No longer a tobacco category afterthought, other tobacco products (OTP) has become an integral driver of profits as cigarette taxes and regulations continue to rise.
But while many retailers have embraced smokeless as the darling of the OTP segment because of its profit-friendly margins and increasing sales, cigars actually could be contributing to increased store traffic c, according to David Bishop, managing partner of Barrington, Ill.-basedBalvor LLC.“Cigars, relative to the overall tobacco business, drive a lot of feet in the door, “Bishop says, citing unit sales as a good proxy for consumer demand. “Cigars on a unit basis drive a large portion of the OTP business compared to smokeless. Infect, they may even drive more of the foot traffi c when you look at units. Consumer demand for cigars is very healthy.”
Indeed, Nielsen’s data shows cigars and smokeless products are neck and neck when it comes to unit sales: In 2012, c-stores sold approximately 1.13 billion cigar units (up 5.3%) and 1.12 billion smokeless units (up 6.4%).
Innovation has been a key factor in driving cigar unit sales. This is especially true of foil pouches, a packaging alternative that serves as its own humidor, giving consumer the freshest cigar possible. The benefits for manufacturers and consumers are obvious: a longer shelf life, more attractive packaging and a fresher product.
Yet, with many manufacturers opting for reprised two-for-99-cents or three for-two packaging, the perks of pouches are less definite for retailers looking to drive profits. Not that they have much say in the matter; the new packaging has become so popular with consumers that carrying it is almost a must.
“Foil pouches do appear to be the segment that is driving the most interest for cigar consumers,” Bishop says. “Not having the right mix there clearly will cost the retailer dearly.”To better understand how these pouches are reinventing the cigar segment, Bishop and several cigar manufacturers weigh in on the appeal of the packaging and how it’s affecting retail business in positive and negative ways.
A ‘Fresh’ Experience
Leading cigar manufacturers such as Jacksonville,Fla.-based Swisher International and Richmond, Va.-based Swedish Match North America are all in on foil
“There have been several important innovations within the mass-market cigar category; these would include foil wrapped singles and multi-stick pouches, “says Ed Denk, Swisher’s marketing promotions manager. “Swisher has adapted these innovations to our product portfolio due to the adult consumer demand and preferences.”
One of the early adopters of the new packaging, Swedish Match first introduced its trademarked Foil Fresh pouches in 2007.
“The Foil Fresh packaging has an immediate impact on preserving the freshness of each cigar made,” says Christel Anastasia,brand manager for Swedish Match. “This packaging ensures our consumers are always enjoying the freshest cigar possible.”This concept of freshness is at the center of the foil pouches’ appeal. The new packaging preserves products much better than the cellophane wrapping and packs traditionally used for machine-made cigars, meaning consumers are not forced to immediately smoke the product or put it into a personal humidor to prevent it from going stale.
“The technology that the foil pouches provide really does improve the shelf life and the quality of that product on the shelf for a longer period of time,” Bishop says. “From the consumer perspective, it obviously improved the quality of the experience.”
Anastasia echoes Bishop’s sentiments:“This innovative packaging and sealing ensures our cigars stay as fresh as the day they are made.”
For manufacturers, the new pouches also offer a different look and feel, which could help existing products stand out.“From a branding standpoint, it helps distinguish one brand from another on the shelf,” Bishop says.
With freshness-ensuring packaging and an appealing design, foil pouches logically would seem to cost more than traditional cellophane-wrapped sticks or packages. However, the current economic environment means consumers are looking for value more than anything else—something many cigar manufacturers have appealed to by prepricing their foil pouches.“Our pricing strategy has had to change to meet the current tax environment, higher gasoline prices and limited disposable income that affects our adult consumers,” Denk says. “We have developed a comprehensive pouch strategy, five-for-three packs and singles, while still having the capability to meet the continuing demand with existing packaging.”
Units vs. Profits
Prepriced foil pouches may have helped manufacturers serve the needs of consumers, but what about the needs of retailers seeking to drive OTP profits?
“When we look at cigars, there’s an interesting situation going on,” says Bishop. “The category continues to grow on a units basis, so demand is strong. That’s something the industry obviously likes to see. Unfortunately, from the retailers ‘perspective, the dollar sales are down year over year.”
According to Nielsen, c-store cigar units rose 5.3% in 2012 while dollar sales dropped 2.2%. Bishop says he expects similar numbers in 2013, in large part due to the dominance of reprised pouches.
“Part of the reason is the intense price competition that’s occurring at the manufacturer level and the subsequent impact it’s having at retail,” he says. “We’ve seen prices on an average per unit basis year over year go down 4% to 5% vs. [the year prior]. Retailers are selling more units, but they’re selling them at a lower price. So we actually have a deflationary effect from this manufacturer price competition. ”
Not surprisingly, many retailers are not as enthusiastic as manufacturers and consumers are about foil pouches.
“It’s a very contentious topic,” says Bishop. “When dollar sales go down, generally profits are going to follow. Retailers have mixed emotions when we talk about foil pouches.”Bishop says a number of successful retailers initially refused to carry reprised foil packages due to concerns about deflationary pricing and margin compression. Sales numbers, however, quickly showed that these pouches are now a necessary component of a successful OTP set.“When you look at the category’s growth, almost all growth is in the foil pouches,” Bishop says. “The packs have taken a real hit because they cost more, and singles have really just treaded water or lost ground because of the growth of the foil pouch. Consumers are moving to the foil pouch because the cost per stick is a stronger value for them, so retailers are compelled to follow that trend.”
