Tobacco Companies Look to Innovation to Boost Sales

Companies have always seen innovation and new product development (NPD) as a way of boosting brand performance, keeping existing customers loyal and attracting new ones. However, marketing restrictions in the tobacco industry have produced a more direct relationship between innovation and sales.

Question: what do you do to improve the marketing mix when much of the marketing mix – media advertising, sponsorship, point of sale advertising, product placement, even display- is banned or restricted? Answer: you place a greater emphasis on what can be done. In the case of tobacco products, that means product innovation and this has become so central to the marketing of tobacco products that we have eventually moved to actual quantification of the contribution which innovation makes to sales.

Thus, in the 2010 BAT Annual Report, for the first time, we find the words ‘Altogether 10% of sales in 2010 came from innovations made in the last 3 years’. In addition, according to reports, the BAT CEO expects country managers to win gains in market share, as well as post better margins in countries where stable market share would have been tolerated in the past and this is being achieved partly ‘by a more rapid roll-out of innovations’.

Capsule filter technology and packaging NPDs

For BAT, innovation is currently focused on capsule filter technology and packaging to offer improved freshness. By the end of 2010, capsules have been rolled out in about half of BAT’s main markets while the ‘Reloc’ resealable pack was used in all the main Dunhill markets. Cigarettes with capsule technology allow smokers to change the taste of cigarettes by popping a small ball of (usually menthol) flavouring in the filter. In Japan, where smokers like flavours, the technology was introduced successfully in the Kent, Kool and Lucky Strike brands. Meanwhile, the ‘Reloc’ pack aims to keep cigarettes fresher after the pack has been opened, and, according to BAT, helped Dunhill to go from a tiny 2% market share in the Gulf States to almost 11% in ‘a remarkably short period of time’.

Capsule technology is not the sole preserve of BAT and is a part of a flavour trend in cigarettes, mainly focused on menthol. In Japan, for example, Marlboro Ice Blast uses ‘innovative menthol capsule technology’ which achieved ‘a more than 1% share after only six months in the market’. Flavour technology for cigarettes is one of the key innovation themes of the last 12 months. Kent Boost, launched in South Korea in February 2011 has two levels of menthol in one cigarette, offering an extra burst of menthol when the smoker presses the capsule in the filter. Kent Boost contains 6mg of tar and is priced at 2,500 Won ($2.20).

The BAT ‘Reloc’ technology is marketed as a means of securing a ‘fresher’ product. This kind of innovation is designed not only to lock in flavour but lock in the smoker to a premium brand by helping to justify the price and discourage downtrading. Similarly, Swedish Match has introduced the new FlavorFresh™ Lid, which claims to lock in freshness for its US Red Man smokeless tobacco brand.

Smokeless and flavour NPDs

The favour themes in cigarettes NPDs extend into the smokeless tobacco category. Pure Mint, a new version of the Swedish Match snus brand Catch, was launched in Sweden in late 2010. According to the company, interest in different varieties of flavoured snus is increasing and mint is one of ‘the most sought-after flavours’. Swedish Match also launched a limited edition snus called Kardus with an East India theme sold in an oak box with a piece of china inside each box as ‘a legacy from the final voyage of the East Indiaman, the Götheborg, in 1745’. Other additions to the Catch collection include Mellow, with a rhubarb flavor, and Glow, with a taste of elder and lime. Catch Collection Ease, has a ginger and orange flavour and will be available in mini-format portion pouches.

Superslims NPDs

As well as packaging to achieve better product quality, style is also a major driver of NPD. Superslims are a global trend in NPDs and have been the key design innovation of the last five years, with particular appeal to the female smoker but also ‘cross-over’ appeal in a number of markets such as South Korea where men have been receptive to the style (see article: ‘Slim/Superslims Big in South Korea and Growing Globally’). In Spring 2010 Karelia Tobacco Co launched Omé Menthol (4 mg) superslims in the United Kingdom in co-operation with Villiger and Altadis France following the launch of its Omé superslims range in France. Since 2009, the Omé range has been launched in 20 international duty-free and domestic markets in Europe, the Middle East and the Far East. The cigarettes are packed in a 20-piece compact ‘purse pack’.

Reduced odour

Some NPDs try to combine style and technology: JT’s D-spec technology claims to reduce unpleasant tobacco smoke odours but the key design feature is the blue ‘D’ icon on the box signifying the use of D-spec technologies. ‘D-spec’ is Japan Tobacco International’s (JTI) proprietary odour-reducing technology which employs carbon in the filter as well as a double layer of paper and added flavours in order to reduce odour emitted from burning cigarettes.

Non-cigarette innovation

Innovation in the other tobacco products (OTP) category can have a slightly different purpose. An interesting and significant trend is that of ‘total tobacco’. For some years Imperial Tobacco has been showing both cigarette volumes and cigarette-equivalent volumes (including RYO and MYO) in its annual report to demonstrate that although cigarette volumes are falling, RYO volumes are rising and this can make a fairly significant difference when the company concerned is world leader in smoking tobacco. Japan Tobacco has in fact taken things a stage further: since 2009, the company’s international volumes (i.e. excluding Japan) have been expressed in billions of sticks but this figure incorporates ‘cigars, pipe tobacco and snus.

New product development to foster the ‘total tobacco’ concept means launching OTP products adjacent to major cigarette brands as in the case of Marlboro snus and Camel snus in the US by Altria and Reynolds in the US and as in the case of Ducados Rubio in Spain. The latter product was launched in June 2011 and according to the company has achieved a 5.8% share of the Spanish fine cut market. Ducados Rubio is the first ‘expanded MYO’ product in the Spanish market.

