Tobacco Challenges Continue

Tobacco companies have faced extraordinary challenges in marketing their products since the national Master Settlement Agreement (MSA) restricted their options in 1998. The agreement forced them to conduct virtually all of their merchandising programs at the point-of-sale, yet it restricted the size and placement of merchandising pieces. Adding to the challenge today is in-fighting among companies over positioning. This has created a more intense merchandising dynamic than exists for virtually any other product category."The bandwidth for promotions certainly has gotten narrower, but the most important venue is and always has been the point-of-sale," says Everett Gee, vice president for legal affairs and general counsel for S&M Brands Inc. The Keysville, Va.-based cigarette maker markets Baileys and Tahoe brands in eight eastern states, and it is one of the leaders opposing some of the merchandising restrictions being imposed by larger manufacturers."The big companies act as if the Master Settlement Agreement hurt them by eliminating their ability to advertise on billboards and in other places," he says. "That advertising can be effective, but it's not as effective as advertising done at the point-of-purchase, and it has a less direct effect on sales. In fact, giving up billboard advertising was a boon to tobacco companies because they could focus their energies on the retail establishment." The end result of that focus, however, has been for the big companies to try to "tie up shelf space and dictate what types of P-O-P materials can be used in the store and where they can be placed."The key points of contention are the specifics of some of the discount programs, called "buydowns," used by the large companies. The programs provide rebates to retailers who meet specific requirements for inventorying, displaying and merchandising selected brands. These programs are voluntary, but the industry is too competitive for retailers not to participate, explains Al Alfano, who heads up Retail Rights, a coalition of cigarette companies and retailers that objects to some of the restrictions.The six tobacco companies spearheading Retail Rights are Brown & Williamson Tobacco Corp. (the thirdlargest company in the U.S. and makers of Kool and Pall Mall, among others), Lane Limited (a maker of smoking tobacco and importer of Dunhill cigarettes), Liggett Group (which produces a variety of discount-priced brands), JT International (the third-largest tobacco company in the world, but only a distributor of Japanese and Canadian cigarettes in the U.S.), Wind River Tobacco Co. (a small Wyoming-based tobacco company) and S&M Brands. Several retail tobacco outlets are also members of the group.The buydowns allow participating retailers to lower their prices while maintaining their margins. That is significant because the market is so price oriented, especially as municipalities and states continue to add taxes onto cigarette purchases. In addition, studies have shown that cigarette consumers buy many other high-margin items during their visits. "If you don't have the market leaders at competitive prices, you not only lose those sales to your competitor, but you lose all those other high-margin sales," Alfano explains.Smaller brands need visibility to gain consumer interest, but that can't happen if the large companies are dictating positioning and merchandising requirements. "In other industries, this wouldn't be such a difficult problem because you could advertise in other ways if one company tried to restrict P-O-P," Alfano points out. "But with all of the restrictions on tobacco, the only game in town for tobacco is point-of-sale advertising. If you control that, you can shut out the competition."Focus on Philip MorrisThe focus of concern is the Retail Leaders program from Philip Morris USA, New York. The Retail Rights coalition claims the program restricts competitive signage and forces retailers to use P-O-P and create facings to benefit Philip Morris beyond its market-share levels. Driving Philip Morris' ability to achieve participation in its program is its Marlboro brand, which has almost as much market share as all the other brands in the top 10 best-selling cigarette brands combined, 37.19% to the others' 39.1%, according to Information Resources Inc.In response, Philip Morris says the program is geared to helping retailers sell cigarette products responsibly and merchandise them effectively within the MSA's restrictions. Portions of the program stress the need to merchandise all PM products in non-self-service formats and to use both the We Card national youth-smoking prevention and education program as well as PM's own youth-smoking prevention materials. Retail Rights' efforts are an attempt by competitors to shut down PM's successful marketing program, PM Spokesman Tom Ryan recently told the Courier-Journal of Louisville, Ky.The higher of two levels of PM's program goes beyond MSA restrictions to more specifically address store merchandising, according to Billy Abshaw, manager of media programs for Philip Morris. It states that a maximum of three PM signs can be used in exterior signage, and it encourages retailers to post fewer. It also prohibits any signage on or above the