From 1 October, the minimum legal age to purchase tobacco in retail outlets was increased from 16 to 18 - retail outlets are now banned from selling tobacco products and rolling papers to anyone under the age of 18 years, and fines of up to £2,500 and a prison sentence can be applied to retailers and employees.

Despite the significance of the change, 1 October came and went with little fanfare centrally. "There was extensive communication from tobacco manufacturers that went into the trade," says Jeremy Blackburn, group communications manager at Gallaher. "However there was a distinct lack of communication from the government to the smoker. Its advertising campaign kicked in about a week before the change in age, which wasn't enough. Our early fears were abuse of staff, but we are waiting to see feedback in this area."

One thing is for sure: it was another potential hammer blow for an industry that's seen its advertising and merchandising potential dramatically reduced in recent years - and it now finds the government has upped the ante again, setting out the timelines regarding the appearance of pictorial health warnings on UK tobacco products.

These images will initially only feature on the back of the packs in place of the existing text health warnings. The first significant date for retailers is 30 September 2009. This is the last day cigarettes can be sold with the current warnings on packs. From 1 October 2009, only packs with pictorial health warnings on the reverse can be sold. Retailers can continue to sell roll your own (RYO) tobacco, pipe tobacco and cigars with text warnings until 30 September 2010. Despite pledging to support retailers through the myriad legislative requirements this move involves, Imperial Tobacco does not think pictorial health warnings are necessary. "They provide no additional information and are designed solely to vilify, stigmatise and shock adult smokers who choose to smoke," says Iain Watkins, Imperial Tobacco's UK trade communications manager. "We disagree with the view held by some public health authorities that pictorial health warnings more effectively communicate the risks of smoking than written warnings."

And, he adds, there is no conclusive evidence to support this claim or the claim that the warnings have had any effect on consumption in the countries in which they have been introduced - Australia, Canada, Brazil, Jordan, Singapore, Thailand, Uruguay and Venezuela.

Despite increasing regulatory pressure from all corners, the UK tobacco market continues to demonstrate remarkable resilience.

Adult smokers in this country currently spend over £13bn a year on their preferred brands, making tobacco a vitally important element of the UK economy - particularly given that around 80% of that figure goes directly to the Treasury in taxation. The government continues to bite the hand that feeds it.

"We are well-equipped to face the challenges and regulations that are inevitable in a controversial industry," says Watkins, adding that the importance of multiple retailers should not be underestimated. "We remain hugely committed to supporting our trade customers."

During 2007, restrictions on smoking in public places were implemented in Northern Ireland, Wales and England, following the Republic of Ireland in 2004 and Scotland in 2006. The jury is still out on exactly what impact the bans will have, but early analysis suggests trends are in line with the tobacco industry's expectations.

Watkins believes the trend towards increased socialising at home presents a potential opportunity for retailers. "Our key advice is to ensure retailers have adequate stocks of their best-selling brands," he says. "This is essential, particularly if a shop is situated close to a pub with an outdoor smoking area. Retail outlets should highlight home entertainment products such as DVDs, pizzas, large-format snacks, confectionery products and alcohol in order to capitalise on the move to home socialising."

The tobacco industry has worked hard to ensure that any effects of the ban are mitigated. "Pre-ban, we did a lot of communication directed at the licensed trade, which was a message of preparation - encouraging them to create outside smoking areas," says Gallaher's Jeremy Blackburn. "Those who have prepared have seen less of an effect on their business than those who haven't. We will continue to communicate at retail level with brand launches and activity in support of current brands, working closely with retailers as we did before."

The multiple retail channel (including multiple grocers and multiple convenience stores) remains vitally important for the UK tobacco market. Currently, UK adult smokers spend over £5bn a year on cigarettes in multiple retailers, and the other tobacco segments also provide vital annual turnover for mults. Adult smokers spend around £350m on RYO tobacco, nearly £40m on papers, more than £200m on cigars and almost £50m on pipe tobacco products in multiples. "Around 30% of all cigarette sales go through multiple grocers, with the trade benefiting from both impulse and bulk purchase," says Gallaher's Blackburn, adding that a third of cigar sales go via this channel.

Tobacco companies continue to work closely with multiple retailers to ensure their strong performance. Despite the merchandising restrictions imposed in recent years, multiple grocers continue to perform well. "We continue to work with multiple grocers to create the correct ranges for their stores, at a local level and a national level," says Blackburn. "Extensive work goes on planogramming - we have our own team that designs planograms for our key multiple partners. There's a lot of work that goes on getting the range, layout and stock levels right so that there are no 'out of stocks'."