Marketing opportunity and NPD

Camel snus demonstrates the opportunity offered to smokeless OTP by public smoking bans. Reynolds American has launched an advertising campaign for Camel Snus, taking the opportunity offered by the new anti-smoking laws applying to parks in New York. One image is of a flame holder with the slogan ‘NYC Smokers: Enjoy freedom without the flame’.

Opportunity comes in different guises. Japan Tobacco launched no fewer than 15 new Mild Seven package designs in early 2010 to take advantage of the new pricing environment created by a big tax hike. The redesigns were of 15 of the Mild Seven brand’s soft pack, box and 100’s box products. These new products also offered favour innovation through a ‘flavour thread filter’ containing menthol flavour.

Another kind of NPD does not offer a new kind of tobacco consuming experience but a concept – focusing a campaign on a limited edition –an example was Reynolds’ Camel special edition pack designs celebrating 10 cities eg Haight (San Francisco), Seattle, Brooklyn, New York and Austin, Texas.

In the UK BAT launched a new limited edition pack (LEP) design for its Pall Mall brand from July 1st 2010. The new pack design has a permanent signature pink colour replacing the amber.

Price and innovation

Innovation may also be employed in the cause of offering consumers a cheaper product and preventing them from down-trading. Imperial Tobacco recently launched a make-your-own (MYO) cigarette-making kit in the UK, the major market where cigarette prices are the highest in the world. The appeal is that the new product cuts the price of a pack of 20 JPS Silver cigarettes – an economy cigarette brand – by over 20%. The smoker pays a one-off price of £3.09 for the cigarette maker with tubes available for 99p a pack of 100 and JPS-branded tobacco for £3.60 for 14g sold separately. This means the equivalent of a 20-stick pack of king size cigarettes for £3.80 compared with over £5 for regular JPS Silver.

The strategy of combining flavour innovation and price in NPD was pursued in early 2010 by JTI with the launch of Sterling Menthol King Size 20s. According to the company, the new variant is in response to rising demand for menthol cigarettes at a value-for-money price. Menthol cigarettes account for some 7% share of the UK cigarette market with volumes increasing 11% year-on-year.

Reduced risk and NPD

The other big driver of NPD and innovation is the drive to offer reduced risk products. In proportion to the size of the tobacco products market there have possibly been more smokeless tobacco product launches in the past 12 months than in any other market sector. This is because smokeless products, without the products of combustion, offer a cigarette alternative with the potential to be viewed by smokers as ‘reduced risk’ (also referred to as ‘reduced harm’).

In early 2010 Altria announced that it planned to expand its Marlboro snus smokeless tobacco brand nationwide by the end of March 2010. Testing of the product in selected markets began in 2007. According to the company, a significant number of consumers now switch between tobacco categories and use different kinds of tobacco products. Lorillard discontinued a joint venture with Swedish Match to develop Triumph snus, but is planning to enter the market for moist smokeless tobacco products, with a new, as yet unnamed product. Euromonitor International would speculate a snus version of Newport – Lorillard’s menthol cigarette – which holds second place in the US cigarette market.

Tobacco Sticks and Zerostyle Mint

A recent example of reduced risk includes Altria’s Tobacco Sticks – launched in test markets in Kansas in March 2011. The tobacco stick consists of finely milled tobacco coated on 2.5 inch-long wooden sticks. The target market is smokers or snuff tobacco users looking for a spit-free alternative to traditional oral tobacco such as ‘dip’. Accordingly the tobacco stick uses two brand names – Skoal, UST’s leading moist snuff brand, and Marlboro (also owned by Altria in the US).

Meanwhile, Reynolds has chosen Charlotte and Denver as markets for the second phase of testing for Camel Sticks, Camel Strips and Camel Orbs. Phase One has finished and adjustments to the packaging, marketing and product mix of Reynold’s dissolvable tobacco products have been made.

Japan Tobacco has another angle on reduced risk, having created a new product whose use mimics the cigarette, in that the user inhales from it. The product is essentially a ‘smokeless cigarette’ with a tapered mouthpiece and a removable cap, with replaceable tobacco cartridges. Japan Tobacco announced the roll-out of the smokeless tobacco product Zerostyle Mint across Japan at a limited number of retailers from the beginning of January 2011.

The initial, successful, launch of Zerostyle Mint was in Tokyo in May 2010. Within two weeks it had sold 650,000 packs and amid reports that consumers could not get enough Zerostyle Mint cigarettes in Tokyo, the company doubled its production capacity from 500,000 packs to one million packs a month by setting up a new manufacturing line at its factory in Iwata Shizuoka Prefecture. The national roll-out will be through an estimated 4,000 retailers, excluding those located in Tokyo and Kanagawa where the product is already available.

Race against time

Looking ahead, the pace of new product development is likely to accelerate as the companies race to cement the qualities of their new brands in the consumer mind before price rises cause brand loyalty to waver. Another issue accelerating the pace of NPD is the trend towards flavour bans which, where adopted, remove a whole genre of products, particularly should menthol ever be included in any flavour bans.

The key area of the future for NPDs, however, is certainly reduced risk and perhaps the most intriguing possibilities for the industry are tobacco-less brand extensions to major brands from BAT and PMI offering products that provide the iconic appeal of the cigarette, but excluding the carcinogens, should their investments in new nicotine delivery product technology bear fruit.

See also articles: ‘PMI Buys Nicotine Aerosol Patent – ‘Reduced Harm’ Development Gets Up Steam’ and ‘BAT Creates Nicoventures to Develop Nicotine Products Without Tobacco’. The themes in this article will also be covered in a forthcoming Euromonitor International Global Tobacco Briefing on New Product Innovation.