North Africa and the Middle East continue to be a major cigarette market, paced by sales in Egypt, Iran, Algeria and Saudi Arabia. According to Euromonitor International (EI) these four countries accounted for half of the world’s cigarette sales in 2005 and 2010.
Owed to a strong smoking culture and the substantial increase in the smoking population (EI cites an increase of 15 per cent over 2005-2010), the Middle East and North Africa is still one of the fastest growing cigarette markets in the world. In 2011, industry reports cited that the region’s key airports posted an approximate 5 per cent growth in duty free tobacco sales versus 2010. Tobacco continues to be a major driver of sales within the region’s travel retail sector. Despite it being a tough year for the industry, global duty free tobacco sales mirrored 2009 levels, which amounted to $2.7 billion. Not a bad sum, considering duty free tobacco sales account for less than 1 per cent of the global tobacco industry.
Air4casts analysts report that 115 airports and 88 airlines together list 14,252 separate stock keeping knits from 74 tobacco suppliers and 361 brands. While this may sound vast, these numbers track back to a global tobacco market that is highly concentrated.
Apart from the closed Chinese market, which accounted for 40 per cent of worldwide volumes last year, the global duty free and travel retail tobacco market is dominated by top four companies Philip Morris International, British American Tobacco International (BAT), JT International (JTI) and Imperial Tobacco that together represent 88.7 per cent of global sales in value terms.
Smoke Signals – What’s Trending?
As the largest single airport retail operation in the world, Dubai Duty Free (DDF) accounted for 5.4 per cent of global airport shop sales and 3.2 per cent of global duty free and travel retail (the entire Middle East represented 7.4 per cent) last year. Ajay Bhatia, Senior Category Buyer at DDF, says “cigarettes, cigars and tobacco accounted for 8.14 per cent of DDF sales and ranks fourth in terms of category as per contribution of sales.”
Philip Morris’ global brand Marlboro lists as DDF’s top selling brand of cigarettes followed closely by BATI’s Benson & Hedges and Dunhill, Imperial Tobacco’s Davidoff and finally Shanghai Tobacco Group’s Chungwa.
“Duty Free is very important to our overall business,” says Dr Jennifer Thanscheidt, Corporate Affairs Manager, Global Duty Free at Imperial Tobacco, the world’s fourth largest cigarette group. “Tobacco is one of the most planned purchases within duty free retail and plays a key role in pulling passengers into the shopping environment to begin with, [making it] more likely [for passengers] to browse other categories.”
Some of the region’s airports (predominantly the GCC) continue to develop state-of-the-art facilities to attract more visitors — a key factor tobacco companies are extremely eager to leverage for their brands. “Duty free is special and is not comparable to the various domestic markets,” says Nicole Peiler, Manager, Trade Marketing and Marketing Operations, Global Duty Free at Imperial Tobacco. “Duty free shoppers buying in Dubai come from Asia, Germany, the UK… you never know. The shopper group is ‘international’. We work closely together with our customers and with the airports to share expertise on new travelling streams and trends.”
Considering that the playing field is limited to a few but powerful contenders, the tobacco industry benefits from a unique pricing power in comparison to other consumer goods. Does this then provide them with the advantage when marketing their products within travel retail? “Far from it,” says Stefano Mariotti, General Manager at British American Tobacco International (BATI). “Pricing is only one element in the marketing
mix. A strong innovation pipeline, relevant offering and having the right products in the right place are all essential to success.”
Positioning is key and Thanscheidt agrees: “Tobacco needs sufficient space within a store to enable good orientation.” Mariotti points out how companies heavily consider the “different ‘shopper modes of travellers, who often have more time to spend browsing in stores.” The international nature of the travelling consumer (linguistic or cultural) is an integral element to travel retail sales, and one which the industry is fast looking to address.
History and tradition is another big trend; seasonal or limited editions alongside key promotion activity, like a main holiday or travelling season, are also major trends,” explains Peiler. Davidoff and Gauloises continue to be Imperial Tobacco’s leading duty free brands.
Another key trend that boosts sales is constant production innovation, both in terms of retail experience and the product itself. BATI’s recent product innovation is Dunhill Switch, which introduced ‘capsule technology’ — a bead in the filter, when broken, turns it into a menthol cigarette — is positioned as a super-premium offering within the region. Dunhill and Kent are two of BATI’s fastest growing brands in the region.
Mariotti believes that global trends too affect consumers across several categories, driving innovation and leading the industry to rethink their portfolio offers. “Some of the trends worth mentioning are ‘the search for new experiences’, ‘empowerment and control’ and ‘identity’. Other important trends like ‘connoisseurship’ and ‘new value expectation’ enable us to provide a unique positioning to each of our brands.”
