Laws, Buydowns Cloud Tobacco Marketing

Cigarette marketers must be nimble if they want to keep their product visible at retail. The barrage of federal, state and local legislation that began several years ago may have let up a bit, but it's by no means over. Combined with competitors' merchandising agreements, laws are still squeezing cigarette P-O-P into even tighter spaces, while merchandising pieces pushing lotteries are taking over once-prized real estate.Moreover, some retailers are promoting tobacco-related products and accessories at the expense of cigarettes, forcing cigarette makers to shift to marketing strategies and merchandising programs that they hope will keep their goods moving.In July of 2004, the Federal Trade Commission gave Reynolds American Inc. (formed early last year by the merger of R.J. Reynolds Tobacco Co. and Brown & Williamson Tobacco Corp., the American division of British American Tobacco) the green light to proceed. And although company officials don't expect the benefits of the merger to be fully realized immediately, figures from IRI Capstone indicate that the combined firms had approximately 33% of the total U.S. cigarette market in 2002, compared to approximately 50% for Philip Morris and 8% for Lorillard. In April, when the company releases its new merchandising platform, retailers may realize what the merger's impact will have on them, says Velma Hartley, owner of the five-store Tobacco Place retail chain based in Columbus, GA, and president of the National Association of Tobacco Outlets (NATO), Eden Prairie, MN. Here's why: programs provided by most tobacco companies lay out buydown (or retailer discount) offers and specific merchandising activities directly related to the discounts. Many of these programs also include requirements -- such as merchandising cigarettes behind the counter -- and displaying youth smoking-prevention P-O-P materials.In some cases, the programs specify what retailers must do with the company's own display materials, provide specific planograms and identify restrictions for placing competitive P-O-P in nearby areas. They typically provide several levels of participation, with larger discounts for more involvement."Nobody in the industry knows what will happen with the new programs, especially with the merger," says Hartley. The combination will boost market share for the new company and eliminate one competitor from the mix, but how that will impact retailers is unclear."We don't know what Philip Morris has planned for its contract, either," she says. "Whatever happens, it will change what we've been doing, and it will affect everyone." Reynolds officials could not be reached for comment.Elliot Eliades, vice president of marketing at S&M Brands Inc. in Keysville, VA, agrees. "The effects of the merger have yet to be seen, but they'll have more clout to get their products displayed," he says, adding that Philip Morris, rather than the smaller companies that already are working on the fringes, may feel the biggest impact. "There will be much less effect on us," Eliades says."Our Retail Leaders program strikes a chord with retailers," says Dana Bolden, senior manager with Richmond, VA-based Philip Morris U.S.A., a division of Altria Group in New York. "It rewards retailers for taking significant steps to ensure there's no self-service on cigarettes by putting product behind the counter and for putting our brands in the best position to improve our visibility," he says.Bolden stresses that while the Philip Morris (PM) program is a category-management system, the planogram is based on market share for each brand, derived from monthly reports from an independent tracking service. He declined to comment on what the merger of RJR and B&W might mean for PM or its programs.Not in the ContractMerchandising contracts like the Retail Leaders program, which restrict placement of all companies' P-O-P, have long been a bone of contention among manufacturers and retailers, resulting in a lawsuit in 1998 by PM's competitors, charging PM with restraint of trade. PM's program was found to be legal by a district court and was upheld on appeal in June of 2003. The appeals court noted the general stability of market share among competitors before and after the program, as well as the plaintiffs' continued profitability and "the ongoing entry and increasing market share of new manufacturers."That doesn't mean those new manufacturers are happy about the contracts, however. "The biggest concern from a small cigarette-maker's perspective is that the big companies control all the space," says Eliades. "Getting P-O-P into the store is difficult, and keeping it in is even more so." The company, which has been selling its regional brands for 10 years, also offers merchandising contracts, he notes. "But we don't have the same leverage, and we don't have the limitations others do. We don't try to lock up shelf space."It becomes frustrating, he says, because some retail chains would be interested in the company's P-O-P materials, but his products are stocked under the counter and out of sight because of the requirements in other contracts. "We offer them posters, but they refuse them because their other contracts won't allow them to use our materials," he says. S&M's reps carry copies of the competitive contracts, he notes, and they review the contracts with the retailers to ensure they understand exactly what they are allowed to do. Sometimes, the retailer thinks the contract is more restrictive than it actually is -- but even in those cases, Eliades says, the store often doesn't want to risk getting into trouble and losing its buydown. "I