In 2009, the travel retail world was given a fright. At the TFWA exhibition in Singapore that year, association President Erik Juul-Mortensen warned of a potential ban on all tobacco products sold through duty free channels. The World Health Organisation (WHO) was campaigning in full swing against the illicit trade of tobacco as part of the Framework Convention on Tobacco Control (FCTC) protocol. The travel retail segment was identified as a purchase hotspot for the smuggling of cigarettes and cigars. The WHO circulated various reports; some suggesting that tobacco smuggling was funding extremist groups including the Taliban to the tune of $40 billion per annum. The TFWA contested that duty free plays a role in such smuggling activities, for which they were accused of compromising efforts to tackle the issue by the WHO. No formal agreement on such a ban has been reached though the debate still persists today with several duty free operators and organisations jostling over the issue.
It would be an understatement to say that tobacco is important to the duty free industry. Along with alcohol, it accounts for the lion’s share of sales within this channel. The prospect of a complete ban would be catastrophic, and just goes to illustrate the kind of obstacles tobacconists face in their line of business. Garish warning stamps are now mandatory for cigarette packs — with some countries opting to be more illustrative with pictures of cancerous organs. Tobacco firms must tread very carefully when marketing their products as they are closely scrutinised by regulatory authorities (more than any other industry). The strategy of marketing tobacco is, therefore, a thing of intrigue.
Todor Dzhankov is the Export Manager for King’s Tobacco, a Bulgarian company with more than 130 years in the business. They were the first tobacco company to be privatised in Bulgaria. Dzhankov describes a niche strategy – producing products of targeted sizes including king size, super king size and slim cigarettes. Some cigarettes in the range are thematic in nature. He comments on the company’s position in the industry. “Our market positions are expanding constantly and we consider Asia as a main focus for our strategic efforts in the close and far future. We have been present in the Asian market for a short time, so we are determined to succeed in this attractive region. Up to now, our products are present in 30 markets around the world. Travel retail and duty free has been an important focus point for us and we are constantly allocating resources to develop it. Our plans in the near future are to concentrate even more on this channel. In this very moment, King’s Tobacco is building a new factory aimed at filling the growing need of the expanding export markets. Our main purpose is to build a new factory to lift and maintain long-term, high quality of all our products. We are also planning to present new brands and to launch several niche products in the very near future. Advertising bans and numerous restrictions are affecting our industry, but we are taking this as an opportunity to show our team’s abilities to be creative, to think differently and to stretch further.”
The cigar industry enjoys the luxury of flying slightly under the radar of the negative spotlight on cigarettes. Regulations, however, are not lost on cigar makers. It is a challenging category to market with a very specific target market. Stephan Qarimi, Export Manager for Agio Cigars, talks about the performance of the company’s products as well as future plans. “The marketplace for our brands in 2011 was very positive. We increased our sales as well as our volumes in travel retail compared with 2010. We see the growth in all travel retail markets; Europe, Middle East, Latin America and Asia. In Asia our Balmoral Dominican Selection, a high quality short-filler range produced in our factory in the Dominican Republic is selling very well. Our Asian customers love to sell these premium cigars because of the attractive packaging, the complete assortment (including the new Churchill Tubos) and the interesting contribution and turnover for the retailer. 2012 will definitely be a good year with a lot of challenges. We will further strengthen our most important brands: Mehari’s, Panter and Balmoral by offering the necessary tools (education and staff/shelf presentation) to our customers and by developing the right travel retail products. Mehari’s Filter Sweet Orient seems to be a winner and we almost doubled the sales of this product in 2011 compared to 2010. In Asia and the Middle East, we increased our sales by extending the distribution of our global brands Mehari’s and Panter and by finding new listings for Balmoral Dominican Selection range. We will further strengthen our position in Asia and the Middle East with our Balmoral Dominican Selection, including our travel retail exclusives. In 2012, we will organise special activities around our Balmoral Dominican Cigar range. Later this year we will present the redesign of our Panter line.”
