FEATURE / CIGARS: Rolling with it

The on-trade market for cigars will be hit hard by the proposed smoking ban, but new off-trade opportunities are softening the blow, says Ben Grant

With the impending smoking ban hanging like The Sword of Damocles, these are not the most comfortable of times for the UK cigar trade. However, while there’s little doubt that the state of the industry will be seriously shaken up when the legislation is implemented next summer, the rewritten rule book and the consequent change in consumption patterns present some clear opportunities for both suppliers and retailers to exploit.

The cigar world is divided into two very distinct groups: premium, hand-rolled, long-filler sticks, favoured by the likes of Messrs Castro and Savile; and smaller, machine-made miniatures, often referred to as cigarillos. In 2004 some 752 million units were sold in the UK, with over 96% of these in the latter. Next summer’s rule change represents both a threat and an opportunity to both categories. But at this stage only one factor remains certain, the market as we know it is about to be turned on its head.

Hunters & Frankau (H&F) has been the sole UK distributor for Habanos, the state-controlled Cuban cigar monopoly, since 1990. With a portfolio that also boasts many of the top brands from the cigar “New World” – principally Nicaragua and Honduras – the company dominates the premium market. Marketing director, Simon Chase, presents a sanguine front when discussing the impending smoking ban, but he is clearly concerned about the prospect. Over 30% of premium cigars are purchased in the on-trade, he says. And people are unlikely to be willing to “step outside” to smoke a 9”-long Gran Corona on a rainy Tuesday in November.

Preliminary research conducted in Scotland indicates that the “rate of sale and the number of [on-trade] outlets stocking product have declined dramatically” in the past sixth months, Chase explains. Rather more encouragingly, however, Hunters & Frankau has registered a 30% uplift in sales from off-licences. In the US (where over 60% of the world’s premium cigars are smoked, suggesting perhaps the most ineffectively-policed embargo on record) long-standing bans on smoking in public places in many States have not made a substantial dent on total sales.

Evidence from Canada, meanwhile, indicates that a ban will increase the level of seasonality in the category, according to Sylvain Laporte, UK sales manager for Henri Wintermans, owner of the Café Crème brand. Immediately after the ban was implemented sales plummeted 8%, but this quickly stabilised at 4% below pre-ban levels. Laporte says, “We registered an increase over the summer and a spike at Christmas, then sales were well down in January and February.” He expects a similar weather-dictated sales pattern to emerge in the UK.

H&F’s Chase is adamant that the impact of the smoking ban on sales will be largely dependent upon decent communication of the rules. “The social conditions and the legislation will create lots of confusion about what people are allowed to do. Many people think it will be illegal to sell cigars in bars and pubs, but this is not true. It is essential that we communicate the rules clearly.” He cites the situation in Ireland, where humidors and cabinets remain in many premises, and sales have shot up since they were recently adorned with stickers declaring “cigars to takeout”.

The way that the product is sold in the aftermath of a ban will either make or break the category. And there is no reason why the trade should anticipate that it will all be doom and gloom. While it seems inevitable that on-trade sales will decline, consequently this represents a wealth of opportunities for the off-trade. Many specialist tobacconists have closed down, says James Barber, the fourth generation proprietor of a store of the same name near Leeds. As a result a substantial proportion of his business is conducted online, a forum that is ideally suited to consumers’ desire to explore products and increase their knowledge.

The decline of the traditional tobacconists means that the onus is on off-licences to present an offer that does justice to a hugely aspirational category. Jeremy Blackburn, trade communications manager for Gallaher, which owns the Hamlet brand, explains that “good merchandising and clearly visible brands” are crucial. He also warns, “Availability of the key selling lines is key. Around 30% of tobacco consumers will leave if their product of choice is not available.” Ensuring that high retailing standards are in place must be a top priority over the coming months.

In a climate where smokers are increasingly made to feel like pariahs, why are consumers still turning to cigars? It appears that while cigarette smokers have gradually become stigmatised as the lepers of the 21st century, the rather more refined nature of cigar smoking means that it remains more socially acceptable. As Edward Sahakian, proprietor of Davidoff of London explains, “Cigarettes are seen as an addiction, but smoking a cigar is all about pleasure”.

The social stigma associated with cigarettes is not nearly as significant with cigars, not least because the rate of consumption is so much lower. Chase points out that, technically speaking, a “light user” of cigars smokes less than one a month, while the cigarette equivalent refers to smokers who don’t finish their pack of 20 by the end of the day.