counter and requires all PM signage to be within 4 feet of the cigarette display, regardless of the location of competitive signs. It also limits placement of competitive signs to an area outside of the 4-foot PM zone. It offers five principal merchandising options for laying out the cigarette department based on PM's market share, each of which gives PM the upper/center position."Our goal is to assist retailers by using key principles of category management to ensure they market our products in a responsible way to adult smokers," says Abshaw. "The program is designed to work with retailers to effectively display our cigarettes, promotional materials and signage. Some of that goes back to our desire to comply with the Master Settlement Agreement, including its goal of reducing the overall profile of tobacco products. The key elements we recommend are that retailers display products in a non-self-service manner and participate in the We Card program with signage and materials. We want to reduce youth access to tobacco products." Abshaw points out that of about 400,000 retail outlets in the U.S. selling cigarettes, PM calls on about 275,000 stores, and about 175,000 participate in its program.Not Anti-CompetitiveThe other major tobacco companies, R.J. Reynolds Tobacco, Brown & Williamson and Lorillard, filed an anti-competition suit against PM's program, but it was dismissed last May. The judge ruled that Retail Leaders was not anti-competitive and did not restrain competition because retailers did not have to participate to receive the same wholesale pricing on PM products. If they don't like the restrictions, they don't have to participate.Retail Rights' Alfano admits that anti-trust laws are a laborious "blunt instrument" that can't address the voluntary-yet-necessary nature of the program. And he stresses that his group does not oppose buydown agreements. The organization only opposes linking the buydowns to specific limits and placement on P-O-P materials. "Retailers want to get control of their stores back, to control their environment and run their own operations," he says.To achieve this, Retail Rights is working at the state level to educate legislators and help them create laws to limit the restrictions buydown agreements can place on a retailer. "The legislation would prohibit a tobacco manufacturer from imposing terms on retailers that essentially force them to relinquish control over one of the most crucial aspects of their businesses," Alfano says. In the proposed legislation, manufacturers would not be allowed to link retail discounting to their retail merchandising contract programs. These efforts have just gotten underway for the 2003 legislative session, and bills have been introduced in South Dakota, Wyoming, Indiana and Arizona.The problem is exacerbated by retailers who aren't aware of what their rights are, says S&M's Gee. "The contracts are ambiguous, so the sales reps can translate them however they want to, and some portions say it's up to the rep's discretion in any event,'" he says. "We constantly have to come back to retailers to put up new signs and educate the retailer that the other reps are overstepping their bounds."Some reps interpret situations differently, he notes, so in some locations the competitive materials and placement are approved by reps, but in other locations they aren't. For instance, some reps view S&M's wire racks as display cases, which have different requirements than if they are viewed as P-O-P materials, Gee points out.Gee says such buydown programs, including those from the other big companies that are not as restrictive but still have requirements, make S&M and other small manufacturers work harder. "We have to remain flexible, continue to educate retailers and keep going back to maintain our displays. We also have to constantly change our materials so we can squeeze into the space that the big companies leave for the rest of us."These problems primarily affect c-stores, Gee notes, where space is at a premium but cigarette sales are high -- and serve as a destination product for many shoppers. "Tobacco outlets are larger, so they can show the products better," he says. "But even they are having problems understanding and dealing with the contracts."Working With MarketersThe agreements provide significant benefits to BP Oil Corp., Plainfield, Ill., which has agreements with all of the major companies, according to John Anderson, U.S. manager of marketing and merchandising. "We like the contracts because we believe it's very important that the manufacturers are partners with us in the merchandising assessment," he says. His stores vary their merchandising look and facings based on market demand shown by past sales history. "The manufacturers understand industry trends on market share, so it's easier to work together to find common ground."He says that the manufacturers do get into specifics of how much P-O-P they can present, going beyond the MSA, "but we ask them for help in putting together a signage program. Our goal is to gain the maximum brand recognition for their products so it's consistent across the category." When contracts from competing brands overlap, he adds, "It can be a problem, but we've negotiated points based on our sales