Tobacco Road to Innovation

New packaging promises a better consumer experience

By  Steve Dwyer, CSP Reporter

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Category Update
As product and packaging innovation continues, the tobacco category as a whole is experiencing a manic year, with sales varying from subcategory to subcategory.

According to Greg Tradup, category manager of tobacco for McLane, Temple, Texas, the cigarette category will be down 3% to 4% this year. “Promotional activity from the major manufacturers continues to be a major factor in the category, which plays a key role in the stability,” he says. “While several segments have had some loss, extreme price value or subgenerics are getting hit the hardest.” At the same time, premium price points from Lorillard and Santa Fe have showed continued growth, he says.

In OTP, there has been a large drop in flavored cigar growth vs. other segments as the FDA mulls how it will regulate this segment. Instead, McLane’s clients have been favoring natural leaf, sweet, unflavored and the pipe segments, Tradup says.

Changes in packaging and prepriced or promotional items have made the cigar category quite dynamic, with foil-pouch items now a segment leader in cigar sales, followed by single sticks and cardboard packs, according to Tradup. Nearly every major manufacturer offers a prepriced or special pack item, and Tradup and other industry analysts recommend that retailers continue to review their OTP sets, specifically cigars, as often as possible to allow for changes in packaging and new items.

And then there is perhaps the hottest subcategory in tobacco: e-cigarettes. According to data from Chicago-based research firm IRI, c-store sales of electronic cigarettes inched upward at the end of 2012; by the end of first-quarter 2013, the growth rate was outpacing the industry average. It’s a growth spurt that is finally beginning to hit conventional cigarettes, the channel’s biggest in-store sales generator.

“What you’re seeing early this year ... is that e-cigarettes have put some pressure on conventional cigarette volume,” says Bonnie Herzog, beverage, tobacco and c-store analyst for Wells Fargo Securities LLC, New York. “I call it ‘displaced consumers.’ ” The new subcategory is creating about a 1% drag on conventional cigarette volume, she says, as consumers switch to or try e-cigarettes.

Online sales are also shifting to retail stores. “E-cigs could actually see faster growth in this category for c-stores in the near term as that volume shifts from online to brick and mortar,” says Herzog.

Tradup points out that disposables are still the hottest trend in e-cigarettes as consumers are still on a trial basis, “but we are seeing strong growth in rechargeable kits as consumers gain more confidence and decide to stay with the category.” Many retailers are adding a location for e-cigarettes rather than sacrifice cigarette or OTP space behind the counter, and most major manufacturers have counter or shelf units available to accommodate them.

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