Cigarette ‘refugees’
This article is no place to delve into the detailed scientific research about health implications. But suffice to say, in the mind of the average smoker, the perception of harmfulness associated with cigars is less than cigarettes, partially because of lower consumption, but also because the smoke is not actually inhaled. This has been the catalyst for large numbers of reformed cigarette smokers indulging in the occasional cigar as a treat (frequently alongside a drink), rather than habitually chuffing through a pack of cigarettes a day. Chase rather charmingly describes many of these new consumers as “cigarette refugees”.

Unsurprisingly, the majority of converts are opting for smaller sticks, explaining the massive increase in market share for miniature products – up from 26% to 43% in eight years. Café Crème is the market leader in the category and Laporte suggests that one of the key reasons for this dominance is the ubiquity of the brand: “It is available in 125 markets, and is present on every tobacco shelf in the UK.” Much like in the cigarette trade, the recent emphasis on health issues has meant that the lower strength reference, Blue, is now out-selling the standard Yellow. The company’s latest line extension similarly taps into the desires of health-aware cigarette refugees; a smaller 5-pack of Café Crème Blue hits the market in November, targeting occasional “treat” smokers.

The other machine-made product that looms large in the UK cigar trade is Hamlet. The tobacco advertising ban has put a halt to the industry’s ability to communicate with consumers, but Hamlet is still riding high on an iconic campaign that remains fresh in our collective memory in spite of the fact that it has not been aired for more than a decade. In an utterly brilliant campaign, the brand managed to simultaneously hijack one of our best-known classical anthems and become the natural sequitur to the phrase “happiness is…”

But these are not the only two smaller products on the market. Recognising the growing number of younger smokers entering the category, J Cortès has devised a brand that does away with the stuffy, traditional aura surrounding the category. The Neos range has bright, funky packaging “to blow a new wind into the cigar sector”, says UK export manager, Bruno Dehullu. And elsewhere, suppliers are modifying not just packaging, but also the product itself, to create a more attractive proposition for new consumers.

Swiss house Villiger has an extensive range of filtered and tipped machine-made products that are popular among new cigar smokers who enjoy the smoke but not the taste of the tobacco leaf in their mouth. This style of product was originally developed for Asian consumers, but has found favour among cigarette converts in the UK. The latest line (currently only available in Asia) is a natural wooden-tipped cigarillo.

The growth of the miniature market and the impending smoking ban indicate tough times for the premium end of the market, but this is not necessarily the case. Barber reports hand-rolled sticks still represent over a third of sales at his store, and he is confident that the business has a bright future. “The world of fine cigars is like wine,” he explains. “It is surrounded by mystery and consumers want to educate themselves. There will always be a strong market for the traditionalists, and there are plenty of newcomers to the category.”

The ‘Savile’ factor
The principle motivation that inspires consumers to start smoking large, relatively expensive cigars is, unsurprisingly, image. Barber proudly points out, “Jimmy Savile is one of my best customers; he started smoking not because of pleasure, but because of image.” While cigarettes are seen as dirty, unhealthy and addictive, cigars still enjoy a Bond-esque perception as classy and aspirational; while cigarettes bring to mind the local bookmaker or bingo hall, premium cigars conjure images of hob-nobbing in the casinos of Monte Carlo.

Fine cigars are also given great exposure by the celebrity fraternity. The stars are as careful hiding their cigarette smoking as they are their stretch marks when the paparazzi are around. But when it comes to cigars musicians, actors, politicians, sportsmen (and, one would assume, reality TV contestants) are happy to be splashed across the gossip rags chomping away on a fat cigar. The impact of celebrity endorsement on sales of various products to younger consumers is well documented.

The premium market is still dominated by Cuban product – over 90% of premium sticks sold in James Barber’s store come from Havana via H&F. It would be impossible to quantify the effect that Castro himself has had in driving the category forward but his smoke of choice, Cohiba, remains one of the most popular brands on the market.

While convenience and ease are among the primary selling points for cigarillos, for the premium segment the exact opposite
is true. The modern consumer is, by nature, a decadent beast. “Aspiration” and “indulgence” are the pre-eminent buzzwords of the 21st century (after “terror”, of course), and they fit the premium cigar world quite perfectly.

And for those who fear that the premium segment is solely the preserve of more mature smokers, Sahakian is adamant in his disagreement. “We see many more younger smokers in the shop; the average age used to be 50s, but now it’s probably 30s. [They] have greater buying power and they appreciate the finer things in life. Many pick up their first cigar because it makes them appear successful.” A genuine appreciation of the product follows soon after.

Premium products will always be a relatively small part of the sector, but it is clear that a sizeable market for high-quality, high-price cigars continues to thrive, and the smoking ban is unlikely to change this. And by courting the cigarette refugees appropriately, the machine-made miniature category could ultimately enjoy the patronage of many more smokers than today. Change is coming, but there’s no reason to believe that the cigar market is about to go up in smoke.

© db October 2006