and how we can grow the category. We try to help motivate the cigarette companies to work with us, because if we can increase our sales based on the way we go to market, they benefit, too."In fact, Anderson says that BP's cigarette sales have grown about 5 to 6% in the past year, compared to c-store industry sales of 1 to 2% growth. "We believe our approach to P-O-P helps with that, but also helping it is that we don't allow prices to fluctuate a lot and we keep them fair -- not the lowest or the highest."Pricing is a key ingredient in marketing cigarettes, especially as taxes send pricing through the roof. BP's P-O-P materials must show the pricing and product brand, with special wobblers used to promote specific brands' pack and carton prices. The company changes the wobblers each month, using different background colors, to create a fresh look for returning customers.The company uses a three-pronged merchandising strategy, with materials focused at the street level with light-pole signs, at the pump and inside the store, where its cigarette wall projects its merchandising statement. "We want to draw customers in from the street with pricing and brands, so we reinforce that message at the pump," Anderson says. "Then in the store, we want to reinforce those messages and show our in-stock position.""Cigarette customers are very intelligent, and they know what they're looking for when they come in," Anderson says. "Their brand loyalty is very high -- they won't accept tradeoffs. If you don't have what they want, they'll go somewhere else." And if the customer comes in more than twice to find you out of stock, "he won't come back."Legislative Restrictions GrowManufacturers and retailers have more to worry about than competitive restrictions, however. States and local municipalities continue to add regulations and restrictions on tobacco merchandising. A key concern for retailers is a growing push to eliminate all self-serve tobacco sales and, ultimately, point-of-sale displays, says Thomas Briant, executive director of the National Association of Tobacco Outlets, Eden Prairie, Minn. This is especially burdensome to tobacco outlets, which typically are restricted to adult customers. "To prohibit the open display of tobacco in our stores is like telling liquor stores to put all the beer, wine and spirits in a locked cabinet," he says. "It doesn't make sense."In some states where self-serve is outlawed, including Illinois and Pennsylvania, exemptions were made for tobacco-only stores. Briant hopes to convince other legislatures of that approach. "It will require major remodeling and modification to stores at a significant cost" if tobacco outlets can't provide self-service formats, he stresses.BP already has anticipated that legislative trend and has launched a remodeling effort that will ensure all tobacco products are merchandised behind the counter in its company-owned stores, says Anderson. "We saw one year ago that regulations were beginning to focus on putting tobacco products out of reach, so we started merchandising tobacco and cigar products behind the counter completely," he says. "As we re-image our stores, that program will continue." He estimates the company was approximately halfway through that process in February for company-owned stores, and BP is encouraging its dealer-owned units to remodel as well.The non-self-serve trend is fairly recent, Briant notes, and so far has arisen only in a few states. "But as anti-tobacco advocates refocus their sights, we expect to see more attempts to put all tobacco products behind the counter. We hope legislatures will understand about tobacco outlets and see that restricting them will not affect youth smoking."Restricting self-serve will be a major obstacle for tobacco manufacturers beyond cigarette makers, he points out. "Smokers like to pick up, feel and smell a cigar before purchasing it. Eliminating self-serve really hampers the ability of adults to consider their purchase and select the best option."Restrictions Require Flexibility"Restrictions continue to get tighter, and many places are restricting tobacco products to behind the counter," notes Dan Miller, marketing and promotions manager for Santa Fe Natural Tobacco, Santa Fe, N.M. "That creates a lot of competition for limited space." The MSA limits the maximum amount of space retailers can provide for exterior banners to 14 feet, which makes it more difficult to gain space in store windows.The limited space means any display materials that are produced must be extremely effective, agrees Ellen Matthews, a spokesperson for Camel cigarettes at R.J. Reynolds Tobacco Inc., Winston-Salem, N.C. "Since the signing of the Master Settlement Agreement, point-of-sale materials have become an even more important tool to reach adult smokers," she says. "Cigarettes are the most restricted consumer products in terms of marketing. Therefore, the limited vehicles we have left to us need to work extra hard to communicate our message to adult smokers."At Santa Fe, the restrictions change the shape and dimensions of the pieces created more than the type of pieces, Miller says. For instance, in addition to smaller sizes, the company is creating taller and narrower materials to maximize visibility. Window