That means even the retailers most against prepricing had to rethink their position when it came to foil pouches, or risk losing customers.
“Reluctantly, those retailers who initially opted out have brought the pouches in,” Bishop says. “They were losing business and market share in those markets where the pouches weren’t offered. The consequences have been twofold: They’ve seen their business improve on a unit basis, but they’re making less money on each unit sold.”
A Premium Opportunity
One way in which some retailers are looking to make up for those lost dollars is with premium cigars, which, thanks to foil pouches, are now easier than ever to introduce into OTP sets.
Leading premium cigar manufacturer General Cigar Co. recently began offering Locked-In Humidity packaging for select sizes of its top-selling Macanudo, Partagas,Punch and Excalibur brands. As with other foil pouches, this protective, air-tight packaging provides fresh-from-the-factory flavor in non-humidified environments.
“This new packaging features a proprietary film with foil and special poly coating that together provide the uniform barrier needed to contain the proper moisture levels in the pouch over extended periods of time,” says Alan Wilmer, vice president of marketing for the Richmond, Va.-based company.
One of General Cigar’s goals in introducing the Locked-In Humidity packaging is to allow nontraditional markets, such as c-stores, to be able to carry the company’s premium products without having to invest money or space in a humidor.
“The packaging enables myriad new purchasing occasions for our adult consumers,”Willner says. “Nontraditional premium-cigar outlets such as convenience stores will be able to participate in the premium-cigar category by offering guaranteed freshness in attractive packaging, without a dedicated humidity controlled environment.”
Likewise, Fort Lauderdale, Fla.-based premium-cigar distributor Commonwealth-Altadis began offering its Romeo Juliet 1875, H. Upmann Vintage Cameroonand Saint Luis Rey in the company’s new Freshloc foil pouches earlier this year.
“This innovation will allow more retailers to stock premium cigars, providing access to 40% to 50% trade margins, “says Altadis’ sales and trade marketing manager, Rob Norris.
Foiled Again?
So foil pouch technology may have made it easy for c-store retailers to offer fresh premium cigars—but will they?
“The premium segment is an interesting opportunity and one the retailers would be interested in primarily because it could help rein late retail prices and, consequently, margins,” says Bishop.
Norris envisions a mutually beneficial opportunity for retailers looking to drive profits and manufacturers looking to continue expanding their business.
“The premium-cigar market is growing, as more adult smokers are taking time to enjoy a premium cigar in their ever increasingly busy lives,” he says. “These new launches will appeal to a wide variety of adult smokers. There will be some trading up from other tobacco categories as well, and impulse purchases by adult smokers who want a premium smoke.”
Still, the higher price point of premium cigars, combined with the expectation of value from the average c-store consumer, could present a challenge for retailers looking to build a premium segment in their stores. “The price competition that we’ve seen with the machine-made cigars has really sensitized convenience-store consumers to the price points,” Bishop says.“It seems as though when the consumer is exposed to cigars in a convenience-store format, that foil pouch pricing of two for-$1 is so predominant today, it’s really hard to move off that.”The true potential may be for c-stores located near areas where premium cigars are traditionally consumed. While the price point is higher than what the average-store consumer is used to, premium cigar smokers might appreciate the convenience of being able to pick up their favorite product on the way to the golf course rather than going out of their way to a traditional smoke shop.“Clustering stores based on the market or customer mix makes a lot of sense; obviously retailers do that to a degree in other areas,” says Bishop. “That may be where there’s an additional opportunity.”For their parts, both General Cigar and Commonwealth-Altadis’ leaders remain confident that a partnership between convenience stores and premium cigars would be beneficial for retailers and consumers alike.“General Cigar is committed to expanding the premium-cigar category,” Willner says. “Locked-In Humidity packaging will fuel category expansion by making premium, handmade cigars accessible to more adult consumers more often and in more places.”
The Wave of the Future
Whether or not they prove to be a perk for retailers—by driving unit sales and providing wider product mix with premium cigars—or a detriment, innovations such as foil packaging will continue to be an important factor in the success of the cigar segment and, therefore, OTP.“Innovation is important relative to adapting to the changing environment, “Bishop says, citing the economy and potential regulations limiting pack size sand coupons as examples. “The ability to innovate and adapt will become critical.”So it should come as no surprise that innovation is at the center of most cigar manufacturers’ plans for the future.“At Swedish Match, we continually assess the marketplace and look to our consumers to understand what their needs are,” says Anastasia. “Innovations are a direct response to consumer demand and interest.”Swisher’s Denk expresses similar sentiments:“Swisher is constantly looking to innovate our packaging and products to keep up with the trends of the market. Regardless, all decisions are driven by the brand and adult consumer preferences, and they are demanding choices.”And it’s not just mass-market manufacturers that are focusing on innovation—it’s also a fundamental part of the premium market. “Innovation in the premium-cigar market is of utmost importance, not just with new blends but with packaging formats as well,” says Norris. “Bringing new adult smokers into the premium-cigar category will help continue the market growth we’re experiencing even during these tough economic times.”As innovation continues to fuel competition among manufacturers, retailers will be presented with an opportunity to leverage consumer demand for such innovations to drive both unit and dollar sales, provided they’re carrying the right product mix.“Innovation continues to be critically important, especially as manufacturers continue to compete for a larger share of this growing market,” Bishop says.“Hopefully, it’s a growing and profitable market.”
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