UK Cigarettes and Tobacco Market – Consumer Segments and Behaviour

The UK cigarettes and tobacco market is somewhat an exception within marketing, the question; Why is it that despite the decline in the smoking population and consumer spending, the cigarette and tobacco market continues to grow year on year…? Price? Consumer trends? Buying behaviour? Throughout this blog I will attempt to provide some insight and analysis into this question. To start, the cigarette and tobacco market is split into four main sections: cigarettes, hand-rolling tobacco (HRT), cigars and pipe tobacco. In 2015, £20.1bn was paid for cigarettes and tobacco products by the UK citizens; this accounted for 1.7% of all consumer expenditure.

Cigarettes are by far the highest contributing aspect of the UK cigarettes and tobacco market, currently contributing 85.2% of all revenue generated, in 2015 cigarettes generated sales that amounted to 17.12bn; an increase of 3.6% from the previous year. Over the last five years the market share has decreased slowly, this is due to a period of economic uncertainty in the UK causing more consumers to opt for the cheaper option being HRT. In Kantar Media’s annual Target Group Index (TGI) they found that 16.8% of men and 16.3% of woman had frequently smoked cigarettes between July 2014 and June 2015, the average smoker consuming around 20 cigarettes a day. A clear trend within cigarettes is its negative correlation with age, it showed that as age increased the penetration of cigarettes decreased; this starts at 20-24 year old having the highest prevalence of smoking at 21% and then decreasing slowly through age classes until 65+ where smoking prevalence rests at 10.2%. The survey also showed that as social class and annual earnings decreased the prevalence of smoking increased, social grade E had the highest prevalence at 26.1% compared to social grade B having a prevalence of 10.3%.

cahrt

Figure 1 – Smoking Prevalence from July 2014 – June 2015              Kantar Media (2015)

Hand-rolling tobacco (HRT) has seen gradual growth since 2011 as more consumer switched to the cheaper product, since 2011 sales of HRT have increased 19.3%. In 2015 sales for HRT increased to £2.73bn, this improved its total market share of the UK cigarettes and tobacco market by 1% between 2011 and 2015. This segment of the UK cigarettes and tobacco market is particularly favored by men being used by 11.3% of them and only being used by 8.7% of women, making a percentage of 9.5% of all people that consumer HRT. It is clear that with this specific segment the lower the social class and family income the more this product is consumed, 19.2% of adults social grade E and 16.8% of families earning less than £9,999 consumed this product. Another interesting trend was the effect of employment on the consumption of HRT, it was found that 14.2% of unemployed adults who are able to work consume HRT; this is compared to the combined 18.7% of adults who are in full or part time work. It was also found that 20.3% of adults renting housing from the council consumed this product compared to the 4.1% of adults who owned their homes outright.

Cigars and pipe tobacco are still fairly niche products within the UK cigarettes and tobacco market, however it has seen growth in recent year despite long term negative growth from both. Cigars currently hold 1.2% of the UK cigarettes and tobacco market and pipe tobacco only 0.1%, in total these sectors have contributed £249m in 2015. Cigars and pipe tobacco show the opposite of cigarettes and HRT, this is because the higher the class or income the higher the consumption; after all they are seen as expensive luxury items. For cigars, social grade A had a prevalence of 2.6% of adults and pipe tobacco held 1.1% of adults; compared against the social grade E which had 1.7% for cigars and social grade D which had 0.4% for pipe tobacco. Despite the stereotype that these segments are consumed by an older generation it is an interesting discovery to find that for both they were consumed the most by individuals aged between 20 and 34.