The multiple grocers' share of total UK cigarette sales has grown over the past 12 months to almost 30%, while multiple convenience stores also grew their share of the market to over 16%.

With UK taxes among the highest in the world, the down-trading dynamic among adult smokers remains a significant trend. The UK cigarette market contains five price sectors - premium, mid, standard, value and economy - and it's the brands from the lower price sectors such as Imperial Tobacco's Lambert & Butler and Richmond brands and Gallaher's Sterling that are consistent performers as adult smokers maintain a preference for quality cigarettes offering value for money.

Gallaher's Sterling was launched nationally into all channels in January 2006 as a "quality brand in the 'cheapest' cigarette sector": according to recent figures, Sterling now leads the sector with a 44% share [Nielsen]. Valued in excess of £261m in retail sales, and with a growth of 52.5% since 2005, the brand is now the number eight cigarette brand in the UK [Nielsen, Jan-March 07).

Added to this, Nielsen's 'Top 100 Grocery Brands' ranks Sterling as the number 25 UK brand, bigger in value than either Pepsi-Cola, Whiskas or Heinz Baked Beanz.

"We launched Sterling into all channels in recognition of the fact that a key driver for a proportion of smokers is price," says Blackburn. "The smoker who chooses to trade down to brands in the cheapest sector, as ongoing tax increases continue to impact on the UK tobacco market, is evident in all trading channels."n

THE TOBACCO HOT SHOTS

The current top ten cigarette brands contain some of the biggest successes across the whole industry, not just tobacco. Imperial Tobacco's Lambert & Butler King Size is the out-and-out winner, with a huge 13.1% market share [YTD August 2007]. This makes it not only the leading tobacco SKU, but the biggest across fmcg, with the next non-tobacco rival being Coca-Cola at £933.5m (value sales in 2006) versus L&B's £1.7bn. While this may not be great news for the health lobby, continuing to make life tough for tobacco, it is pretty reassuring for retailers, given the difficult climate. The rest of the top five is tightly competitive: Mayfair KS (7.1% share), B&H Gold (6.1%), Marlboro Gold KS (5.6%) and Richmond SK (5.5%).

CATEGORY INSIGHT:?Smuggling & counterfeiting

Growing as taxes rise, smuggling is another issue on brands' list of woes, but they aren't taking it lying down

Tobacco manufacturers continue to work closely with governments and customs and excise authorities worldwide to tackle smuggling and counterfeit activities. Significant progress has been made in reducing the volume of 'genuine' smuggled cigarettes: they only represent up to 18% of total consumption in the UK - in 2001, the figure was 24%.

"Our brands comply with all regulatory requirements," says Iain Watkins, Imperial Tobacco's UK trade communications manager. "Counterfeit product does not comply and therefore deprives the adult smoker of the quality and taste they associate with their favourite brands."

While UK tobacco tax remains among the highest in the world, tobacco manufacturers believe there will continue to be an incentive for smugglers to purchase tobacco products in lower-taxed markets and resell them illegally in the country.

HM Revenue & Customs' (HMRC) seizures of genuine smuggled Imperial Tobacco cigarettes have reduced by almost 98% since 2001. Counterfeit is now the major challenge facing both HMRC and the manufacturers.

"We have a dedicated team of specialists operating internationally, in conjunction with customs authorities, to disrupt the supply and sale of illicit product," says Watkins.

Jeremy Blackburn, group communications manager at Gallaher, agrees that counterfeit product coming into the country in bulk is a big issue. "From the trader's point of view, if they're naïve enough to be selling this product, there are heavy fines," he says. "But, from a consumer's perspective, they need to be aware of what the implications are for buying product off the street - where the money goes, what it funds. We need to make consumers aware of what the long-term effects of buying counterfeit actually mean."

The measures seem to be working. In the year to September 2006, Imperial Tobacco's global anti-counterfeiting operations resulted in 105 factory closures, 26 printing operation raids and 80 warehouse raids - leading to total seizures of over 1.1 billion counterfeit Imperial Tobacco cigarettes.

what the suppliers are saying

Initially when the ban to under-18s was announced, our customers were fearful that the physical and verbal abuse they already endure would increase. Although the government did highlight the age change in some magazines etc, it didn't go far enough, and I am fearful retailers could bear the brunt. We were instrumental in the No ID, No Sale campaign however, which highlighted that it was the government's legislation, not the retailers. We also pointed retailers in the direction of the initiative's training forums, which trained staff to say no to under-18s, which is much more difficult than it sounds. Despite the leglislation, they are not going to stop smoking, which reopens the smuggling debate.

