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June 12, 2012

New Tobacco Research - What is it Telling Us?

CA1_BlogAnalyst Insight by Don Hedley, Analyst-Tobacco at Euromonitor International 

Euromonitor International's latest global tobacco market research spanning 2011-2016 shows that growing smoking populations in China and other large-population developing markets, plus the pricing strength of international brands has kept the world tobacco market robust. This is in spite of falling cigarette volumes in many developed markets, itself exacerbated by the effects on consumers of the financial shocks of recent years.

According to Euromonitor International's updated appraisal of the global tobacco market, world tobacco sales were worth some US$740 billion in 2011, about 11% more than in 2010. Click to tweet! The global cigarettes market was the dominant constituent, accounting for some 92% of the tobacco products market by value and driving this growth by means of pricing strength and the increasing proportion of the global market accounted for by the international flagship brands of the leading companies. Thus, overall product mix improvements in the cigarette market were achieved despite the impact on consumer confidence of low and negative economic growth and rising unemployment in many developed markets: overall, uptrading beat downtrading.

Cigarettes – driven by China and smoking populations

The global cigarette market increased its value by double digits despite only growing marginally in volume and with such global growth as was achieved due almost entirely to China which accounted for over 40% of global volume cigarette consumption in 2011 and delivered growth of some 4% which translates to almost 90 billion sticks worth of additional sales – more than all but the 10 largest cigarette markets consumed. Click to tweet! Growth in China was despite a slight fall in smoking prevalence which could not prevent smoking population from rising due to raw population growth, and this same pattern was repeated globally, with population and smoking population growth in large population developing markets matching the effect of falling prevalence and falling smoking populations in most developed countries. Excluding China, world cigarette consumption fell in 2011 by just under 2%.

Pricing strength continues

Pricing strength in cigarettes was the driver of global tobacco market robustness and of the financial strength of the industry and its major companies: the average price of a pack of 20 cigarettes in 2011 was US$2.4, up from US$2.1 in 2010. Click to tweet! The discrepancy in average prices in developed and undeveloped markets remains profound with average price in Asia-Pacific and Middle East and Africa at US$1.6 per pack in 2011 compared with some US$6 per pack in Western Europe and North America. However, significantly average price growth 2010-2011 was greatest in the world's largest region by volume - Asia-Pacific, at +16%, matched by growth in Eastern Europe as the newer EU members continued to increase prices in accordance with EU tobacco control requirements.

PMI's early 2012 results show the way in which pricing has come to dominate global company thinking with the company quoting 'pricing variance' (ie sales attributable to higher prices) in the first quarter of 2012 of US$369 million and positive 'volume mix variance of US$224 million' ie additional sales attributable to a higher proportion of premium/higher price brands in the sales mix. Only a few years ago these are numbers which would not have been highlighted in company reports.

Illicit paints varied picture

Euromonitor International estimates global illicit trade in cigarettes in 2011 at some 9% of global cigarette consumption (illicit plus duty paid consumption). Click to tweet! Actual illicit trade was some 560 billion sticks, a slight fall due the small reduction in China. Click to tweet!  Excluding the China factor, illicit trade continued to rise, albeit by less than 1% due to crackdowns in some major markets. However, with prices continuing to rise and more sophisticated fake products able to be produced by modern technologies, prospects are for illicit to continue to edge upwards in most markets.

International flagship brands growing

The four leading international tobacco companies – Philip Morris International, British American Tobacco, Japan Tobacco and Imperial Tobacco accounted for some 45% of the global market, or around three-quarters of the market outside China. The biggest tobacco business in the world by far is CNTC, the state organisation which controls China's tobacco companies, which supply some 350 million smokers – approximately 40% of the global smoking population. Click to tweet!

The leading global cigarettes brands, excluding Chinese brands, were Marlboro (PMI), Winston (JT), L&M (PMI), Pall Mall (BAT) and Kent (BAT). The leading 20 brands, most of which are global flagship brands owned by the leading international companies, accounted for some 24% by volume of the global cigarette market in 2011, a proportion which has been rising (if the fall in Mild Seven and Altria's Marlboro due to industry decline in the US and the effect of the tsunami in Japan are excluded). Excluding China, the share of the world's top 20 brands in 2011 was just over 40% of volume sales.

Other tobacco products led by RYO

In 2011 other tobacco products (OTP) accounted for just over 8% of the global tobacco products market by value and although all three OTP categories achieved greater volume growth than cigarettes, only smoking tobacco achieved higher value growth 2010-11 than cigarettes. The strong performance of smoking tobacco was due to the popularity of roll-your-own (RYO) as a cheaper alternative to cigarettes, particularly in markets experiencing economic downturn like Spain, UK and France, but also in Germany. Cigars and Cigarillos were also strong performers, particularly in China (the main growth driver of the global market), and as a cheaper alternative to cigarettes in Spain. The moist snuff category of smokeless tobacco in the US and in Sweden continued to drive the smokeless tobacco market.

Future of smaller but higher value smoking

Looking ahead with Euromonitor's forecasts to 2016, cigarette consumption in developed markets will continue to fall. However, one interesting trend may be that declines are beginning to moderate suggesting the possibility of the existence of the core smoker syndrome in some markets. This may or may not prove to be a lasting phenomenon. Overall the future global trend is that the average smoker will consume fewer cigarettes and total smoking prevalence will continue to fall.

However, judging by current trends, the individual smoker may well also be prepared to spend more per cigarette, helped by increasing average disposable income in developing countries and by innovation and product improvements driving the process of premiumisation – the increasing proportion of premium price band cigarettes in the product mix. As one major company expressed it - consumers worldwide are increasingly looking for and expecting real value, meaning that quality and innovation will both play a growing role in delivering market share - although consumers are demanding value they also expect quality and innovation.

That said, the spectre of legislation such as plain packaging will impact the ability of product innovation to shore up value growth. The impact on Australian sales is too early to tell, but the industry expects a decline in duty paid sales and an attendant increase in illicit. Given that more countries (including the EU) have expressed a desire to implement plain packaging, this is one area to watch in the coming year. 

 


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