The major challenges facing tobacco retailing in Australia.

1. I R I I N S I G H T S – T O B A C C O
J U N E , 2 0 1 7
ince 2010, we’ve seen the retail-
display ban and plain-packaging
laws introduced, while smokers have
faced continual price hikes due to
increases in excise.
The tobacco market in Australia
is dominated by three major
companies, the largest being
British American Tobacco Australia
(BATA), which is followed by
Philip Morris Australia (PML) and
Imperial Tobacco Australia (ITA).
In 2014, PML ceased
manufacturing tobacco products
in Australia and BATA closed its
manufacturing operations here
in 2015, leaving no local tobacco
producers.
When assessing how the tobacco
industry is performing commercially,
it’s important to focus on the number
of ‘sticks’ – single units – being sold,
rather than tobacco dollar sales,
which are artificially inflated by the
large amount of excise. Using this
metric, over the past three MATs to
January 2017, the overall tobacco
market has seen significant volume
declines of between five and six per
cent each year across the board
(IRI Market Edge Total Grocery
Cigarettes data MAT to 1/1/17).
Excise hitting hard
The impact of excise increases in
particular has had a notable effect
on stick volumes sold within each
of the key tobacco price segments
in the grocery channel.
As the price of a pack of
cigarettes has continued to soar,
consumers have moved from
brands within the ‘premium’ price
segments to those in the ‘value’
and ‘sub-value’ price segments.
Growth in the sub-value segment
has been especially noticeable
since 2012; over the past three
MATs to January 2017, the segment’s
year-on-year volume growth has
been up to 30 per cent. This is
dramatic when compared with
the other price segments, which
have experienced volume declines
of between 10 and 25 per cent
(IRI Market Edge Total Grocery
Cigarettes data MAT to 1/1/17).
In addition to consumers moving
to cheaper alternatives, there has
also been growth in the comparably
cheaper roll-your-own (RYO) tobacco
segment, with volume growth of 4.2
per cent for the MAT to January 2017
(IRI Market Edge Total Grocery RYO
data MAT to 1/1/17).
A changing retail dynamic
Some interesting trends have
been observed in how tobacco
products are retailed, with the
strong emergence of the tobacconist
channel. This is now the second
biggest tobacco-sales channel in
terms of volume (35 per cent), only
just behind supermarkets (Coles
and Woolworths with 37 per cent).
Independent supermarkets and
convenience stores are notably
smaller channels, with 16 per cent
and 12 per cent shares of overall
volume, respectively (IRI Market
Edge Total Grocery Cigarettes data
MAT to 1/1/17).
Tobacconists have increased in
popularity due to the wide range
of products they stock, their more
personable customer service and
general price competitiveness.
Due to the significant increases
in wholesale cost, margins have
continued to be reduced in the
convenience channel to remain
competitive with other key channels.
In these tough market conditions,
inventory management has become
crucial for retailers seeking to
minimise money tied up in excess
stock. This has led to investment in
automatic inventory management
(ie, Coles’ easy-ordering system)
and more specifically in planogram
selections that focus on higher-
selling items. Also, since the
introduction of the retail-display
ban, price boards and products
themselves are now organised
alphabetically, due to the lack of
product visibility. This has aided
retail staff in locating products
and offering the most efficient
customer service possible. Product
configurations such as twins
and varying-sized cartons/slabs
(eg, three- and four-packs) have
increased in emphasis among
manufacturers as they seek to
maximise value for the consumer.
Product-innovation focus
New-product development has
been a significant focus for all three
manufacturers fighting against these
headwinds. This has come in the
form of new pack sizes (eg, 22s, 23s
and 26s) in an Australian market
historically dominated by 25s.
Faced with continually increasing
costs, consumers are moving
towards the smallest pack sizes (20
sticks is the minimum in Australia)
to reduce the hit on their wallet,
even if larger pack sizes are more
affordable on a per-stick basis.
The other area of development
has been in the blending of tobacco
variants to create satisfying new
taste options. Traditionally, Virginian
tobacco has been used in most
cigarettes. There is now a trend to
blended products, with a mixture
of burley and oriental tobaccos
among others. These blends have
led to more descriptive names on
packaging as manufacturers look to
entice consumers with tastes that
have previously not been available.
Examples of these products are
Longbeach Moments from PML
and Winfield Explorer from BATA.
PML also recently launched the
preservative-free Craftsman in the
RYO category with two varieties that
have distinct taste profiles.
The future of tobacco retailing
in Australia
The tobacco industry will continue
to see volume declines in combustible
cigarettes, with the Australian
Government extending additional 12.5
per cent yearly excises to 2020 on top
of yearly average-weekly-ordinary-
time-earnings excise increases. There
will also be a continued focus on
preventing the sale of illicit tobacco as
the Australian market becomes more
lucrative for illegal importers because
of larger potential profits as consumers
look for more affordable alternatives.
There will be strong growth in
e-cigarettes, which are seen by some
as a healthier alternative and which,
other than the initial investment in the
device, are significantly cheaper in the
long run than traditional cigarettes.
This is despite the fact that the devices
themselves are currently available for
purchase only online or in tobacconists
(refills can also be purchased only in
tobacconists, but, in Australia, are not
allowed to contain nicotine).
Future legislation surrounding these
products is yet to be confirmed by
the Government and therefore
the development of the market is
difficult to predict.
The changing face of tobacco retailing
in Australia
A decade of seemingly endless challenges has driven significant change within Australia’s tobacco industry
for manufacturers, retailers and consumers alike.
Geoff Baun
Senior Account
Manager
Geoff is a Senior
Account Manager at
IRI based in Melbourne
and has significant
experience working in
the tobacco industry.
He has a degree in
marketing as well as
postgraduate honours
in market research
from the University of
Auckland.
About IRI
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