Is Imperial Tobacco fighting the illicit trade in tobacco with Make Your Own cigarettes, as it claims, or has it spotted a nice little earner, asks Vince Bamford
When Imperial Tobacco unveiled its Make Your Own cigarette kit last week, its pitch was that the product would help to fight the illicit trade in tobacco.
Whether it will is open to debate anti-smoking group ASH told The Grocer the product was a “cynical device to keep poorer smokers hooked”, for example. But one thing is certain: there is a lot of money to be made in make-your-own (MYO) cigarettes. In Germany, for example, MYO accounts for 20% of total smoking tobacco sales. Given that the UK cigarette market is worth £11.3bn [Nielsen 52w/e 30 December], if a similar proportion of British smokers switched to MYO, the business generated would be worth more than £2bn.
Imperial claims the launch of its JPS Tobacco together with a cigarette-making machine that inserts tobacco into paper tubes will actually grow the legitimate category, however.
It says the product will encourage smokers either using or tempted to use smuggled cigarettes to buy from legitimate retailers “as the JPS brand gives them a quality reassurance backed up by the value for which JPS is renowned”. After a one-off £3.09 hit for the machine, the cost of 20 cigarettes will be £3.87, compared with the £5.59 rsp for a price-marked pack of regular JPS Silver cigarettes a saving of £1.72.
The use of machines and paper tubes is not without precedent in the UK as Imperial launched the Concept system 10 years ago. The difference is that MYO is being marketed using the familiarity of the JPS brand. And to underline the brand’s development along multi-format lines, Imperial also unveiled JPS Roll Your Own tobacco, which is designed to be handrolled in traditional papers.
The strategy seems to have impressed wholesaler Palmer & Harvey, which is recommending retailers stock the £6.99 price-marked introductory kits containing the MYO machine, 100 filtered tubes and 14g of JPS Tobacco.
Given that MYO offers retailers better margins than pre-rolled cigarettes, they probably won’t need too much persuading. When bought at best terms and sold at rsp, JPS Tobacco has a margin of 10.7%, compared with 5.9% for kingsize JPS Silver and 7.8% for the company’s premium Embassy Number 1.
The better margins are a result of MYO tobacco being classed as roll-your-own tobacco for tax purposes. The government takes a smaller cut from RYO than it does from finished cigarettes roughly 75% of the retail price of economy RYO goes to the taxman, compared with the 88% to 90% it can take on a pack of economy cigarettes.
In the current economic climate, British smokers are already embracing the idea of trading down. All the major brands are seeing strong growth of mid to low-priced cigarettes, with Imperial claiming 25% of the cigarettes sold in 2010 were economy lines in 2008 this figure was 11.4%. Sales of RYO tobacco, meanwhile, have soared 18.2% to £1.2bn [Nielsen].
Cigarette manufacturers have been cautious in the past about launching MYO products because of the risk of smokers finding lower-budget items more appealing than finished cigarettes, says Euromonitor International tobacco analyst Don Hedley. But, he adds, “given that cigarette smokers are already switching, Imperial is ensuring it is there to catch them with an alternative product. For a tobacco company it is better to ‘lose’ a cigarette smoker to a MYO/RYO product than to no tobacco.”
It’s a view echoed by Mark Alldred, marketing manager of cigarette paper manufacturer Republic Technologies. “If a customer is really being squeezed by rising cigarette prices,” he says, “this is a smart solution to keep smokers within the JPS brand.”
Other industry observers say MYO is more likely to appeal to cigarette smokers trading down than existing RYO smokers, who often feel there is a cachet to rolling by hand. It could also win over female smokers, suggests Richard Buchanan of branding agency The Clearing, who says RYO can be seen as macho and “grubby”.
“Ultimately, the question is: why would the market leader in RYO introduce an MYO product?” he adds. “Roll-ups aren’t for everyone, and Imperial clearly believes there is a massive market for this. And it is probably right.”