TOB: Over the next decade, where do you see the relationship going between Republic Tobacco and tobacco outlets?
Donald Levin, chairman of Republic Tobacco: We see and note the growth of tobacco outlets, and they are becoming our most important customers. All of our planning is done with the outlets in mind. As time progresses, our relationship will become deeper and even more important, and we will continue to be active in supporting legislation protecting tobacco outlets.
TOB: What are your most popular products suitable for tobacco outlets? What new products have you launched and what are their distinguishing features?
Republic Tobacco: We have many popular roll-your-own and make-your-own products available at tobacco outlets, including the nation’s No. 1 seller, TOP® Cigarette Tobacco. As RYO/MYO sales continue to grow dramatically due to high prices of factory-made cigarettes, our full line of TOP and Gambler® products are gaining broader and deeper distribution at outlets. Both brands feature a variety of cigarette tobaccos, filter tubes, and injector machines. As the category and consumer demand expand, so do our line extensions. Recent additions include TOP® Menthol Filter Tubes, as well as Gambler Ultra Light and Gambler Menthol Light Cigarette Tobacco. Gambler is the best-selling value bag in the U.S., which is MSA-protected, as are all the tobacco products from Republic Tobacco.
The new and improved TOP-O-MATIC™ Cigarette Making Machine has already achieved an excellent response from outlets and consumers. It is a heavy-duty, stainless steel tabletop model, enabling the user to easily make a perfect filter cigarette in 10 seconds or less. Other features include a limited one-year warranty and a $10 TOP coupon offer.
TOB: You manufacture and sell top brand names such as TOP, DRUM, and JOB. Which product lines do you plan to expand in the next six months?
Republic Tobacco: In 2007, some of our brands will have line extensions. New JOB Crystal Cigarette Paper debuted in February with both 1-1/4 and King Size Slim Cut sizes. The premium paper is transparent. JOB Crystal Papers are pre-scored and slow-burning, allowing for complete tobacco enjoyment. Crystal is the only transparent paper on the market that is interleaved, and has 32 leaves per booklet. The packaging features metallic foil stamping, rendering a very high-end and chic look designed to get noticed and stand apart.
TOB: Will you be offering any promotions geared toward outlet retailers?
Republic Tobacco: In late 2006, Republic Tobacco rolled out a huge vertically-integrated TOP MYO Demo Program for tobacco outlet chains. Program components included everything from TOP make-your-own demonstration kits featuring a DVD with a free TV/DVD player unit for in-store usage, to P.O.P., floor racks, a rebate offer, instant prizes, and a merchandising contest with cash and cruise prizes. The number of participating outlets has been quite impressive, surpassing our expectations.
Republic Tobacco plans to continue and enhance its promotional efforts directly to tobacco outlets, both chains and independents. Direct mail, trade advertising, trade shows, and sales coverage will all be employed. As always, Republic Tobacco is a large exhibitor at the annual Tobacco Plus Expo, and will have an array of promotions, displays, and show deals available for retailers and their distributors. We have always provided outlets with support materials such as posters, banners, shelf talkers, danglers, and displays.
TOB: What trends or preferences have you observed in the RYO/MYO category? In tobacco retail as a whole?
Republic Tobacco: MYO/RYO is the fastest growing segment in the entire tobacco category, underscored by a 20 percent category increase in 2006, as compared to 10 percent for cigars and 8 percent for smokeless.
Driven by both consumer economics and awareness, many trends are evident. Consumers demand that outlets carry a complete line of product entries from premium to value and everything in between. Consumers are experimenting with the category and want choices available at all qualities and price points. Outlets must offer a full complement of choices to consumers. Republic is the only source offering European, premium and value tobaccos; premium and mass-market papers; high-end and value tubes, and the full variety of accessories.
As more consumers become familiar with MYO/RYO, there is more education, acceptance, and awareness. The savings and quality control factors have become more obvious to smokers. Hence, there is more shelf space, more merchandising and display activity, and broader selection.
