong” and “extremely profitable.”

Nat Sherman has also seen an effect, says Sherman, but largely in inventory reductions on the distributor and retailer level. Sales, meanwhile, have been strong, although single-digit increases have replaced the double-digit annual spikes the segment was enjoying before the passage of SCHIP.

But while superpremium smokers may be smoking somewhat less, they are not downtrading to lower-quality cigarettes, he insists. Sherman says, “They already understand they’re paying more, so the price fluctuations [that make] people switch brands—we’re a little more insulated from that.” The uniqueness of the superpremium smoke, from its distinctive packaging to its marketing, make it more difficult to replicate further down the food chain.

“It’s almost like a prestige cigarette,” says Archer of Shell Food Mart. “They may smoke Marlboros regularly, but if they’re going to a club or something, they will pick up a pack of [Nat Shermans] because it looks a lot cooler coming out of their pocket.”

 How does a retailer know if it can be part of the “in crowd”? Examine the sales for the rest of the store’s superpremium offerings, from gasoline to beer to potato chips, says Sherman. From there, he recommends two to four facings of Nat Sherman as a starting point.

“Really, it’s the consumer that has to tell you,” he says. “Once the consumers see you carry it, they put in requests for additional product lines.”

While independent c-stores such as Shell Food Mart and tobacco shops are the traditional retail strongholds for superpremiums, larger c-store chains are somewhat more hesitant to devote space to the segment, Sherman observes, largely because its share of the category is so small.

The main selling points for superpremium: It rounds out and provides a growth opportunity in a declining category, it offers greater margins than premium, and it brings in a consumer who will be more inclined to buy other “superpremium” products within the c-store.

And it becomes an aspirational story for retailers as well.

“We’re something not carried everywhere,” says Sherman. “By carrying us, you do cement and create a very loyal following for your store. It’s important for all retailers to distinguish themselves and show something different than the guy next door.” 


Tips to Grow On

  • Superpremium cigarettes can differentiate a retailer’s offering.
  • The main consumer is brand-loyal and less sensitive to price but buys less frequently.
  • Consider sales of other superpremium categories—gasoline, beer, snacks—to gauge their potential.
  • Customer loyalty—not share of sales— is the key selling point for superpremium.  

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