Photo courtesy of International Tobacco Partners
|
COVER STORY
Quality or Value?
With import cigarettes, there's
more than one way to profit
Photo courtesy of International Tobacco Partners |
By Tracy Cox
Import cigarettes are a study in contrasts, primarily because sourcing of the product is driven by two distinct consumer demands: niche quality and low price.
“The imports category covers both ends of the spectrum,” says Tim Chang, owner of Premium Tobacco Distributing in Ocala, Fla. “You can compare it to car imports—where, on the one hand, you have a less expensive Hyundai import and then, on the other hand, you have the higher-end, expensive Porsche import.”
Depending on whether a retailer is affected by the 1998 Master Settlement Agreement, retailers have different insights into the import cigarette category’s performance, and sales often vary by state. The competitive playing field has been altered by the MSA, according to Jeffrey Avo Uvezian, president of International Tobacco Partners, Ltd. in Great Neck, N.Y. He says grandfathered subsequent participating manufacturers (SPMs) can have a lower average price per carton, due to a deal resulting from their joining the MSA within 90 days of November 1998, resulting in a market advantage. “Essentially, these companies pay no MSA payment on any sales equal to their 1998 market share or 125 percent of their 1997 share,” he says. In those states where the MSA is not in effect, Avo Uvezian says the company’s quality brands can compete more effectively. And he says pending litigation in cases like Freedom Holdings vs. Spitzer in New York State will eventually further affect the market.
Photos courtesy of Kretek International |
A changing market
Prior to the MSA, imported cigarette brands were expensive, high-priced cigarettes that were often packaged in flip-top or hinge-lid boxes, and they would have been identified as premium blends. But today it ’s a whole new ballgame—the players have changed since the MSA, Avo Uvezian says. “A whole new class of value-oriented, discount cigarette blends has been manufactured overseas,” he says. “These blends are aimed at the consumer looking to trade down from high-priced premiums to save money, and at the same time enjoy a quality cigarette.”
Since 2000, International Tobacco Partners has imported Boston, Tough Guy and COBRA cigarette brands. Tough Guy and COBRA cigarettes are value discount brands manufactured in the Republic of Armenia, and Boston is manufactured in the Philippines. All of the brands are MSA-escrow compliant, Avo Uvezian says.
The International Tobacco Partners import demographic is the price-driven customer, looking to avoid high prices per carton that often result from price increases absorbed by the consumer since the MSA went into effect, Avo Uvezian says. “Cigarette smokers tend to be sensitive to high prices,” he says. “The typical, fourth-tier cigarette smoker is a middle-aged individual switching from his or her high-priced premium to a viable ‘value’ alternative brand.”
Photo courtesy of International Tobacco Partners |
In Florida, which is a non-settlement state, Chang does not have to report to an MSA authority. Import cigarettes are brought in from a licensed importer, according to Chang, who also distributes brands imported from all over the world, including Armenia, Columbia and China. Chang sells a broad range of imports, including both fourth-tier cigarettes and higher-end Kretek Djarum brands. Fourth-tier import brands have a marked price difference —on average 30 percent lower than other brands, according to Chang. Customers who buy based on lower price gravitate to these brands, and price keeps them with the products. “I cater to retirees and lifetime smokers who moved to Florida from northern states and have seen major-brand price increases,” Chang says. “They see their cigarettes trending upwards of $20 per carton, and they are changing to a brand that may sell at half that price. Value is what keeps these smokers smoking.”
The premium smoker is the other import cigarette customer demographic—consumers accustomed to quality in their cigarette smoke. Kretek International imports the Djarum Brand of Kreteks from Indonesia, and also owns the Dreams brand of specialty and flavored super premium cigarettes. Kretek Djarums are an example of a niche market that has flourished due to a loyal customer base with an acquired taste for this premium product.
Overall, sales of super premium are up year after year, according to Darren Thibodeau, director of marketing for Kretek International in Moorpark, Calif. Much of this success can be attributed to the fact that the import is a product that caters to the premium smoker better than domestic premium, he says. These smokers are looking for something a little more special, Thibodeau says, and they appreciate the high-end import product for its quality. “This is fueled largely by the fact that today’s smoker is legislatively limited as to when they can smoke, where they can smoke and in many cases, what they can smoke,” he says. “The cost difference to a super premium brand is not too terribly high for a large percentage of these customers, and they find that they prefer the alternative experience these brands offer.”