can't blame them, but it makes us mad as a competitor. But it's the nature of the business, and we have to work within it," he says.Santa Fe Natural Tobacco Co. in Santa Fe, NM, takes a similar approach, says Keith Grover, director of sales. "We try to explain that the majors' contracts aren't as limiting as the retailer may think," he says. "And we try to find places where we can fit into their program. We try to have a dialogue about opportunities. As a small brand, we can't dictate position."Promotion Over PricePM's Retail Leaders is the company's "key driver and flagship" program, Bolden says. He notes, however, that this year, "The biggest trend with our programs is to reallocate our spending away from merchandising payments [buydowns] to more consumer promotions, especially two-for-one deals. That's what we're seeing retailers have success with today. Consumers are looking for more value. We want to drive these purchases by providing more consumer offers, which bring in more traffic. Today's market is less about pricing and more about providing value. That builds loyalty for us and volume for the retailers." In 2002, the most recent year for which dollar figures are available, PM cut its advertising budget for the fifth straight year to focus on price and product promotions, it reported. Magazine advertising decreased by 72%, the company reported to the FTC. Newspaper ads decreased by 31%, and retail P-O-P advertising decreased by 26%. However, the company's overall spending increased 7% due to the cost and frequency of its discount programs. Philip Morris' two-for-one pro-motions are carried out in a variety of ways, including two-pack packaging pieces. In other cases, on-pack labels explain the program, allowing customers to pick up a second pack. "Consumers are demanding this type of value, and that's what's driving our program," Bolden says. The program plays especially well in c-stores, where the majority of sales are individual packs, not volume-based cartons, notes Jeff Lenard, director of public affairs for the National Association of Convenience Stores (NACS), Alexandria, VA. And c-stores' share of cigarette sales is growing, according to the 2004 NACS State of the Industry report. "One of the reasons for this growth is that convenience stores have been very successful in garnering market share in cigarettes from other retail formats," the report says. (For more information, see chart at right.) Making Room for Little GuysC-stores are a key battleground for small tobacco companies, but fitting into the small space available creates challenges. "Compact is in, that's no secret," says S&M's Eliades. "Flexibility is a key to success. We're working toward providing our salesforce with merchandisers that stack or connect to create modular units." The goal is to be able to turn a 50-count display into a 150-count unit by building up, not out. "Footprint is a problem -- retailers tell us they don't have enough room, especially with everything being behind the counter."U.S. Smokeless Tobacco also is using modular units extensively for its products, says Jon Schwartz, communications director for the Greenwich, CT-based company. "We are designing modular merch-andising systems to allow for multiple configurations," he says. "These modular systems also provide our reps with the ability to quickly and easily add channels, single- or dual-feed, as a system grows."Versatility is the key, agrees Santa Fe's Grover. "Tobacco has a diverse retail environment to fit into, so we try to create a broad selection and array of P-O-P materials to ensure we find a piece that fits into a specific retail environment rather than take a one-size-fits all approach," he says. The company also is expanding its versatility to include decals, illuminated signs and a variety of temporary and permanent displays. "Counter space is always at a premium, so we are trying to create compact displays for smaller footprints." But smaller, he says, also indicates less visibility, so it requires finding the perfect balance."We're trying to find other areas of the store where we can display," says S&M's Eliades, "but we want to be near the cigarettes and not near items related to other age groups. There's no way I want to be near ice cream."Store exteriors offer potential, he adds, but local municipalities are passing laws to gain more control of this space by controlling highway landscapes. "It becomes difficult to find space, but we keep looking for ways to make it work," Eliades says. C-stores' gas pumps, with toppers or even electronic messages, offer some potential, too. "But does the consumer pay attention?" he asks. "We don't know." Two-foot by two-foot posters remain the bright spot for the company, Eliades notes, and S&M has expanded its use of them.Santa Fe, on the other hand, concentrates on gaining visibility for its packaging, which features a distinctive logo. The company has spent the last two years reorganizing and streamlining its packaging, color-coding pieces to make them consistent across lines. It also has seen success with a neon sign and is in the process of creating a smaller version that provides more flexibility and acceptance. But replicating the firm's distinctive logo in a small neon piece has proved difficult, Grover says. Santa Fe also will introduce a 10-inch by 18-inch wooden sign in 2005, emphasizing the company's focus on organic tobacco. "We're always open to new ideas and take suggestions from retailers and our field sales staff," he says.Even the major companies are feeling the pinch of limited space behind the counter. "The importance of P-O-S signs on back-bar fixtures