He continues by discussing some of the difficulties faced in this space as well as plans to deal with the same. “Of course, we are concerned about space allocated to the tobacco category. However, I am convinced that our category, cigars and cigarillos, still has great opportunities in travel retail. Because of limited knowledge about this subcategory, cigars/cigarillos sometimes are more challenging products to sell. So our responsibility is to engage our customers, their sales staff and consumers by offering more information about the category, our products and characteristics. Tobacco is still a good footfall driver in duty free. Our category, cigars and cigarillos, fits perfectly in the duty free and travel retail world and experience. Consumers looking for a nice gift to treat somebody or themselves will look for an attractive box of cigars which is different from the products and packs they find in domestic markets. Our main goals in 2012 will be to strengthen the knowledge about shortfiller cigars/cigarillos in the travel retail industry by offering tailor-made training/education programmes for our customers and their staff; also, to improve the presentation of short-fillers in travel retail outlets, possibly in combination with other product categories, and introduce travel retail exclusives into the premium segment.”
Larger tobacco firms are usually the first to be put under the microscope when regulators revisit marketing practices year-after-year. The duty free tobacco market is almost completely dominated by these industry behemoths — Phillip Morris, JT International, Imperial and BAT control about 89 per cent of global sales in this segment. James Li is Head of Brands for Global Travel Retail Asia Pacific at BAT. He discusses some of the notable brands under the BAT umbrella and how they have fared in the Asia Pacific region. These include Dunhill Release — a cigarette with a menthol capsule inserted in the filter, which is clicked by the smoker to release the flavour. The Lucky Strike Dragon Limited Edition is a promotion celebrating the Chinese year of the Dragon. Additionally there is the SE555 Limited Edition (available in four variants) and Kent HD — inspired by the pioneering world of High Definition. The latter has in-line charcoal membranes incorporated to the outer edges of a three-part art HD filter, delivering a discernibly smoother taste.
“Capsule product is one of the recent tobacco innovations which capture people’s attention. With a clickable capsule embedded within the cigarette filter, adult consumers can choose to crack the capsule any time when they are consuming the product so to change the product taste. One of the common ways to apply the capsule is to use a menthol capsule on a normal cigarette so adult consumers can choose to have a sensation of menthol at any point of time when the stick is consumed. BAT Global Travel Retail Asia Pacific (“British American Tobacco GTRAP”) had launched Lucky Strike Click and Roll, Kent Convertible and Dunhill Switch with such features and are performing well. BAT says it believes in a multi-brand strategy that consumers from different backgrounds and cultures are looking for different products, so there is no “one-fits-all” brand or product. BAT GTRAP’s popular brands include the Global Drive Brands mentioned above: Dunhill, Kent, Lucky Strike and Pall Mall. Moreover, State Express 555 and Benson & Hedges are also very popular in the Asian travel retail space with sales on par with, or in some cases even outpacing, some of BAT’s major brands.”
Li says consumers in the travel retail channel behave differently compared to the domestic market. “Sales patterns, seasonal impacts, purchasing purposes, packaging needs are all different from regular channels. Nationality wise, the Chinese are leading traveller growth in Asia and their importance cannot be ignored by any segment of the travel retail market. BAT has products which are welcomed by the Chinese adult consumer in both their domestic market as well as in the duty free channel (in particular, State Express 555, Dunhill and Kent).”
As far as the impact of recessionary periods are concerned, the figures he reveals back the notion of demand inelasticity in the cigarette category. “Based on our data during 2008 to 2009, Asia travellers PAX fluctuated by less than 2 per cent compared to 2007 and sales of BAT GTRAP were not affected too much by this. Then the market resumed its growth very quickly that 2010 compare to 2009 PAX actually increased by over 10 per cent. 2011 compared with 2010, BAT GTRAP volume increased by high single-digit percentages, while PAX increased around 3 per cent, mainly contributed by our Global Drive Brands where growth was of double-digit percentages.”
On the subject of rigid regulations, Li reveals that they have grown to influence internal policy at large tobacco firms. “Sure the restrictions from various local regulations affect our marketing strategy, but BAT has very strict policy to ensure that we do our business within law restrictions and with responsibility; in most cases our internal policy is even tighter than what local laws require. Inbound allowance plays a key role affecting travel retail consumers’ appetite and choice of product. When consumers understand they can bring back limited quantity, they tend to serve their high priority purpose first, and they tend to maximise their allowance as well. Moreover, local tobacco advertising laws also affect the way tobacco products can be displayed and communicated. We are aware that the Macau government has just announced the reduction of inbound tobacco allowance from 200 sticks of cigarettes to 100 — this we expect will impose some volume impact in travel retail sales.”
It seems the industry is mindful that scrutiny comes with the territory. They have adapted to persist regardless — though a complete ban on tobacco in travel retail might, however, have a very different impact.