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June 13, 2012

RYO and the New Age of Total Tobacco

CA2_BlogAnalyst Insight by Don Hedley, Analyst-Tobacco, at Euromonitor International 

The appeal of RYO (roll-your-own) tobacco is as a lower cost, self-rolled alternative to cigarettes. A new global briefing by Euromonitor International report quantifies the price advantage and examines the markets driving the global fine cut industry to see if there is real potential for RYO to expand beyond its niche and thrive as an alternative to cigarettes.

There are two kinds of smoking tobacco – RYO and pipe. RYO is fine cut tobacco used for roll-your-own cigarettes while the coarser cut pipe tobacco is used for traditional pipes and (with various additives) for water pipes (shisha). "RYO Tobacco and The New Age of Total" sets out to analyse the RYO (fine cut tobacco) category of the smoking tobacco market with the focus on its viability as a cheaper alternative to cigarettes, as tobacco companies begin to adopt the 'total tobacco' concept.

'Total tobacco' refers to the combining of cigarettes sales, (quantified by number of sticks sold) with RYO in terms of cigarette equivalents. Quantifying loose RYO tobacco in terms of sticks is an estimation based on the average number of roll-ups derived from a certain weight of loose tobacco. Some RYO manufacturers even state the equivalent number of sticks on the pack. Imperial Tobacco, as fourth-largest international tobacco company in terms of value sales and cigarette volumes sold, is also the global leader in RYO sales. Combining RYO with cigarettes provides a better result in terms of growth because RYO sales are generally growing while cigarettes sales are not.

The market for RYO (fine cut) tobacco was worth some US$17 billion in 2011, a substantial global market, though accounting for only 2.4% of the total tobacco products market by value. Click to tweet! Although value growth in RYO over the period 2006-11 was among the lowest of the tobacco product categories, as the report explains, this is not the real story, and were it not for the success of pipe used as a cheaper RYO product, value growth of fine cut would have been far higher. The report considers the practice of substituting pipe tobacco for fine cut tobacco for RYO, the tax treatment which makes it possible, its impact on the market, and prospects for the future of the practice.

"RYO Tobacco and The New Age of Total Tobacco" also analyses the regional nature of RYO. Western Europe accounts for three quarters of the RYO market by volume and value – an unprecedented regional dominance based on high cigarette prices and a RYO culture in a few markets. Thus, a key question is whether the RYO market has the potential for a wider footprint. For example, the key growth region has been Eastern Europe in recent years while the biggest decline was in North America. However, in both cases this was due to substitute usage of pipe tobacco as RYO.

The report also analyses the big issue for RYO – its price relationship with cigarettes and identifies and quantifies the price advantage in all the main markets. In fact, in only four countries - Canada, New Zealand, Norway and Sweden – do RYO cigarette equivalents not have a major price advantage over cigarettes. For example, in Germany, easily the largest RYO market in value terms, the average equivalent per 20 stick RYO price was 58% cheaper than the price of a cigarette pack in 2011.


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