has grown due to the need to communicate brand availability, product equity and imagery, as well as to deliver effective promotional and brand messages," says Keith Faircloth, director of merchandising for Lorillard Tobacco Co., Greensboro, NC. As a result, Lorillard created a Zone Signage approach in 2003. The program identified three key areas with different needs: Point Of Sale (check-out area), In-Store (high-traffic areas) and Store Exterior.New Products = SalesSome retailers are separating the tobacco category into cigarettes and other items. British Petroleum's c-store division, for instance, has redesigned its stores around the concept of "self-expression shopping," officials said during a presentation at the NACS convention last fall. A key ingredient in the program was moving smokeless tobacco products from behind the counter onto gondolas. "We were missing an enormous amount of sales because we were keeping [such products] locked up and away from our customers," says Polly Finn, president of the BP stores.To help it gain more visibility in stores, U.S. Smokeless Tobacco's Schwartz says, "Today we are using our patented Showcase Shelving system to merchandise our products full-disk instead of in the side-label configuration as seen in our traditional vending displays. Predominantly, the space devoted to our products at retail has not changed. What has changed is the way we utilize that space. We have seen a growth in the number of SKUs at retail devoted to the entire category, which is our fundamental goal."Tobacco Place's Hartley says she's converted 12 feet of retail fixtures from cigarettes to other types of products to maintain her profitability. "We're diversifying with new products in many ways," she says. "As more places add taxes onto cigarettes and costs go up, we're making less money on cigarettes and need other revenue." (For more on rising cigarette taxes, see sidebar, below.)Such items include roll-your-own products, especially papers. "Those products have really taken off," she says. Other categories include novelty and high-end ashtrays, money clips and pocket watches. Candles and other cigarette smoke-controllers also are popular, she says.At the same time, new SKUs continue to roll out, such as Philip Morris' new Marlboro Reds and Lights, which are a half-inch shorter than regular versions. Designed for people who want a shorter cigarette break without wasting tobacco, they debuted in January 2005.Flavored cigarettes also are gaining popularity, although some critics say the brands are designed to attract younger smokers. "The jury is still out on the popularity of flavored cigarettes," says Eliades of S&M, which doesn't have a flavored line. "There are a lot being made, but who knows how long the trend will last?" He doubts younger smokers are the primary audience, as the lines are expensive. NATO's Hartley agrees. "Our sales go to both men and women primarily in the 25- to 45-year-old bracket," she says. The restrictions on space and proliferation of products creates a difficult situation. "Category space allocated to cigarettes has been reduced slightly over the past few years due to declining retail store owners and the rising cost of inventory," says Lorillard's Faircloth. "SKU counts continue to increase, driven largely by the rapid expansion of new brands produced by minor manufacturers as well as line extension packings from some of the major manufacturers."Those pressures, which eliminate many options for temporary pieces, have led manufacturers to focus on more permanent displays. For instance, in the past few years, Lorillard has begun producing its own merchandising fixtures for its contracted retailers to "provide a permanent home for Lorillard products," Faircloth says. "Based on a need to change brand and pricing communication on these fixtures, cigarette manufacturers are opting for improved signage and price call-outs within the allocated space on fixtures." A popular approach, he says, features "flip signs," which are hinged graphic panels that often are placed over the product to ensure inventory space isn't used. "Flip signs offer better impact, including changeable pricing," he says. PM's Bolden agrees that trend is growing. "We're producing fewer signage pieces and using more fixtures, with themes on them," he says. Marlboro's 50th anniversary has played a major role in that approach, with imagery appearing on both fixtures and on packages. S&M also has been increasing its budget for permanent fixtures, Eliades says. "The future is in permanent and more expensive pieces, plastic and metal versus paper." At the same time, the company has shifted some of its displays from steel (because material prices recently soared) to pressboard to save costs at this high end of the market.Tobacco companies also are faced with a new competitor for its valued and rare counter space: lotteries. "Lotteries are worse than the cigarette companies," says Eliades. "They throw a lot of elbows to get their space, with window signs and danglers and other pieces. They've done a good job, and they are a new force to be reckoned with."As for the overall future state of tobacco P-O-P, Eliades says, "I'd like to think [the top marketers' dominance and restrictions] will change, but I'm not so sure that they will. I need to gain consumers' attention, but I may not be able to do that in the store. We may be pushed into the mail box and away from stores."

Laws, Buydowns Cloud Tobacco Marketing

P2PI MEMBERS

JOIN P2PI

Related Images

Business Topic

Market Segment

P2PI MEMBERS

JOIN P2PI

Related Images

Related Articles

Business Topic

Market Segment