MYO/RYO cigarette tobacco now falls into four niches: premium, value premium, value, and discount (non-MSA product). On the premium level, you will find specialties and European blends such as our DRUM® Halfzware Shag, which is priced slightly higher than the value premiums. The value premiums, such as our TOP® Cigarette Tobacco, have excellent quality, mid-range pricing, and full line accessory support. The value niche is primarily represented by bagged product, with lower pricing and good quality, such as Gambler®, which we also offer. Drum, TOP, and Gambler are each the country’s No. 1 sellers in their respective niches. Importantly, all of our brands are protected by the security of our MSA participation (Master Settlement Agreement.) The fourth niche of discount product is generally offered in low-priced bags by non-MSA participants, known as “NPMs.”
This NPM segment has limited production capacity and retail support. They can afford to keep their pricing lower since they are not contributing; however, the trade is not really protected when selling NPM product. Due to recent litigation requiring more state enforcement of MSA (Master Settlement Agreement) statutes, we expect non-MSA companies to de-list product in some states. Some non-MSA companies have already withdrawn from states with strong enforcement of the MSA statutes.
TOB: Some say RYO has peaked, what is your view of the growth potential of the category at this point?
Republic Tobacco: RYO/MYO has definitely not peaked. The future of the category looks bright, and segments should continue to grow dramatically as more consumers turn to this alternative versus packaged cigarettes, which can cost up to four times more in heavily taxed cigarette markets. The category competition alone has fueled awareness of MYO/RYO benefits: quality, choice, improved products, and technology. Population growth of baby boomers on fixed incomes will also fuel growth, as will continuing tax increases.
TOB: What can outlet merchants do to maximize the potential of these categories? How can retailers get customers to try RYO? How wide a variety do they need to offer? How important is display?
Republic Tobacco: The questions are woven together by the overall concept of improved merchandising, education, and promotion. Republic Tobacco offers demonstration kits for merchants to show both employees and customers how to make their own and save! The kits include everything from videos and TV to educational brochures and store signage. Floor displays help build the RYO/MYO section for the outlet, creating a “department” if you will, making it easier for customers to identify and find the products. The merchant has to consider the right product mix of MYO/RYO products, which would often simulate the demographics of the outlet’s trading area and sales detail of factory-made cigarettes. At the very least, the store should offer RYO cigarette tobacco in regular, light, and menthol, as well as a few varieties of filter tubes and injector machines.
Training employees, educating prospects, increasing awareness of benefits, and ultimately selling the customers can all be accomplished with the above in-store marketing tools.
Our TOP® MYO Demonstration Program was designed to address all facets of outlet marketing, from the headquarters, to the manager, clerks, and customers. The program is active at hundreds of participating outlets through March, 2007.
TOB: There has been a great deal of controversy about regulation of tobacco and tax increases. What is your view of regulation and how it will impact the industry and your business? Do tax hikes spur sales in RYO/MYO?
Republic Tobacco: People are switching to RYO for value and taste. Packaged cigarette manufacturers economize by using less satisfying tobacco that an RYO consumer would not consider purchasing if they saw it. While tax increases sometimes make RYO more desirable from a value point of view, RYO is also growing because the name brands have superior quality.
So long as regulation is even-handed, doesn’t favor Philip Morris, and has reasonable accommodations for small businesses, we don’t think increased regulation will affect the industry.
TOB: What do you see as the biggest challenges ahead for your company and the industry as a whole?
Republic Tobacco:
•Better policing of NPM’s and their effect of downgrading the quality perception of the category.
•The importance to the trade of carrying MSA-backed products.
•Shifting retailers from the focus of manufactured cigarettes to MYO, and gaining more shelf space.
TOB: What else is important for retailers to know about your company?
Republic Tobacco: The major point of difference between Republic Tobacco and other RYO/MYO companies is that our cigarette tobaccos, cigarette papers, and filter tubes are manufactured by our affiliates. This level of production and order control keeps our quality high, our customer needs met, and our responsiveness quick. Our ultimate accountability provides wholesalers and retailers alike with the finest customer service, the highest-quality products, and the security of MSA-backed tobacco products.
Republic Tobacco brands are all market leaders, and the company is the largest distributor of RYO/MYO products in the U.S. Donald R. Levin, chairman, started the company back in 1969 with the exclusive U.S. distribution rights for French-made JOB Cigarette Papers, and from there has created the largest allied line of RYO/MYO products available in the country. •