decals and ceiling danglers have proven successful, both in retail acceptance and visibility. One effective piece has been an "origami-folded" mobile, which unfolds neatly when the retailer takes it out of the shipper.Decals have also been successful, Miller notes. "They're unobtrusive pieces that fit many places." Santa Fe also just rolled out a program with White Hen Pantry stores that called for a 12-inch by 18-inch door decal. "They had a specific spot for us, with a message that focuses on our products' high quality rather than price promotions." The company's premium-end products help them avoid discounting in general, he notes. "Our customers don't expect it from us."The company also has had success with neon signs in tobacco outlet windows, he says. "Neon works 24 hours a day and projects a strong image for us. And it can be placed pretty easily -- retailers are accepting of it because it provides an elegant look, and it's small enough that it isn't a problem under most legislation."This year, Santa Fe is developing a display that can be mounted to the wall behind the counter, ensuring access only by retailers while maintaining visibility. "C-store retailers are focusing on dollars generated per square inch, so you need to offer a range of options," he says.New Approaches, FormatsCamel's approach this year varies from previous approaches, Matthews notes, because marketers want to create visibility for the new family of Classic, Turkish and Exotic blends. "All of our merchandising pieces this year are designed to convey information about the products and get the word out to adult smokers that we have three lines that are very heavily grounded in flavor." The Exotic blend, positioned as being a rich tobacco to be enjoyed on special occasions, was introduced nationally in January.Creating an educational approach can be a challenge in today's market, Matthews says. "Overall, there is even less time to make an impact due to the competitiveness of the tobacco market. Our merchandising pieces have to be engaging and quick to explain our message."The company is using a variety of pieces for all of its lines to project "very rich depth and a metallic look," she says. "They have a luster to them that is extraordinarily eye-catching. We want to emphasize the quality of the product but also pay tribute to the Camel heritage, which extends back to 1913. It's one of the oldest brands in the market, and we're very conscious of that. It means a lot to us."Gaining consumer's attention also is a challenge for JT International, which was created in 1999 when the Japan Tobacco Group purchased R.J. Reynolds' international operations. Its brands include Mild Seven, Japan's top seller. "There is less and less space in stores to promote products in the United States," says Jennifer Lombardo, marketing manager for the Englewood Cliffs, N.J.-based company. "Being a small company with a small market share -- at least in the U.S. -- we are faced with limited real estate. So we try to make attractive pieces that are eye-catching and that project the quality and integrity of our brands."The company focuses on creating streamlined and sophisticated materials that add equity to its brands, Lombardo says. "We also want to provide one design and one layout so people learn to associate our brands with that style. We want to create synergy among our materials so consumers recognize the style and connect it to us." Those displays include countertop pieces as well as posters. "It can be difficult at times to gain space due to the restraints from the larger companies, but if the pieces are attractive, more retailers are willing to accept them."Keeping up with local regulations can be impossible for a national staff, says Debra Moreira-Caunedo, manager of merchandising strategies for U.S. Smokeless Tobacco, Greenwich, Conn. "We rely on our field personnel to stay on top of everything happening in their markets and to let us know if special needs arise due to changes. Then we work out what we need to do to meet that legislation."In areas that have eliminated self-serve, for instance, the company creates displays for back-bar areas or provides locking door mechanisms for the fronts of their existing counter displays. In some cases, the displays are designed to face the retailer, allowing the back of the display to present P-O-P messages to consumers.The company is focused this year on gaining visibility for its in-line products. To aid that initiative, marketers have created a new shelving system, called Showcase Shelving. The fixture is incorporated into the company's existing retail shelving and requires the same amount of space as the former presentation, but it creates full top-disk facings for the smokeless tobacco cans. "It provides a better configuration that's just as efficient while showing the full disk," she says. The shelf is angled to gravity feed the disks to the front, while its construction features clear acrylic plastic to aid inventorying.That has been aided by a recently completed $32 million category-initiative program designed to help develop each channel of trade, explains Jon Schwartz, communications director. The company also offers a retailer publication that for five years has discussed category trends