Age Cigars Pipe Tobacco
15 – 19 2.7 0.8
20 – 24 3.3 1.6
25 – 34 3.2 0.5
35 – 44 1.6 0.4
45 – 54 1.7 0.5
55 – 64 1.8 0.5
65+ 1.2 0.6

Figure 2 – Smoking Prevalence from July 2014 – June 2015                  Kantar Media (2015)

Now that we understand the current situation of the UK cigarette and tobacco market and the segments within it, we can now delve into the emerging consumer trends that will shape this market in the future. The first trend is the continuing reduction in the number of smokers in the UK, this has been a long term goal for the UK and EU governments; and can also be contributed to the raising awareness of the damages that smoking can cause to an individual. According to the TGI, 11.7% of smokers in the UK had attempted to give up within July 2014 and June 2015; this was done mostly by those aged 20-44 and was prominent within families with a lower class or income. Within decline it smoking prevalence throughout the UK large tobacco companies such as Imperial Brands PLC and British American Tobacco PLC, who are the largest brands within the UK cigarette and tobacco market, will need to invest more into new emerging markets and new product innovation.

Nicotine replacement therapy was one of the first kinds of replacements that where publicly available, products such as: patches, gums, aerosols and inhalers. Patches first hit the market as a prescription drug in 1992, however in 1996 these patches became publicly available. Given the age of these products it is no surprise that the majority of users were aged between 25 and 44 as these are the products that have been around for most of their lives and have had the most publicity. In more recent years the UK cigarettes and tobacco market has been saturated with a range of different products to aid the quitting of smoking, these include: E-cigarettes and vaporizers, safe cigarettes, herbal tobacco and other treatments such as acupuncture and hypnosis. For e-cigarettes and vaporizers they found more popularity with hardened smokers and those aged 15-24, for smokers this method replicates the smoking action allowing them to smoke without the harmful chemicals. In regards to those aged 15-24 most vaporizers do not have an age restriction as 0% nicotine liquids are available. Safe cigarettes and herbal tobacco also allow the consumer to replicate the action of smoking but neither contain any nicotine, herbal tobacco has been particularly popular with marijuana smokers as it provides a healthier alternative to real tobacco; This has been heavily implemented in Amsterdam as it is still illegal to smoke tobacco indoors but is not illegal to smoke herbal tobacco indoors. Acupuncture was most popular with those aged 35-44 and hypnosis was most popular with those aged 20-24, these methods are more focused around the perception of the treatment rather than actual scientific evidence; which has led to them both being very niche services.

Now we are going to move onto why consumers act the way they do within the UK cigarette and tobacco market; my personal opinion is based around the manipulation of addiction. Nowadays businesses within the UK cigarette and tobacco market understand that what they are producing is an addictive substance and so can increase the price of their products dramatically, essentially taking advantage of their consumers as they know they will continue to purchase the products regardless of price. This can be showed by the increase in price for each segments of this market, the most significant of which is cigarettes. In 2010 the average price of twenty cigarettes was £6.13, a mere four years later the price had reached £8.23; this equated to a rise in price of just over 25% in that time. During the same time however the amount of cigarette smokers in the UK had been decreases slowly, in 2010 21% of people smoked cigarettes; four years later only 18.3% of people smoked.

line

The information above also reflects the financial documents of most tobacco companies, for this example I will use Imperial Brands PLC. In 2011 they produced a turnover of 29.2bn of which the pre-tax profit was 2.2bn, a year later revenue dropped by 2.2% and profit dropped by 49.8%. If we fast forward to 2014 however despite further decline in revenue totaling -11.4%, the profit of the company had taken a different turn having an increase of profit from 2012 totaling 38.4%.

This clearly shows that despite the decrease in the smoking population and revenue that is produced by tobacco companies, the addiction of their product allows them to rapidly increase price of their products and in doing so the profit that they can make.

References

Key Note (2015) Cigarettes and Tobacco: Market Reports 2016. London: Key Note Limited

Kantar Media (2016) Available at: http://www.kantarmedia.com/uk

Times, L.A. (2008) UCLA pharmacologist invented nicotine patch. Available at: http://articles.latimes.com/2008/may/14/local/me-jarvik14 (Accessed: 4 May 2016).