Japan Tobacco International (JTI) recently launched five new smoking lounges at Dubai International Airport as part of their global efforts to address the issue of accommodating smokers and non-smokers in airports. Covering an area of more than 600sqm and located in all three terminals, Dubai’s Terminal 1 features the world’s largest airport smoking lounge with a surface area of 250sqm.
JTI’s innovative concept has notched 21 airports worldwide with a combined traffic of more than 300 million passengers. Calling it a “top priority for JTI” David Francis, General Manager, Worldwide Duty Free and Vice-President at JTI, adds in a press statement that JTI would continue to invest significantly in building smoking lounges in new regions and airports. “Nowadays, over 20 per cent of adult passengers are smoking and their choice of airports is being influenced by the existence of smoking facilities,” he adds.
Bhatia believes that the underlying negative trend on smoking due to government and WHO restrictions being tightened all over the world, has sparked tobacco companies to introduce “lights in varying amount of different formats.” As tobacco is a key sales driver of travel retail, duty free companies like DDF work with tobacco brands to innovate constantly. “[Right from] promotions to offering customers something new, in product experience or gifts with purchase, it helps maintain freshness in the category and attracts footfall into the shops,” he adds.
In addition to Dunhill Switch, BATI’s Vogue Innovative pack format, which launched last year, sports an innovative and glamourous design and was reintroduced in response to the outstanding growth in the super slims market. JTI joined the fold with two new travel retail line extensions to the Camel brand — Black and White — with a completely new pack design. This year, JTI will introduce Camel ACTIVATE (similar to Dunhill Switch) to 11 duty markets. In 2010, Serbia-based Monus Tobacco Company announced it’s entry into the travel retail sector with its De Santis cigarette brand. After listing domestically, it approached international duty free operators across Romania, Greece and the Middle East. In a released statement, Monus General Manager Zivojin Zorkic, said: “While we’re relatively new to the duty free industry, our brands Monus Slims and Fast have really done well domestically and we’re looking to parlay that success as we move into the travel retail sector.”
According to Global Industry Analysts’ tobacco report, the rising health concerns among consumers, lawsuits, restrictions on advertising, limitation on the display of tobacco products at retail stores, bans on smoking in public places and high taxes imposed by the various governments on cigarette companies are the major challenges faced by the industry. Reports on the tobacco industry focusing on the potential in emerging markets, was countered with claims by the industry to already having a presence in developing markets for hundreds of years. The industry has maintained that they do not market to or recruit new smokers (in developed or developing countries) instead marketing to existing smokers of local tobacco products as a means to ‘upgrade’ to premium or aspirational Western brands.
Following the downturn in passenger numbers as a result of the recession, travel retail and tobacco sales have faced several challenges — from the restrictions of liquids and gels, the single carry on rule, and most significantly the WHO Tobacco Free Initiative’s price and taxation policies as a means to reduce the demand for tobacco. WHO health officials recently agreed on a provisional global deal to combat tobacco smuggling, with reports estimating that the trade makes smoking too cheap and robs finance ministries of up to $50 billion a year. “We are totally opposed to illicit trade and are committed to working with governments, customs and excise authorities [globally] to tackle tobacco smuggling and counterfeiting, [which] benefits no one and creates a market that is uncontrollable and unaccountable,” says Thanscheidt.
Leading companies like Imperial Tobacco and BATI spearhead their own efforts to illegal trade by applying stringent controls across their networks as well as having dedicated specialists who fight against smuggling and counterfeiting. “We understand the role that regulation plays in regulating the industry. We believe, however, that duty free sales are a legitimate part of our industry and that reasonable regulation should be applied. In this respect, regional associations such as APTRA, ETRC and MEDFA are playing a key role in representing the interests of travel retail,” says Mariotti.
Mariotti and Thanscheidt both relate similar insights on unplanned events, which include everything from the Arab Spring to volcanic ash in Iceland as potential market dampeners.
“[Another challenge] is if a major airline changes a route from Europe to Qatar or Dubai, this can have an impact on bookings to Singapore or Hong Kong or vice versa. 2012 will bring challenges as parts of the world — particularly Europe — fall into recession. So, in duty free you never know, we always need be to flexible and ready,” adds Thanscheidt.
In travel retail, tobacco companies rate any event that affects passenger numbers as their biggest challenge. Leading tobacco companies believe a strategic growth will continue to be their focus for travel retail. “We are constantly working to improve our already excellent relationships with retailers in order to improve space allocation, brand offers and promotional opportunities,” says Thanscheidt. Strategic and sustained growth is on the cards for tobacco, and maintaining existing relationship with travel retail organisations is paramount.
While established brands work on new experiences, duty free operators are always looking to provide variety and the latest in the market to ensure sustained sales.
“Any new brand needs to ensure that the necessary customer demand, international exposure, strong market share in key regions as well as evidence of executions within the strength markets can be clearly demonstrated. If the product ticks all the right boxes then the listing is considered and win-win partnerships are created to execute the brand successfully.”