and educated retailers about each brand's performance. "Owning eight of the top 10 SKUs in the smokeless-tobacco market as we do makes it easier for us to talk to retailers about the category overall and where it's going," he says."We're always looking at new and different ways to merchandise the products that will get us placements," Schwartz adds.Currently, Santa Fe is considering adding floor decals and mats to its arsenal. The company also makes use of limited-edition packaging, including decorative tins. "They give us more visibility and get us more display space for a promotional period," he says.New MaterialsNew materials are also helping products gain visibility. RJRT is using several enhanced printing technologies and new substrates for Camel this year, says Bob Johnson, promotional materials manager for RJRT. PETG transparencies with a high-gloss finish are providing more impact than the former traditional transparencies. "This material overall enhances our colors and provides a higher-quality look," he says.Another significant benefit provided by the transparencies comes when the backlit fixtures that house the transparencies are not turned on. "The standard styrene transparency substrate we have been using for years looks flat when not backlit," he explains. The lack of illumination is a real-world problem that occurs due to burned-out bulbs and unplugged fixtures. "With this new substrate, the transparencies will be impactful either way."RJRT adds UV coating to all of its boarded P-O-P materials to give the pieces a higher quality look at retail, Johnson notes. They also have begun using Dimensional FX, a new substrate and technology printing process, for a select group of P-O-P materials. It laminates a faux engraved-foil substrate to a high-gloss poly sheet. "This provides higher quality and a more impactful look at retail. It almost looks three-dimensional. All of these support Camel's premium-quality image for consumers."Continuing to find new materials is critical, Matthews says. "Our displays have to be clever. The average consumer is so sophisticated that to hold their attention, merchandising must be very well designed, well thought out and clever. We have to be very aware of new P-O-P products and materials that can help us. We need to continue to gain more flexibility with our pieces and consider anything that can help our displays become lighter or stronger in packaging or printing."Communication Is Critical One of the problems in creating an array of P-O-P materials, notes Santa Fe's Miller, is ensuring retailers are aware of all of the options, especially when local laws eliminate some materials that had been in use. "Our biggest challenge is letting our retailers know what we have available through our distributors," he says. Santa Fe marketers make a point of attending an array of retailer and wholesaler trade shows to promote the company's products and menu of merchandising materials. The company also holds an annual Retailer of the Year contest, in which retailers send in photos of their displays in conjunction with a June "American Spirit" promotion. Last year's competition, the fifth, garnered 300 entries.Staying in close contact with retailers and meeting their needs as dictated by local regulations and individual needs is critical for tobacco marketers, especially in c-stores. A late-January poll by the National Association of Convenience Stores, based in Alexandria, Va., indicated that nearly two-thirds of respondents (65.79%) said that cigarettes were the one aspect of their business most under attack from legislation, well ahead of motor-fuel sales at 13.16%, beer/alcohol sales and store design, which tied for third at 7.89%, and labor at 5.26%. (NACS was unable to provide the total number of respondents, but said the site receives about 15,000 visits per day.)"Tobacco is under attack in three ways: how it is retailed, where it is smoked and how it is taxed," says Jeff Lenard, NACS director of communications. The tax issue is c-stores' key concern now, he notes.That additional expense is significant enough to drive some smoking consumers to the Internet, since they can avoid the prohibitive sales taxes. "Buying over the Internet eliminates other impulse sales and cuts into stores' revenue," he points out. The average c-store sells $355,000 worth of tobacco products per year, a significant source of revenue the stores can't afford to lose. These taxes pass legislatures easily, in part because some studies have shown that consumers (especially young and new ones) will smoke less as the price rises.Virtually everyone agrees that restrictions on tobacco merchandising and sales will become even more strict in the future, not less. That means marketers have to be more creative and work more closely with retailers to gain some of the ever-shrinking retail space. "There is more third-tier product coming in now and there are more restrictions," says JTI's Lombardo. "So we have to keep our displays small and be prepared to adjust as situations change, so we can react quickly to the new environment. And we have to be proactive to create new pieces if we see a trend becoming apparent."

Tobacco Challenges Continue

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