When your biggest brand launch in three decades succeeds only on its price – especially when you have spent an estimated 20m on advertising it – something has gone wrong.
This is the situation facing the UK’s biggest tobacco manufacturer Gallaher, which launched its mid-market cigarette brand Sovereign more than 18 months ago (MW February 2 1996) in an effort to claw back share from Imperial’s buoyant Lambert & Butler brand.
L&B’s share has been growing rapidly at the expense of more glamorous premium brands such as Gallaher’s Benson & Hedges and Silk Cut, as smokers switch to cut-price cigarettes (which now account for nearly one-third of the market) in the face of relentless tax hikes and price rises. The latest on Monday saw the price of a pack of 20 cigarettes rise by 19p.
L&B has now overtaken Silk Cut as the UK’s second biggest brand, after the nation’s top-seller Benson & Hedges.
But despite throwing millions of pounds at Sovereign in promotion and advertising, Gallaher has failed to crack the quality-economy sector of the market. It has had to resort to “buying” share by holding price down and pushing Sovereign perilously close to own-label cigarettes at the bottom end of the market.
Gallaher now finds itself with a brand it is treating as premium product in terms of ad spend (estimated at 2m a month), on which it is making only small own-label margins.
Since launch, it has slipped from price parity with L&B, now retailing at 2.75 – to being between 7p and 10p cheaper (about 2.68 to 2.65 for a pack of 20). This is only a few pence more expensive than its stablemate Mayfair. Both brands will probably hold their prices, following last Monday’s 19p tax rise, until the end of January.
Imperial and Gallaher have been slugging it out for years in the UK market. By the beginning of this year Imperial was breathing down Gallaher’s neck.
And it’s hurting. A competitor points out the importance of being number one to Gallaher’s corporate pride. “Gallaher wears a badge that says: ‘We are number one’. Imperial is a bit more pragmatic. It would rather have profitable share than share for share’s sake,” he says.
The issue of market leadership was particularly sensitive for Gallaher earlier this year when it was preparing to demerge from its US parent company American Brands. It floated on the Stock Exchange in June. Some observers explained its decision to hold down the prices of its low-cost brands as a mechanism for boosting the share price. Only in that way, they suggested, could it maintain market leadership.
The gap between the two narrowed to 0.7 per cent earlier in the year but Gallaher is again pulling away and now holds an estimated 39.5 per cent of the market to Imperial’s 37.9. The increased gap is attributed to the growth in volume share of Sovereign, which has a 2.2 per cent share, and is estimated to be worth 6m to 7m in annual profits. But it is a long way from the brand’s original target of 3.2 volume share.
Sovereign has undoubtedly slowed L&B’s growth, and it has forced Imperial to counter with increased advertising spend. In January it appointed Mustoe Merriman Herring Levy to create a new poster campaign, which features the “Jeeves and Bertie Wooster” style characters Lambert and his Butler.
This jousts with Sovereign’s black and white Jester campaign created by Gallaher roster agency M&C Saatchi, which has been criticised by the trade for failing to give the brand – supposedly a quality-economy product – a sufficiently premium image.
Despite Sovereign’s current profitability, Gallaher is understood to have told the trade it aimed to reach a volume share of 3.2 per cent prior to its launch, and this was at the relatively higher price point.
Some observers say Gallaher may try to build Sovereign’s share and only then will it gradually inch up its price. But in the highly cost sensitive cigarette market, it is difficult to increase prices once a brand becomes established with consumers.
In fact, it may be Imperial which makes the next decisive move. If Gallaher begins to take too much low-margin volume share with the combined weight of Sovereign and Mayfair, Imperial could launch an ultra-low price brand. It is not an option it relishes – some of L&B’s share will be cannibalised and margins will be punishingly low because tax will make up a large proportion of the pack price.
This is the third time Gallaher has tried, and failed, to establish a real competitor to L&B. It pushed Mayfair as a mid-market brand in the early Nineties but was forced to reposition it as a cheap product. It also tried and failed with Berkeley King Size, which now has a tiny share of about 0.2 to 0.3 per cent.
Of course, it may try a fourth time, but it will continue to face an uphill battle in hurting a well-established rival brand if it cannot offer smokers a real reason to switch.
Nobody from Gallaher was available for comment.