Natural-leaf cigars, characterized by their veiny tobacco leaf wrapping, hardly represent a modern innovation. Companies such as Commonwealth-Altadis and Swedish Match have been producing natural brands for literally hundreds of years.
As Christine Umstead, senior brand manager for Fort Lauderdale, Fla.-based Commonwealth-Altadis Inc., says, “Cigars have been wrapped in natural-leaf wrappers since cigars began.”
But what’s new about this subsegment is growth. Nielsen data shows that while total c-store cigar volume was up 2% year over year as of Aug. 2, 2014, natural-leaf growth significantly outpaced the rest of the category. Commonwealth’s Backwoods, for example, spiked 5.4%, while Richmond, Va.-based Swedish Match’s Garcia y Vega soared by 46.8%.
“In our market, this is not a new phenomenon,” says Stephanie Lorance, a tobacco specialist for Framingham, Mass.-based Cumberland Farms. “I think we are hearing about it more as the demand for natural leaf increases.”
The obvious question begs asking: Why, after hundreds of years on the market, are consumers suddenly going natural?
Better marketing, packaging and pricing from natural leaf manufacturers certainly play a role. And Umstead points to something beyond typical marketing 101: the modern OTP consumer.
“Adult smokers are becoming savvier and more educated when it comes to the products they enjoy,” she says. “[They’re] looking for a new experience.”
The bigger question is whether this renewed interest represents a fleeting fad or a turning tide of consumer preference—and, if so, how retailers can best capitalize on this naturally occurring phenomenon.
Why Natural?
When it comes to what separates a natural-leaf cigar from the majority of cigars on the market, Dionne Lucas, a cigar brand manager for Tucker, Ga.-based Scandinavian Tobacco Group Lane Ltd., says the answer is simple: product quality.
“Natural-leaf cigars wrapped in a full premium tobacco leaf,” says Lorance, “as opposed to homogenized tobacco leaf (HTL) cigars, which is a chopped-up, processed tobacco leaf made into what is essentially a paper wrapper.”
Along with selecting a premium appearance for the outside of their cigars, many manufacturers take great care in choosing which types of tobacco leaf wrappings to pair with their cigars. Lucas says Scandinavian went with a more flavor-absorbing wrapper to bring out the flavors of its Cubero cigars, while Umstead says Commonwealth’s new Dutch-branded mint fusion cigarillos are paired with a sweeter Candela wrapper.
The result is a higher-end product people can see and taste.
“It gives the consumer a much, much smoother smoking experience, much closer to a premium cigar,” Lucas says.
Manufacturers are expanding natural’s appeal by shifting their offerings. While large cigars were once the standard for natural leaf, consumer-friendly cigarillo-sized offerings are rolling out. Swedish Match category director Joe Teller says companies have also updated how natural-leaf cigars are sold, offering two-stick resealable foil pouches as opposed to the traditional cardboard five-packs or single sticks.
“It would make sense that there’d be a lot more growth once everyone starts to get in the preferred package type and stick count,” he says.
These smaller pack-sizes also lend themselves to trial.
“I don’t think it’s a new phenomenon; I just think they’re better-quality cigars and they’re finally being offered at a price that people can afford,” says Andrea Myers, president of Kocolene Marketing LLC, Seymour, Ind.
Lucas has observed this firsthand, both at retail and in focus groups, where she says consumers tend to naturally gravitate toward the more premium offering.
“It’s a better-looking cigar; they see that quality right away,” she says. “Consumers are trying them because natural leaf isn’t that much different in price, but the quality is better.”
CONTINUED: Managing SKUs; Measuring Margins
Manageable SKUs
Unfortunately, in the modern OTP landscape, consumer interest isn’t always enough to warrant space for retailers already attempting to cram too many products onto the backbar.
The good news for retailers considering dedicating space to natural leaf is that there are relatively few brands in play.
Like HTL cigars, the majority of natural-leaf cigars sold at c-stores are machine-made. However, unlike HTL, natural cigars require an actual human touch to select, inspect and smooth out the tobacco leaves used for wrapping.
That means very few manufacturers are equipped to make these products. In fact, Teller estimates that only two or three companies produce 99% of natural-leaf brands.
“With HTL, a retailer could be carrying 15 to 20 different brands. On natural leaf, there’s really only a few brands out there,” Teller says.
Even better, these fewer brands represent what retailers describe as a truly differentiated offering. “It’s a more natural product,” says Myers.
Lucas adds, “It’s about choice and options. Since there’s not as many natural-leaf options, the more space given to natural leaf, the bigger it will become.”
Margins, Consumer Value
Perhaps the most promising aspect of the natural-leaf cigar phenomenon (at least for retailers) has to be the higher margins. Most natural-leaf cigarillos are priced in the two- or three-for-99-cents range, boasting margins of 30% to 40%. Numbers like that are appreciated in a category in which manufacturers have been trending toward less profit-friendly prepricing, often to the detriment of retailers’ bottom lines.
“This race to the bottom is getting quite old,” Lucas says. “The consumers win, but the retailer’s losing margins.”
In the post-recession landscape, it’s understandable that consumers are seeking out value. However, at least when it comes to cigars, this doesn’t necessarily mean that they’re looking for the lowest possible price.
“There is a segment of consumers going in to buy cigars that are not as cost-conscious as the value shopper,” Lucas says. “They’re not looking for the lowest of the low. If they can spend 10 to 15 more cents and get a natural product, it’s not a deal breaker.”
When pressed on the biggest potential drawback of the natural-leaf segment, Myers acknowledges that the products tend to be priced higher than the average HTL cigar. But this slightly higher price may not be the deterrent she once feared.
“Lately they have been surpassing HTL (in growth),” says Myers. “We, as retailers, like it because it’s a higher ring.”
The key is that, compared to a large premium cigar, most natural-leaf cigarillos are priced more comparably to HTLs. When marketed correctly, customers see they’re getting more bang for their buck.
“Consumers realize they have potentially better value with natural wrapped cigars through a slower burn and smoother taste,” Umstead says.
For value-driven convenience shoppers, HTL still reigns supreme, with Nielsen reporting roughly 80% of cigars sold at c-stores falling into the homogenized category. But retailers and manufacturers alike are confident growth in natural leaf is not likely to wither anytime soon.
“It boils down to: Small natural leaf is the fastest-growing segment,” says Teller. Swedish Match’s distributor shipment data suggests that the company’s Game natural-leaf cigarillos alone will be up 77% in terms of year-over-year volume. “If a retailer’s not in that business, they’re not competing with the store across the street.”
“As long as the product is a viable product in the market, I can see us adding more natural-leaf products,” agrees Cumberland’s Lorance.
Or, as Lucas puts it, “You can’t look at the growth and the share of natural leaf and not respond to it.”
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.