Consumers are looking for more natural products in all categories, from the foods they eat to the beverages they drink. This trend is spilling over into the tobacco category, as natural leaf tobacco grows in demand across both cigarettes and cigars. It’s becoming a bright spot in an overall declining category.
“Customers are looking for better products in the water they drink, the mints they use and more, and this includes tobacco,” said Larry Sherman, executive vice president of Nat Sherman, a New York-based manufacturer of both cigars and cigarettes, including the Nat Sherman Naturals line.
In addition to natural leaf tobacco being free of additives, such products offer a longer and better smoking experience, added Matt Spillane, vice president of national sales at Nat Sherman. The cigarettes are made with only tobacco and water, and provide a more “authentic taste with more tobacco. This results in a greater puff count per stick, creating a longer, more satisfying smoke,” he explained.
It’s these incentives that have consumers willing to pay a premium price. In fact, in the cigarettes category overall, the premium segment has seen the smallest decline, according to Nielsen data for the 52 weeks ended Nov. 22, 2014. While sales of sub-generic/private label and fourth-tier cigarette brands declined more than 3 percent and 4 percent respectively, premium sales only dipped by 0.2 percent.
The news is even better in the natural cigarette segment, which continues to grow, including in premium options. The convenience store industry brought in more than $997 million in sales of natural cigarettes during 2014 and is projected to sell more than $1 billion worth in 2015, according to Spillane. Additionally, sales of natural cigarettes grew more than 19 percent between Oct. 1, 2014 and Jan. 31, 2015, according to Nielsen, with 47 million units sold in convenience stores.
“While the entire [tobacco] industry continues to face annual decline, the natural cigarette category continues to grow — for more than 10 consecutive years,” Spillane noted. “Taxes have lessened the gap in pricing between discount, premium and super premium. The difference in price from a percentage standpoint is lower, making premium much more attractive to the consumer.”
The same is true in the cigars segment, which grew overall by 0.6 percent in sales for the 52 weeks ended Nov. 22, 2014. But when looking at natural leaf, specifically in large convenience stores, the growth is much more. The natural leaf cigar segment grew by more than 10 percent in the 24 weeks ended Feb. 15, 2015 at c-stores, according to Nielsen.
“Natural leaf has been growing for a long time, but the big spike upwards in convenience started in early 2013 for cigars,” reported Joe Teller, director of category management at Swedish Match, based in Richmond, Va. “Traditional natural leaf, which is a single leaf wrapped around the tobacco, has been around forever. But we are seeing growth in the rolled leaf segment, which is a group of natural leaves rolled together.”
THE OPPORTUNITY IN CIGARETTES
When looking at cigarette sales across all channels — convenience, supermarket and drug — convenience stores still rank No. 1 in terms of market share, representing 86.7 percent of all dollar sales for cigarettes in the 52 weeks ended Nov. 22, 2014. The category overall is declining, but natural cigarettes offer an opportunity for c-store operators to make up some of the loss.
Natural cigarettes have been growing for years, but in the past were found predominately in tobacco shops and tobacco outlets. This presents c-stores with an opportunity to take advantage of the growth. Nat Sherman products, once found primarily in tobacco shops, now have distribution in more than 3,000 convenience stores nationally, including Speedway, Chevron, RaceTrac, MAPCO and Circle K locations.
Top-selling brands in the segment include Natural American Spirit from Santa Fe Natural Tobacco Co. (a subsidiary of Reynolds American Inc.) and Nat Sherman, which both saw increases in unit volume between Oct. 1, 2014 and Jan. 31, 2015, according to Nielsen data. Natural American Spirit grew 19 percent, while Nat Sherman jumped 12 percent.
When it comes to merchandising the products, Spillane recommends c-stores take all the natural brands and cluster them together to create awareness for consumers because there are more people looking for these products than they may realize.
“The natural category is the only true growing category within cigarette sales for convenience stores, and there are more consumers in this category than chains who are cultivating it, which means there is opportunity for more growth,” he said.
THE OPPORTUNITY IN CIGARS
In the other tobacco products (OTP) category, smokeless is still the top seller at convenience stores, but cigars ranks No. 2 and is still seeing overall sales and volume growth. The trend toward natural leaf wrappers is boosting the cigar segment even more.
While total cigar stick volume grew by 8.8 percent in the 24 weeks ended Feb. 15, 2015, natural leaf grew 10 percent, according to Nielsen c-store chain data. Within the natural leaf segment are traditional and rolled, with traditional using a single tobacco leaf and rolled using a group of natural leaves together. Rolled leaf grew by 15 percent, and traditional was up 8 percent during the same time period.
“Natural leaf cigars are wrapped in a veiny tobacco leaf so they look more like premium cigars than regular homogenized tobacco leaf cigars,” said Teller. “Natural leaf has been growing over time, and is about one-third of category sales and still growing.”
Swedish Match launched Game Leaf cigars this March and demand is already outstripping supply, Teller said. Also, the current number of convenience stores carrying Game cigars is double what it was two years ago and continues to grow. The company also sells the Garcia y Vega brand in rolled and traditional natural leaf.
Commonwealth-Altadis Inc. (a division of Imperial Tobacco Group plc) is another category leader selling natural leaf wrapped cigars. Its Dutch Masters line underwent a brand refresh in January, including a refresh of its 100-year-old logo.
“Dutch Masters made the biggest changes in the brand’s history to meet today’s adult smokers’ lifestyles and preferences,” said Christine Umstead, senior brand manager at Commonwealth-Altadis, based in Fort Lauderdale, Fla. “We expanded the product range with new variants designed to match category growth and the changing demands of smokers.”
The four new variants to Dutch Masters’ three-pack cigarillos are Sweet Green, Cognac X.O., White Grape and DeLuxe. The products are sold in c-stores including 7-Eleven, Circle K and Wawa.
Driving the natural cigar trend, similar to natural cigarettes, is the awareness of it being a natural product, the premium look and a better smoking experience at a similar price point to alternatives, according to Umstead.