Like many products in the tobacco industry, adding a touch of flavor to smokeless tobacco has led to increased sales. Swedish Match North America is experiencing great success with its recently released Peach and Apple flavors of
Timber Wolf.
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‘Less is more
New flavors, discounting and pouches continue to drive smokeless tobacco’s growth
by Keith Reid
Without a doubt, the smokeless tobacco category continues to be a hot, innovative one. “The Smoke Scene, U.S. Tobacco Trade Survey, First Quarter 2005,” a report prepared by Smith Barney Citigroup, confirms this description. Data supplied for the report by U.S. Smokeless Tobacco Company and Swedish Match North America estimated that the smokeless tobacco category grew around 5 percent compared to the historic growth rate of around 2 percent.
There are a variety of developments driving the growth, including greater smoking restrictions, price/tax advantages, the continued development of discount and sub-discount products within the category, and the successful customer appeal found in the merchandising of flavors and pouches.
The retailers surveyed in “The Smoke Scene” believed that 40 percent of the category growth was due to new discount/value products. In addition, 69 percent of retailers believed that the cheaper brands are cannibalizing the premium brands in sales. Some 27 percent believed it was the result of new customers or smokers switching to smokeless and 22 percent believed it was due to innovations in the market. A full 67 percent believe this growth is sustainable.
“I think smoking restrictions are having an impact on the category,” said Jon Schwartz, spokesperson for Greenwich, Conn.-based USSTC. “Across the nation we’re seeing smoking restrictions increase and we think the category is growing effectively by attracting adult smokers. A primary focus (of ours) is on moist smokeless tobacco product introductions – in a variety of flavors and forms that would appeal to smokers. Since moist smokeless tobacco accounts for only 3 percent of the entire domestic tobacco category at retail, every one percent of adult smokers who convert to MST represents a 10-percent increase in the segment’s adult consumer base.”
Discount tiers
The new tiers of discount MST remains a strong driver of growth in the category, with a significant spread between premium and the sub-discount offerings.
“The value segment has been one of the main factors driving category growth for the past few years,” said Roy Reynolds, brand manager, smokeless tobacco, for Richmond, Va.-based Swedish Match North America. “With the continued introduction of new line extensions from the primary price/value brands (Grizzly, Longhorn, Husky), we believe the accelerated growth of the category will continue in the short term. Since the snuff category has a fairly homogenous user base, the consumers attracted to the price/value brands are those whose purchase decision has become primarily based upon price and saving money.”
The Smith Barney report noted that the average retail price per brand ranged from $4.52 for Copenhagen, down to $1.51 for Husky. A number of analysts have expressed concern over the margin impact and potential cannibalization of premium brands by the new discount brand entrants. That is not necessarily a concern at the retail level.
“We’re making 10 percent on the premium brands, but about 18 percent on the lower-end brands,” said Paul Mahoney, president of P&D Discount Tobacco, which operates 23 units, primarily in central Pennsylvania. “We get just about the same profit per can and it’s really moving. The ones that are most active for us are Timber Wolf and Red Seal. The bottom discount tier isn’t doing as well as the middle, and the premium segment is flat with maybe some slight declines.”
According to USSTC, the typical moist smokeless tobacco consumer is a white male that works full time and has an average annual household income of $40,000. The customer is between the ages of 18 and 36 and buys three cans per week. Mahoney still sees his customer base for the discount products as being traditional for the category, but fairly diverse within that demographic with appeal to both more affluent and less affluent customers who are looking to save a little money. And premium can’t be overlooked in the product mix.
“In terms of pricing in the MST category, it’s important to note that new adult consumers tend to enter the MST category at the premium product level, and at USSTC we’re seeing that it’s the success of our new premium products that is driving overall category growth,” said Schwartz. “We compete in the traditional price-value segment with Red Seal, which is now the top-selling brand in that tier, and we compete in the sub price-value tier with Husky. We will continue to offer adult consumers high-quality products in each price tier. Tobacco outlet retailers will find that offering a wide selection of MST products will build traffic and drive incremental volume, thereby enhancing profitability.”
One problem with marketing the discount products has been customer education. The price difference is so great, that it causes confusion where quality issues are concerned.
“Some customers have been very faithful to a brand, but the prices are so different between the premium and the discount levels that it’s hard to explain what exactly the issues are from a quality standpoint,” said Andy Shango, president of Smokers Palace, which operates 10 stores in mid- and northern Michigan. “A premium brand may be $4.50 a can, and the discount may be $1.50 or less per can. The new customers usually go after the premium stuff, because of the brand name and we find the established customer tends to do the switching. That’s the guy who is really going to know the quality when he chews it and if it’s good enough for the cheaper price.”
 Flavors and pouches
Flavors continue to provide strong customer appeal and generate category growth.