TMA (2014) UK Cigarette Prices. Available at: http://www.the-tma.org.uk/tma-publications-research/facts-figures/uk-cigarette-prices/ (Accessed: 20 May 2016).

 

 

UK Cigarettes and Tobacco Market – An Oligopoly of Addiction

The cigarette and tobacco market is split into four main sections: cigarettes, hand-rolling tobacco (HRT), cigars and pipe tobacco. Currently this market contributes 1.7% of all consumer expenditure which currently is around £1.1 trillion a year and increasing. In 2014 the UK cigarettes and tobacco market was worth £19.18bn: cigarettes took a dominant standing with a worth of £16,427bn, HRT has increased in popularity over recent years and is currently worth £2,527bn, cigars and pipe tobacco on the other hand have continued to decline with a worth of 213bn for cigars and 13bn for pipe tobacco.

Untitled

The UK cigarettes and tobacco market is shrinking in size and has been doing so for some time. Due to external pressures, competitors within this market have had to raise prices and invest in new smoking products in order to remain competitive. The UK cigarettes and tobacco market is heavily effected by political factors, this is due to the high concern that the government has concerning the dangers of smoking. In order to combat smoking the government implemented a tobacco control plan which was designed to reduce all aspects of smoking including: consumption, promotion, affordability and exposure, it was also designed to help smokers to quit. In 2014 smoking cost the NHS around £2bn and so the Chancellor of the Exchequer discussed a tobacco levy, this aimed to increase the taxes on tobacco companies to increase their contribution to the economy in order to recover their damages.

For a long time now retail costs have been rising and tax on tobacco products have increased dramatically. On the 1st of January 2005 a pack of 20 cigarettes would cost on average £4.83 RRP, of this charge £3.77 was tax. As of the 1st of January 2014 the average cost of a pack of 20 cigarettes was £8.23 RRP, £6.26 of this charge was tax; this meant that tax typically accounted for 75.9% of the RRP of cigarettes. In the 2013/2014 fiscal period the UK cigarettes and tobacco market contributed approximately £12.3bn into the UK economy as a result of tax. There have also been talks of a minimum excise tax (MET) for lower brands as they have found large success in recent years when people were unable to afford the high priced tobacco brands. The aim of MET is to make cheaper brands less affordable in an attempt to further reduces the amount of people who would be willing to pay for high cigarette prices, currently there are 24 of 27 EU countries that have implemented MET.

One of the largest concerns when it comes to the UK cigarette and tobacco market is underage smoking, according to a national statistics report 22% of children aged 11-15 have tried smoking at least once with 57% say that a friend gave them the cigarette; this report also showed that on average an underage smoker consumes 31.1 cigarettes every week. Smoking also causes a large amount of health issues, it is estimated that 17% of all deaths aged 35 and over in the UK are caused in some way by smoking. To counteract this the government runs services and social events to help those who do smoke to quit, between April 2013 and March 2014 the NHS Stop Smoking Services help 300,539 successfully quit. Alongside this every October an event is held known as “28-day Stoptober” where people attempt not to smoke for that month, this is a smart and affective method as it gives people the motivation to quit and it has been shown that people are 5 times more likely to give up during this month than any other.

no-smoking-sign-k-2685As the awareness about smoking increases the UK cigarette and tobacco market had to respond and did so with two main methods: Reduced risk cigarettes and E-cigarettes. The reduced risk cigarette was designed for smokers who enjoy the taste of tobacco, it is an alternative healthier option to a cigarette which heats tobacco up and produces a tobacco flavoured vapour. The reduce risk cigarette does however still use real tobacco which is heated by a carbon cigarette tip, this carbon tip is designed to produce the vapour without any of the other harmful chemicals which are released when burning tobacco rather than heating it. E-cigarettes were a whole different game however as they do not contain tobacco but instead contain a flavoured liquid, because of this e-cigarettes are not subject to the same regulations as cigarettes or tobacco. This has caused a lot of uncertainty around the potential health effects, there are tests and the product is being monitored as the long term effects are unknown. There is also talk around legislation for flavourings and advertisement of this product, currently the main concern is to ban under 18 year olds from purchasing these products; since it is still a product that requires the action of smoking it is believed that it could encourage younger people to smoke later on in life.