Market trends
Darren Schwartz, president of Smokers Choice, Monticello, N.Y., sells an import cigarette selection that covers all of the bases. He sells both third- and fourth-tier imports and also the higher-end imports such as Kretek Djarum brands. The No.1 goal is to provide an offering in every category, Schwartz says. “Our stores deal with so many different classes of customers,” he says. “We have to sell something for everyone.”
Photo courtesy of Kretek International |
Import sales continue to do well for Schwartz, and he says it is because consumers love choice—a wide variety of cigarette brands lining the store shelves. And retailers who provide this broad selection will benefit with return customers, brand loyalty and maximized profits. “The tobacco outlet segment has really blossomed,” Schwartz says. “And price and choice are the key benefits of the cigarette outlet.”
A value-priced alternative is always a focus for customers, and Schwartz says catering to a certain price point can result in common ground for retailer and customer. “You can help customers as a retailer, in a limited sense,” he says. “You can’t change gas prices or utility costs, but you can find cost-effective ways to help them find the right products, and educate them on what these products are. You can help customers by advising them on the best product for them.”
The value-focused consumers will always be a strong segment, agrees Avo Uvezian. “There will continue to be downtrading by the price-conscious smoker to lower-priced quality/value brands,” he says. “The fourth-tier category has evolved further to meet consumer demand.”
Avo Uvezian notes one growing trend in the segment is toward “little cigars,” as smokers are interested in viable, less expensive alternatives that offer a quality smoke at a reasonable price. He says International Tobacco’s Little Cigars have attracted interest recently, as have the company’s i80 Little Cigars and high-quality Verona cigarillos. It’s a product that satisfies consumers looking for a combination of premium and value, Avo Uvezian says. “We expect this trend to continue,” he says.
True little cigars like these are made with cigar tobacco, but cigarettes that masquerade as little cigars have already drawn fire. In May, attorneys general from 40 states asked the U.S. Department of The Treasury’s Alcohol Tobacco Tax and Trade Bureau to change the way it defines “little cigars” to bring those that NAAG describes as “cigarettes wrapped in brown paper” under the restrictions of the MSA. Resulting increased taxes might reduce the cost advantage of those products.
Thibodeau says that the demographic of today’s adult premium cigarette smoker is trending in two different directions, with one group of customers focused on standing out from the crowd. “Both groups have made a conscious adult decision to smoke and choose to smoke a better product,” he says. “However in one group, the smoker is looking for product that calls attention to itself. This smoker wants a very aromatic product, or perhaps a different colored stick. This group of smokers wants to make a statement with the product—they want to get noticed. This is different from the group that prefers to quietly enjoy a super premium product and fly under the radar.”
Marketing imports
Retailers can market the import cigarette product according to its primary selling suit—and that is usually a focus on either value or quality. Customer exposure to the products, as well as high visibility of the various brands should be the prime marketing focus. The premium imports are a good category for spotlighting within the store, Thibodeau notes. “Retailers should set up specific sections in the store to showcase super premium brands,” he says. “This can draw attention to the category overall, resulting in more discussion, interest and eventual sales within the category.”
On the value end of the import category, Avo Uvezian says that retailers can market the import cigarette product with the use of initial promotional programs created in connection with their wholesale distributors. These programs are devised to draw customer attention to the value-priced product. “Retail sales are all about profit per square foot in a highly competitive store front,” Avo Uvezian says. “Interestingly, recent convenience-store studies show that 20 percent of the SKUs in a store produce 80 percent of the sales. Value-priced, fourth-tier brands that offer rapid turns—along with inventory fulfillment—create a profitable equation for the three parties in this distribution chain.”
Avo Uvezian adds that company involvement is the key to successful marketing efforts. He says that International Tobacco Products offers full sales support at the retail level to promote import brands and to help the initial promotion and presentation of the products in the store.
Most tobacco retailers understand the importance of product innovation and bringing something new to the table for customers. “Products that are properly merchandised and properly priced will do well,” Schwartz says. “But the real questions are, ‘How do I create deals for my customers?’ and ‘What kind of promotional activity will support the launch of a brand?”’
In the end, creative marketing techniques might involve getting the product in a customer’s hands, Schwartz says. “Sometimes, I will open a pack of cigarettes and let a customer taste the product they are thinking of buying,” he says. “Nine times out of 10, the customer will buy the product, because of this kind of store promotion. The customer appreciates that, as a retailer, I have already made a commitment to them as buyer.” |