“The expansion of non-traditional flavors has also contributed to the growth in the snuff category,” Reynolds said. “While it is still early, it appears that new flavors such as Peach and Apple have found a base of users and are exhibiting staying power. We also find that snuff consumers, even those loyal to a specific flavor, are very willing to try new flavors. However, many consumers may only use the non-traditional flavors as an occasional ‘change of pace.’ As with pouches, we believe the non-traditional flavors also are more appealing to consumers of other tobacco products looking at snuff as an alternative.”
Smokers Palace is one retailer that is sold on flavor sales. “Moist snuff plays a big role in our business because we do a lot with it,” said Shango. “We’ve had some pretty big percentages, especially with some of the specially promoted products that came out in the last few years, as well as the flavors during that time. Apple and peach have been just a huge success for us – they smell good and they taste good. I was at a wholesaler the other day and said, ‘Man, it smells like a fruit market in here.’ The one that really didn’t go was vanilla.”
Shango noted that some of the new flavor sales were coming from traditional flavored cigar customers in addition to new tobacco users. “What helps us is that these people don’t necessarily want to smoke cigarettes, so snuff provides an alternative,” he said.
However, the appeal of exotic flavors is not universal. “Your regular flavors are the ones that sell 90 percent of the time for us,” said Mahoney. “None of (the new flavors) are really big. Your Copenhagen and your Skoal, and the ones that duplicate them, are the ones that sell. If you’re one of the manufacturers and you get 2 percent on something like peach that’s huge, but it’s not for us.”
Although not a true spitless solution (at least with current offerings), pouches continue to appeal to customers looking for neater and cleaner smokeless experience. Schwartz noted that pouches are up 52 percent year-to-date compared to last year, according to USSTC data. At Swedish Match, pouches have grown in the past few years, but they still occupy less than 6 percent of the total category.
As with flavors, individual retailer success can hinge on the market. “Pouches aren’t big for us, not at all. I’m thinking maybe 1 percent or 2 percent,” Mahoney said. Shango has had the same experience and both retailers link the lack of action to their predominately rural markets.
Marketing
Success in the category can hinge on focus and the willingness to promote and merchandise, as well as carrying the proper product mix. Just what focus should a tobacco retailer have on the category?
“Retailers in all channels should treat other tobacco products, and especially MST, as a priority category,” Schwartz said. “Retailers need to evaluate the space they now devote to MST. Our research shows that the MST category, when effectively positioned with highly visible and innovative merchandising, can realize significant growth. Additionally, retailers can optimize product assortment by understanding the adult consumer and ensuring that they are satisfying local demand. Retailers should also ask manufacturers about the support they can provide in maintaining MST as a profitable growth category for all channels of trade.”
USSTC also offers information to tobacco retailers to help optimize the performance of the category in the channel through its “S.T.E.P.S.” initiative. This is a set of tools that allows the company to work with its retail partners to accelerate category growth.
“All retailers would be well-served to employ category management best practices when determining their snuff sets,” said Reynolds. “However, it is important to carry selections for all consumers in the category. A higher volume retailer will need to offer selections from all segments, including premium, price/value, non-traditional flavors and pouches. It is also extremely important to reflect similar percent margins across all segments. Retailers who try to increase margins on the value products to improve ‘penny profits’ risk losing business to competitors with better pricing. This is important because snuff is a destination item. When a retailer loses this customer, they are losing the total market basket of the consumer, not just a snuff sale. As for trends, we believe there will be continued accelerated activity in the price/value, non-traditional flavors and pouches segments for the near term.”
Reynolds also noted the primary importance is visibility when merchandising, so that the consumer can see the full range of products with the prices clearly marked.
P&D Discount Tobacco has enjoyed great success with its focus on the category and moves nearly 140 cases of smokeless tobacco per week.
“We’ve pushed smokeless harder than anything else we carry,” Mahoney said. “In Pennsylvania, you have a state minimum for cigarettes so the prices are the same everywhere. We get a pretty low margin on snuff compared to convenience stores, but we headline that because it’s one of the few things we can do to draw people so we push it hard. We run promotions, we have customer appreciation days, we coupon a lot and we really work it hard. In the small towns we’re in, we will sell 60 to 70 percent of the smokeless tobacco in that area.”
The retailers surveyed in the Smith Barney report believed, by 65 percent, that buydowns were the most effective promotion. Smokers Palace has also enjoyed success with “two-fers.”
“We’ve worked a deal with a company to sell ‘two-fers,’” said Shango. “We price the two-fers for so much money off and then the company promotes it with us. It comes down to $10 off per roll, which makes it a big hit and we do very well with it. I wish we could do with cigarettes, but we haven’t been able to yet.”
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