Iain Watkins

UK trade communications manager, Imperial Tobacco

CATEGORY INSIGHT:?The RYO market

Sales are growing nicely in the roll-your-own market, driven by price and other factors such as taste

Duty-paid roll-your-own (RYO) tobacco sales increased by nearly 10% over the past year, while value also grew - by over 15% - making it an important sector of the tobacco market. Multiple grocers account for 31% of UK RYO tobacco sales and multiple c-stores account for nearly 17%.

Last year, UK RYO tobacco brands generated £734m annual expenditure among adult smokers, representing an increase of over 15% since June 2006.

Increasing numbers of UK adult cigarette smokers are moving into the RYO tobacco market after moving down through the cigarette price sectors. This is due to the economy and control that RYO tobacco offers. The 'dualist' trend - whereby around four million adult smokers switch regularly between cigarettes and RYO tobaccos - is still prevalent.

Following extensive research into this growing and evolving area of the tobacco market, Imperial Tobacco launched a new RYO tobacco brand, New Gold Leaf, during 2007. The company says it has already demonstrated "exceptional growth" and accounts for nearly 2% of total UK duty-paid RYO volume sales less than six months after its launch.

Meanwhile, adult smokers spent £112m on rolling papers in the 12 months ending June 2007 and more than £100m of this was generated by the Rizla range. Rizla continues to lead the UK rolling papers market and its share has grown by more than 3% in the last 12 months. As the RYO segment has evolved and adult cigarette smokers move into RYO or dual between cigarettes and RYO tobacco, the rolling papers market has also diversified.

Research conducted by Imperial Tobacco highlighted that adult cigarette smokers often found the harshness of RYO tobacco as a barrier into this segment. As a result, the company launched Rizla Smooth in September 2007.

The growth of the RYO segment has also stimulated the rolling machines and filter tips markets. Annual sales of these accessories are now worth more than £37m to UK retailers and, as with rolling papers, offer very high trade margins of over 50%.

what the suppliers are saying

To really get a full picture of the effects of the smoking ban, you need to go through a whole year of trading: this is what we said as a result of following the situation in Ireland and Scotland. But if we look at the lessons learned from the ban in those countries, we saw that, after an initial dip in sales at the time of the ban, sales do return back to normal levels. This is down to a number of factors. People try to give up or stop and then, when they realise they can still smoke in a number of places, they adapt - although they may smoke one or two fewer cigarettes a day because of time constraints or the inconvenience.

Jeremy Blackburn

group communications manager Gallaher

CATEGORY INSIGHT:?UK Cigar market

Miniatures are driving growth in the UK cigar market, which thrives particularly around the Christmas period

The run-up to Christmas is traditionally a busy and successful time for the cigar market, buoyed by the miniature sector, which grew at an impressive rate in the past 12 months. Multiple grocers now account for 34.3% of UK cigar sales, up from 32.4% in 2006.

The UK cigar market is still clearly segmented into three distinct size sectors - miniature, small and large - although it is the miniature cigar brands that are driving much of the growth, accounting for 47% of total cigar sales through UK retail outlets - a share that is forecast to hit 50% by 2009.

The Café Creme range from Imperial Tobacco recorded impressive growth over 2006/2007, with Café Creme and Café Creme Blue now accounting for over half of miniature cigar sales.

Jeremy Blackburn, group communications director at Gallaher, which markets Hamlet, explains the reasons behind the strong performance of the miniature sector. "They're extremely portable, and a more appropriate size given the amount of time people have to smoke. Also, people who move from cigarettes move to smaller cigars because of their similar size."

Meanwhile, the small cigar sector currently accounts for more than 40% of total cigar sales, with Hamlet, Classic, Panama and King Edward Coronets remaining leading brands.

Gallaher is launching Three Crowns, a new miniature cigar, which is set to capitalise on the growing popularity of the small cigar sector. Three Crowns is exclusive to the multiple channel.

The value small cigar sector, which Three Crowns fits into, is in growth, up 130% since 2000. Cigars in this sector have experienced particular popularity in multiples, where they now account for more than 6% of all miniatures sold.

"Small cigars are in growth and this is partially down to changes in smoking habits. It is likely that this growth will increase as the small cigar sector becomes more and more popular."

The large cigar segment is particularly popular at Christmas, when adult smokers traditionally treat themselves by trading up, and many large cigar brands are purchased as Christmas presents. Imperial's Castella Panatellas grew by more than 7% since June 2006.

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