Tobacco: Innovation or Me-Toos?

The answer will likely determine the success of cigar sales in 2014

By  Melissa Vonder Haar, Tobacco Editor

Article Preview: 

With the prepriced craze driving down margins and the threat of a flavor ban looming, it’s understandable why retailers might be hesitant to get excited about new cigar products, especially when there’s so much going on elsewhere.

And while the cigar segment isn’t growing at the exciting rate of electronic cigarettes, the cigar consumer is still a very important one for the c-store channel.

“Consumers that are in the cigar segment tend to buy frequently and spend more,” says Dionne Lucas, cigar brand manager of Tucker, Ga.-based Scandinavian Tobacco Group Lane. “The OTP consumer visits twice as often and spends two and a half times more than the non- OTP consumer.”

The struggle has been to find new products that boast consumer-driven innovations—as opposed to “me-too” offerings—while still driving the profitable margins retailers need to justify the space in an already overcrowded tobacco set.

“It really begins with focusing on understanding what the adult cigar smoker is looking for in a cigar,” says Brian May, spokesman for Richmond, Va.-based John Middleton Co.

Based on the year’s newest cigar products, 2014 consumers are seeking out bigger, less processed and adult-centric cigars. The question is: Do these trends represent true growth potential, or more me-toos?

The Premium Difference

One way manufacturers can combat squeezed margins is by upgrading consumers to the premium segment. It’s exactly the market Scandinavian Tobacco is going after with Havana Honeys. The new line—which hits shelves in June—features high-end tobacco blends, a slightly larger size (falling into the petite corona category), premium-looking cigar bands and stylish matte packaging.

“It’s very much like a premium cigar, the only difference being that it’s not made by hand,” Lucas says.

Tantus Tobacco, Russell Springs, Ky., is also looking to capitalize on the premium market, adding Red Buck Premium Robusto, a hand-rolled long filled box press cigar from Honduras. Although these larger cigar products don’t generate the frequent purchases of smaller cigars, they can attract a new consumer to the  channel, according to Ross Haynes, Tantus’ vice president of sales and marketing.

“This cigar appeals to consumers that are looking for a ‘big’ cigar smoke without having to find a tobacco store,” he says. “Data has found that large cigars are a great add-on item for the person grabbing a six-pack at the c-store for a weekend.”

One reason for the boom in premium cigars is the advent of foil packaging, which has made it easier than ever for c-stores to offer the kind of freshness that previously required a humidor.

The combination of quality, size and packaging has Lucas confident that Havana Honeys can bridge the gap between different factions of cigar smokers.

“These are a nice transition for either people who smoke premiums or discount smokers who are interested in premiums,” and there’s a high potential to upsell, she says. “Cigarillo consumers might be ready to pay a little more for a larger, higher-quality cigar with a natural binding and wrapper.”

Going Au Naturale

Lucas’ point hits on another trend within the cigar category: natural-leaf wrapping.

“The fastest-growing segments tend to be in natural leaf, whether they are traditional small natural-leaf cigarillos or rolled leaf,” says Brian Love, director of cigar marketing for Swedish Match, Richmond, Va.

The popularity of natural wrapping speaks to a larger consumer preference for healthier, organic products as a whole.

“Any time you can use something natural vs. something that’s overprocessed—even when it comes to tobacco—it means something to the consumer,” Lucas says.

Like many manufacturers, Swedish Match has been able to capitalize on this trend. “Several years ago, we made a concerted effort to aggressively grow our natural-leaf portfolio,” says Love, reporting that the company’s Game line is the fastest-growing natural-leaf product.

Looking to natural wrapping to propel new products, Scandinavian Tobacco’s Havana Honeys feature natural binding and wrappers; and Swedish Match is growing Game via the January introduction of a Red flavor, and its natural-leaf Garcia y Vega cigarillos with a brown-leaf option.

Flavors Grow Up

With anti-tobacco advocates accusing cigar manufacturers of luring in minors with “candy” flavors, there’s been a distinct movement toward adult-themed flavors.

In April, Swedish Match’s national rollout of Garcia y Vega’s 1882 Rolled Leaf cigars will feature a Bourbon flavor; Swisher Sweet’s latest limited-edition cigarillo is the watermelon rum-tasting Island Madness; Commonwealth-Altadis’ new Phillies Krome Crown Collection introduced a Topaz-Amaretto flavor; and Scandinavian’s Havana Honeys’ initial launch includes Original, Classic Cognac, Sweet Honey, Spiced Rum and Menthol Mojito options.

“We challenged our production team and cigar experts to dig deep for this one,” Lucas says. “They used different tobacco blends that are a little more special and hard to come by, going as premium as possible. We tried to make these flavors very mature, adult flavors.”

Others have opted for “barely there” flavor blends: John Middleton recently expanded its Black & Mild Jazz brand, adding wood-tipped and plastic-tipped offerings to the tobacco-flavored cigarillo line. According to May, “Black & Mild Jazz offers adult cigar smokers an exotic blend of Middleton’s pipe-tobacco adults enjoy for its smooth taste and pleasant aroma.”

Whether it’s alcohol or tobacco flavoring, expect to see more companies moving away from strong, characterizing flavors—at least until the FDA weighs in.

“There’s a subtlety to it,” Lucas says of the Havana Honeys. “When you smoke a grape cigarillo, the taste is pretty overwhelming; this is more like flavored vodka.”

It’s too early in the year to deem 2014 the year of the large cigar, the natural leaf or alcohol flavoring. But we can be certain that cigar manufacturers will continue to look for new, exciting products to grow the segment.

“The lifeline of this category is innovation,” says Lucas. “There’s a significant percentage of OTP consumers who are all about what’s new; they want to bring what’s new to the party.”

That means retailers will need to continue to try to find the right blend, determining which products represent true innovation and which are just taking up valuable shelf space.

“While space is always a challenge, getting the right products into the OTP section is more important than ever,” Love says. “Cigars are one of the growing areas of tobacco sales and thus needs to have more space and a bigger focus on trying new products.”

Haynes sums it up: “Nicotine use is not declining, and many occasional smokers still like a cigar for the relaxation and enjoyment. Why send those people to a cigar shop when you as a c-store operator can capture that sell?”

Click here to download full article