The UK cigarette and tobacco market has many environmental issues attached to it from farming, to smoking, to disposal. According to a WHO study around 200,000 hectares of forest and woodland is destroyed each year because of tobacco farming, combine this with the 2.6 billion kilograms of carbon dioxide and 5.2 billion kilograms of methane that are pumped into the atmosphere every year as a direct cause of smoking and the environmental effects are gigantic for this single market. Many other countries have taken action in order to cut this down however, in the People’s Republic of China they have started reducing emissions produced from the cigarette manufacturing process in an attempt to better the environment. In Costa Rica they have classed cigarette butts as special waste, this means that they must be disposed of in a certain way, this prevents their country from being littered with cigarette butts like many other countries including England.

The UK cigarettes and tobacco market is under strict UK law which is aimed to discourage people from smoking and encourage people to give up. The most significant and impacting law was enforced in 2007, this law banned smoking in enclosed space and was enforced across the whole of the UK. This law shook up the UK public and was the beginning to a nationwide anti-smoking campaign: soon after the UK raised the legal limit to buy tobacco to 18, in 2008 the European Commission enforced printed warnings on all tobacco products, later in 2011 tobacco became illegal to sell out of a vending machine and in 2012 tobacco displays were banned from large stores. These legislations brought a lot of unwanted attention to the UK cigarettes and tobacco market, people started to open their eyes and the realisation of just how harmful smoking can be was brought to light. An industry that was built on sophistication and the hazy perception of being “cool” suddenly had a negative image that people did not want to be associated with.

fda-graphic-warning-labels-i-cause-disease

However despite the best efforts of the government and outside organisations, the lucrative nature of the UK cigarettes and tobacco market is that they sell a very addictive substance which allows them to capture and keep their market. This means that regardless what the increase of price for this product, the demand will fall at a radically decreased rate to the increase in prices. The pressure that is being placed on tobacco companies have allowed the prevalence of counterfeit products, these products are available across the country and are far less expensive the regular cigarettes. The downside to counterfeit cigarettes is that they are far more dangerous to the consumer’s health, The Guardian (2014) stated “Efforts to reduce smoking and improve health are being hampered by the black market trade of millions of illegal cigarettes filled with human excrement, dead flies, rat droppings, mould and asbestos”.

At the end of 2013 the three largest companies were Imperial Tobacco Group PLC, British American Tobacco PLC and Gallaher Ltd. Combined these three businesses had a turnover of £48.326bn; this lead them to a total profit before tax of £7.218bn. Within the UK the cigarette and tobacco market is dominated by this oligopoly, new entrants to the market are mostly companies capitalising off the newer lower risk alternative to smoking.

The cigarette and tobacco market is one that is heavily regulated and holds strong social opinions. Even with a large fall in the consumption of tobacco products, it is a closed market with a heavily demanded set of goods. Be it tobacco, alcohol or anything else, it is in human nature to feed addictions; until an alternative that almost replicates the smoking process perfectly comes across this market will continue to grow and make a profit.

References

GOV.UK (2014) Available at: https://www.gov.uk/

Key Note (2015) Cigarettes and Tobacco: Market Update 2015. London: Key Note Limited

The guardian (2014) New Effort to Stop Fake Cigarettes Filled with Excrement, Mould and Asbestos. Available at: http://www.theguardian.com/society/2014/aug/23/councils-crack-down-fake-cigarettes-excrement-mould-asbestos (Accessed: 25 January 2016).

WHO IRIS (2014) Framework Convention on Tobacco Control – Global Progress Report 2014. Word Health Organisation