In an improving economic climate, it’s not surprising that consumers are “treating” themselves to higher-end products. That trend is evident in the cigarette segment: Ten years ago, superpremium cigarettes accounted for less than 0.5% of all cigarette sales; today, Nielsen has the superpremium segment at about 4% of the category.
While that may not seem like much, this growth occurred while the rest of the category was flat or in decline.
Andrea Myers, president of Kocolene Marketing LLC, Seymour, Ind., has seen that growth firsthand. While the entire superpremium segment is growing, a specific superpremium subsegment is really lighting up Myers’ cigarette sales: natural, additive-free cigarettes, such as Santa Fe Tobacco Natural Tobacco Co.’s Natural American Spirit and Nat Sherman brands.
It’s a phenomenon that’s occurring seemingly independent of any retail or manufacturer-driven efforts.
“Our numbers are just great,” Myers says. “[Our reps] want to know what we’ve done. … I’d love to say we did something, but I think just making sure these brands are available is the trick.”
Though some of the success of natural and superpremium cigarettes could be due to lower prices at the pump, many believe this is a trend that’s been brewing long before fuel prices plummeted—and one that will continue long after prices stabilize.
“If you really think about it, we’ve been seeing this trend for quite some time, even with gas prices higher and the economy in much worse shape,” says RBC Capital Markets/Equity Research tobacco analyst Nik Modi, New York.
He cites trends beyond cigarettes. The gravitation toward higher-quality, more natural and locally made products is everywhere from fruit and vegetables to beers.
But organic cigarettes? It’s fair to ask if this is really a legitimate trend and, if so, whether such a trend could thrive on the c-store backbar.
The Natural Movement
Consumers have been paying a lot of attention to ingredients. It’s evident in the success of Whole Foods and Trader Joe’s and products on convenience shelves, such as Greek yogurt or Toblerone chocolates.
“It’s following a broader trend,” says Matt Spillane, vice president of sales for natural cigarette manufacturer Nat Sherman, New York. “Consumers these days are demanding better quality of goods.”
Santa Fe and Nat Sherman will be the first to tell you that their products do not present a healthier or lower-risk alternative to any other cigarettes on the market. What they will tell you is that their products are made with only tobacco and water, use no repurposed tobacco or artificial sprays for flavor, and employ higher-quality papers and filters than that of mass-market cigarettes.
“This results in a greater puff count per stick, creating a longer and more satisfying smoke,” Spillane says. “There is value in quality. Consumers are looking for that across the board.”
It’s possible that more ingredient-savvy smokers would prefer a more natural cigarette, similar to the fact that consumers are moving away from artificially sweetened diet sodas in favor of more caloric but naturally sweetened regular sodas.
“As we talk about something like Natural American Spirit, the wellness trend is somewhat playing a role here,” says Bonnie Herzog, senior tobacco analyst for Wells Fargo. “With the organic, no-additives position of that superpremium brand, I think it’s speaking to a lot of the millennial consumers.”
And this millennial generation also wants to know who’s making them. “Millennials are digging deeper, wanting to understand what’s behind the brand,” Spillane says.
Modi concurs: “In today’s social media world, people really need to tell stories. Brands and categories that have stories behind them are the ones that actually work.”
Which is where natural cigarette manufacturers have a leg up on mass-market brands. Though Santa Fe Tobacco Co. is owned by No. 2 Big Tobacco player Reynolds American Inc., the Santa Fe, N.M.-based company has committed to its “natural” image with a TerraCycle recycling program and other green initiatives. Nat Sherman, meanwhile, has been owned and operated by the Sherman family since the company was founded in the 1930s.
Seth Moskowitz, Santa Fe’s director of communications, says such efforts are “one of the reasons that adult smokers of (our) products are so loyal to the brand and are willing to pay an undiscounted premium price.”
It’s the kind of background that can’t be faked. Such authenticity puts companies such as Sherman and Santa Fe—and their retail partners—at a distinct advantage, Modi says: “Authenticity is really a key driver of all these trade-up strategies.”
CONTINUED: Organic Convenience
Organic Convenience
This kind of high-end messaging, authentic as it may be, hasn’t always worked on the c-store backbar.
“I was all for them a long time ago, but they didn’t sell so well,” Myers says of natural brands. “Now they’re starting to sell.”
Along with 10 years of consecutive growth in the natural-cigarette subsegment, Santa Fe and Nat Sherman are looking to capitalize on the c-store opportunity by growing distribution. Nat Sherman alone has picked up 3,500 to 4,000 retail locations over the past year and continues to grow.
What’s more, these right-place-right-time natural brands are bringing an attractive consumer into the convenience channel. As Don Burke, senior vice president of Pittsburgh-based Management Science Associates (MSA), explains, natural and superpremium cigarette shoppers tend to be significantly less value-driven.
“In the superpremium category, you find far less promotions. … In fact, you find almost none,” he says. “Consumers are not used to seeing any kind of features or able to determine a pricing benchmark for those items.”
According to Spillane, this lack of concern over pricing often expands beyond the tobacco section. Consumers seeking natural products appreciate—and pay for—everything from coconut water to small-batch jerky. “People that are spending more on our products are going to spend more in the stores,” he says.
“It’s nice to be able to carry a product where you can advertise they’re organic or natural as opposed to just a low price,” Myers says. “I would love to have salads in all of our stores, but sometimes fresh just doesn’t sell. This is an opportunity that works.”
The better growth and profit margins of superpremium and natural cigarettes have another advantage: Spillane estimates natural brands boast a 30% greater profit margin compared to premium brands, and Nielsen shows more than 10 consecutive years of growth in the segment.
“The same qualities that have fueled [the natural segment’s] growth will continue to propel Natural American Spirit’s popularity and growth,” says Moskowitz.
“For retailers, this is certainly an opportunity to increase your tobacco sales,” says Burke. “If they are not in this category or not carrying enough of a selection in the superpremium area, they may want to consider it.”
As for those who think the organic appeal doesn’t extend to their consumer base, Myers says Kocolene’s largely rural stores are bucking that stereotype. “To me, the all-natural products used to be for college towns and big cities. That’s not our demographic,” she says. “The category is way up for us. I think the word is spreading.”
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