The match that lighted a UK cigarette war

The UK tobacco sales war between old rivals Silk Cut and Marlboro is about to be re-ignited following last week’s announcement that Philip Morris is transferring the UK distribution rights for its Marlboro and Marlboro Lights brands to Imperial Tobacco (MW August 16).

The five-year sales and distribution agreement starts in September and will end the tobacco company’s existing deal with British American Tobacco (BAT), which took over the distribution rights when it bought Rothmans in 1999.

Philip Morris will retain control over marketing, although it declined to reveal future plans for its advertising, which is handled by TBWA/ London and Carat.

Once Marlboro is added to Imperial’s stable it will have about a 46 per cent share of the UK market (this will give Imperial the majority market share, Gallaher will be second with 41 per cent, and BAT third with six per cent). Observers say this dominance will give the company power to negotiate even more shelf space for Marlboro and Marlboro Lights. And that can only be bad news for Gallaher, Silk Cut’s owner.

A tobacco consultant says: “The real battle is Silk Cut versus Marlboro Lights. If I were Gallaher I would be pretty concerned.

“Its main competitor now has the biggest cigarette brand in the world. That will put pressure on Silk Cut in London and the South-east. I can see Gallaher stepping up marketing in order to hold its market share.”

Jonathan Fell, tobacco analyst with Merrill Lynch, says Imperial will be going all out to push the Marlboro brand. “I don’t think Philip Morris had complaints about Rothmans, but Rothmans didn’t have the clout to get Marlboro as widely distributed as it wanted. Imperial covers more outlets and has more sales reps than Rothmans. Gallaher will have to work hard to protect its position.”

Imperial has 480 sales staff. Imperial UK marketing director Graham Blashill says the company will be able to push Marlboro brands beyond its South-east strong-hold and into the northern territories, which is a key area for Imperial.

He says: “Eventually we intend to extend in-store distribution and display through our ability to leverage space.”

Philip Morris says increasing the distribution of the brand was its main reason for choosing Imperial. A spokesman says: “We have chosen Imperial because we have an existing relationship with the company in Ireland that has been beneficial to us both.

“We believe that Imperial’s extensive and well developed infrastructure in the UK makes it well placed to be the most effective and efficient business partner.”

The beauty of the deal for Imperial is that it has no brand of its own that conflicts with Marlboro Lights. The closest is Lambert & Butler Lights, which is not a premium brand. This lack of conflict will enable Imperial to concentrate on the Marlboro Lights brand in the premium lights segment.

It’s set to be a close race between Imperial and Gallaher. Marlboro and Marlboro Lights’ UK market share by volume has risen from 3.3 per cent in 1995 to 5.6 per cent in 2000, representing just over 3 billion cigarettes. At the same time Silk Cut’s market share has fallen from 10.3 per cent in 1995 to 7.5 per cent in 2000.

Gallaher is keeping quiet for the moment and refuses to comment on its rival’s deal.

As for BAT, the company has four options: buy a rival – many say it has its sights on Gallaher; stop distributing its own products in the UK and contract the job out; develop a rival to Marlboro Lights and Silk Cut, such as its existing Lucky Strike brand; or stay as it is. Observers say BAT will have to do something to ensure its survival – when it loses Marlboro its share of the UK market will be just six per cent.

BAT declined to be interviewed although a spokesman says: “We are likely to make some form of announcement in the future.”

Fell says: “BAT’s operation as it stands doesn’t look that economically viable. But I don’t think it will buy Gallaher because it would have to commit a lot of money to what is essentially a mature market.

“As for Lucky Strike, it is difficult to see it as anything other than a niche brand. And it would be expensive to develop. The most sensible option would be to get a company to distribute BAT’s brands for it, with Imperial the most likely candidate.”

However, a tobacco consultant says: “The rational solution would be for BAT to shut down its UK distribution, although that would be like admitting it screwed up. Developing a brand is very expensive and takes time in the UK because it’s a sophisticated market.”

BAT is between a rock and a hard place in the UK, although to put it into context it is a small market for the company. Europe as a whole represents 26 per cent of BAT’s sales – its biggest markets are in Africa, the Middle East and South Asia. The company recently said it was committed to the UK market, but what form that commitment will take in the future remains to be seen.

While BAT ponders its future in the UK, Gallaher and Imperial will be turning up the heat on the market.