Managing Tobacco’s Four Tier War

A Closer Look at Who’s Trading Down

According to Mintel International, 80% of smokers polled said it’s worthwhile to have a quality cigarette, which is contributing to sales of premium cigarettes. Other factors influencing sales include:
• 51% of smokers have one preferred brand they always like to buy.
• Less than 2% of smokers 45 and over said they like to try different brands of cigarettes, indicating strong loyalty to their preferred brand.
• Younger smokers are less loyal. Less than four in 10 smokers 35 and under only purchase their favorite brand. By comparison, six in 10 smokers over 45 only purchase their favorite brand.
• By a margin of 2-1, smokers 25-34 said they would buy whatever premium brand is running the best promotion versus the 45 and over tobacco consumer.

As cigarette taxes grow, smokers have some big decisions to make, such as whether they will pay the price, trade down to a lower tier, switch brands based on promotional activity, move to a smokeless brand or quit entirely.

Suppliers continue to offer promotions on premium and lower tier cigarettes alike to keep customers loyal to their brands as retailers—who are eliminating SKUs as they reorganize the back bar to include other tobacco products (OTP)by the June 22 FDA mandate—pour over sales data to determine which brands will make the cut.

“We want to offer as much variety as we can without sitting on inventory that’s not turning, so it’s a fine line between making sure everything you decide to carry is selling without alienating loyal customers by eliminating their brand,” said Lanny Duncan, marketing director for Workman Oil Co., which operates 47 Apple Market stores in Virginia and Kentucky.  

Mintel International, a Chicago-based research firm, noted that from 2004-09, the tobacco market increased 27% to $88.2 billion overall. The greatest increase occurred in 2009, resulting from the 62-cent increase in the federal excise tax per pack to $1.01. Meanwhile, the volume of cigarettes purchased declined 8%.

Duncan saw customers begin to trade down from the premium category after SCHIP, when he said sales of Philip Morris cigarettes dropped substantially at his stores. PM responded by deep discounting its Marlboro 72s and its new Special Blends to keep customers in search of a cheaper smoke from exiting the Marlboro brand. Giving customers the Marlboro brand at a fourth tier price was extremely successful at Apple Market stores.

“Customers either want a brand name or the cheapest price, everything in between has kind of gotten squeezed out,” Duncan noted. “Fewer people in our stores are looking to the second and third tier brands.”

Who is Trading Down?
According to research by Mintel International, older smokers admit to smoking more cigarettes a day (15) compared to younger smokers (seven), making chronic smokers more likely to consider a cheaper alternative rather than their usual premium brand.

“If you multiply out the cost and you’re buying two packs a week versus 4-5 packs a week, it makes a big difference to the person with a more ingrained habit to save 50 cents to $1 a pack than it does to the younger smoker smoking fewer cigarettes a day,” said Billy Hulkower, senior analyst at Mintel.

On the other hand, younger smokers (under 35) tend to be more adventurous and less brand loyal than older smokers, as well as more interested in a wider array of tobacco and nicotine products.

“There’s more of an issue of fun for the younger consumer. It might be more fun to get a premium brand or super premium brand. They haven’t had the habit as long and they’re interested in experimenting. When they see a new brand packaging they are going to want try it. With your 56-year-old pack a day smoker who has been smoking Basics for 20 years—no amount of new packaging is going to make him say, ‘Oh, let me try that one,’” Hulkower said. 

As for those exiting the category, Mintel found young men between 18-29 are the most likely to move toward smokeless, and are more likely to experiment with new tobacco products in general.  “If you’re 21 and started smoking at 20, you might be a social smoker, you might not be buying a pack everyday, but bumming different brands from friends—maybe one day no one has cigarettes so you bum some snus. There’s more experimentation and more potential for word of mouth to spread on a product like OTP.” 

Managing the Fourth Tier
At Apple Market stores, Duncan has seen strong customer interest in fourth tier brands. When Apple Market acquired its 17 Kentucky stores in May of 2008, the stores already offered Wave by JTI, which made up 20% of the stores’ entire cigarette business. “Naturally we continued to sell it and about a year later added it to our 30 Virginia stores,” he said.  “After three months it was 18-20% of our business in Virginia as well, so it definitely took off and did extremely well for us.”

In-store promotions are vital to the success of fourth tier brands. “Wave does a lot of promoting, and when it is on sale I’d consider them one of the cheapest out there,” Duncan said.

In July, Apple Market will be adding JTI’s new fourth tier product, Wings, to its stores, which will be less expensive than Wave, except during Wave promotions. “When Wave goes off sale it’s going to be a good alternative because it will probably be a good $2-4 cheaper. It gives us another price value brand with brand recognition,” Duncan said.

Also among its fourth tier cigarettes, Apple Markets offers regional brands like Kentucky’s Best in Kentucky and S&M’s Bailey’s and Tahoe brands in Virginia. It also carries Pall Mall and has been testing Pyramids in select stores in the last three months and has seen good sales.

“When it comes to the premiums we carry pretty much all the major brands and when it comes to the cheapest, how many brands do you need as the cheapest? If somebody comes in and says, ‘What’s your cheapest brand?’ you don’t need to rattle off five different brands. You really only need to talk about two or three,” Duncan noted. 

Managing the Back Counter
As the June 22 deadline looms to move all tobacco products behind the counter, Apple Market is waiting until June to make the move and subsequent SKU cuts, but when it does, it’s not planning to cut cigarettes from one specific tier.

“The major companies we carry—PM, RJR, Lorillard, Wave and S&M Brands— in larger sets, we’ll fit all five companies, but in smaller sets we’ll cut back to three. In Virginia that third company is Lorillard, behind PM and RJR, but in our Kentucky stores its Wave,” Duncan said. “But until all our competition stops self service or until the deadline gets closer, we don’t want to be the first to do it because it will hurt sales.”


Tobacco Segment Industry Sales (millions) Sales Change Monthly Sales Average/Store
Total (2008 vs 2009) $47,300.40 14.20% -2.30% $27,270
Premium $39,354.60 12.70% -4.20% $22,689
Branded Discount $3,343.10 7.30% -9.50% $1,927
Subgeneric/Private Label $3,308.90 47% 28.70% $1,908
Fourth Tier $1,255.30 17.30% -4.50% $724
Imports $38.50 -7.70% -20.30% $22

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