Uptrading Beats Downtrading as Global Tobacco Market Scrapes Through

Euromonitor International’s latest global tobacco market statistics reveal that growing smoking populations in China and other large population developing markets plus the pricing strength of international brands kept the global tobacco market robust in 2011 in spite of falling cigarette volumes in many developed markets, including some of the industry behemoths such as US, Japan and Russia.

Continued pricing strength is best illustrated by the statistic that between 2006-2011, the global cigarettes market grew in volume by only 4%, yet increased in value by 44% (US$ year-on-year exchange rates, current prices) during the same period. This soaring value growth is due to tax-driven and manufacturer-driven price rises plus the average consumer tending to up-trade rather than down-trade in terms of brand purchased.  In four out of six regions market value growth was up despite contracting volumes.

In fact, only two regions exhibited volume growth in 2011 – Asia-Pacific and Middle East & Africa.  Due to the presence of rising smoking populations and smoking cultures in markets such as China and Indonesia, these two developing regions were the only ones which combined volume and value growth.

Pricing strength in the developed regions is maintained via a process of premiumisation – essentially a process of increasing the proportion of premium brands in the product mix by adding value to these offerings through innovation – and thus enabling higher value sales from lower volume sales. This process means that the share of the top 8 multinational brands (excluding China) have grown to account for 23.3% of all brands (excluding CNTC brands) by volume, up from 18.7% in 2006.

Euromonitor’s forthcoming global briefing on Innovation in Cigarettes shows how innovation is now present in all price bands (premium, mid-price and economy) and that many of the innovation trends are common to each, including novel pack types, limited designs, lower tar variants, super/ micro slims, carbon filters, pack size variants, cigarette length variants and flavour capsules. Despite the emphasis on ‘premiumisation’ all manufacturers are also striving for “good product mix”, ie presence across all price bands via targeted innovation, particularly in countries where higher price bands are being squeezed.

There has also been a prevailing trend of launching sub-brand extensions of international brands in different price bands through innovation in a variety of areas, such as pack type, pack size, cigarette length, tobacco blend, etc. Innovation itself is also becoming more country-led, based on specific country factors such as price band splits and legislation, as well as becoming more prominent in economy
and mid-price brands as well as in non-cigarette categories such as RYO, which has benefited from cigarette smokers migrating to cheaper products.

As an example of the dominance of pricing power as the most important driver of profitability Philip Morris International has reported ‘pricing variance’ (ie sales attributable to higher prices) in the first quarter of 2012 at US$369 million. Pricing strength, innovation and ‘premiumisation’ are all connected concepts which will continue to keep the industry robust – Euromonitor International forecasts that the global cigarette market will average around 1.5% growth in volume CAGR terms between 2011-16, compared to nearly 30% period growth in value terms in the same period.