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Market and business environment
Opportunities and challenges in a changing industry
The global market for tobacco is estimated to more than 300 billion USD annually. The segments comprising smokefree products, cigars and pipe tobacco account for about 7 percent of the total market. Growth is expected primarily within smokefree products and cigars.
Considerable consolidation of the market has occurred in recent years. The market is dominated by a number of large multinational players primarily within the segment for cigarettes. Within smokefree products, the number of players is much fewer. In recent years, however, there is a distinct trend of major players increasingly showing an interest in smokefree products, in the form of both proprietarily developed products and the acquisition of operations.
Swedish Match has established a strategic position in niche areas of the tobacco market, smokefree products and cigars, which are the fastest growing segments of the tobacco market. While Swedish Match is a relatively small player in the global tobacco industry, it has strong positions in local markets, primarily in Europe, South Africa and the US.
The short term outlook for the tobacco industry is positive. The strongest volume growth is in smokefree products and pipe tobacco/roll your own. There is continued potential for cigars, in particular small cigars. For cigarettes, consumption is decreasing in the western world, even though a moderate growth is expected globally.
Market
Snuff and Snus
Snuff is the product category that is demonstrating the highest rate of organic growth. The principal markets for snuff and snus are the US and Scandinavia. In North America, the snuff market is growing rapidly and has shown volume growth of more than 6 percent in recent years, while a more stable trend has been noted in the Scandinavian market.
The snus market in Scandinavia is characterized by a long-standing user tradition and use of the product is accepted in all social categories. The Scandinavian market is being driven by increased market segmentation and adaptation of the products to satisfy consumer preferences. In North America, consumption of snuff is much less widespread within various social categories compared to Scandinavia. Growth is driven by accelerating consumer interest in snuff products, primarily in the low-price category, not least among smokers who choose a smokefree alternative.
Cigars
North America and Western Europe are the largest markets for cigars. The US cigar market grew both within the premium and the machine-made segments. In terms of volume, the US market for machine-made cigars grew by 8.9 percent in 2007*, while growth for premium cigars was lower.
The North American consumers show a greater interest in premium cigars. The market is more concentrated than the European market.
In 2007, the total market for cigars stagnated in Europe. The European market is fragmented, characterized by many smaller players and regional, family-owned cigar companies. Major variations are also discernible between these markets in terms of consumption, pricing and tax conditions.
* Source: ACNielsen
Lifestyle patterns and consumer trends – driving forces for growth
Consumer insight is of vital importance to create growth and sustainable profitability of fast-moving consumer products. Consumer preferences for tobacco products are influenced by such factors as lifestyle patterns, health trends and market regulations.
One trend among tobacco consumers in Scandinavia, Swedish Match’s main market, and also in the US, is a continued switch from cigarettes to smokefree products, such as snus. Brand loyalty among consumers is also considerable, which means that strong brands, brand care and consumer-driven product development are key competitive tools in efforts to capitalize on growth opportunities and profitability.
Preferences for products that provide a feeling of luxury, enjoyment as well as social status is a general social trend in many markets. Cigars, primarily premium cigars, fit in well with this lifestyle trend, whereby the special character, packaging and not least brand of the product create a unique experience.
Snus is a modern and socially accepted product in Scandinavia and, with the continually improving products and greater health awareness, snus products are reaching growing numbers of consumer groups. Today, snus is not used exclusively as an everyday product, but also on special occasions.
Shopping via the Internet is increasing for virtually all types of consumer products. This also applies to certain tobacco products. In North America, the Internet is growing as a distribution channel for the marketing and sale of cigars and Swedish Match envisages opportunities to further develop this sales channel.
Regulations
Unlike most other consumer products, tobacco products are subject to stringent regulations, which have become significantly more restrictive in the past few decades. The opinion of Swedish Match is that such regulations should aim to prevent consumption among underaged and that the use of tobacco should be steered away from cigarette smoking to low-risk products, primarily snus.
Comprehensive bans on smoking in public environments are creating scope for smokefree products. For cigars, this is resulting in new product design and packaging requirements.
Recurrent tax increases for tobacco, primarily in Sweden, have hit sales of snus the hardest and means that the price difference in relation to cigarettes has decreased. This is unfortunate from a public health perspective, since extensive scientific data clearly shows that snus has a dramatically lower risk profile than cigarettes.
Within the EU, a ban on marketing and selling products of the Swedish snus type exists since 1992. In February 2008, the European Commission published a scientific report aimed at evaluating smokefree tobacco products which may have the potential to reduce harm (Art. 11, Dir. 2001/37). The conclusions of this report firmly speak in favor of Swedish snus as means for risk assessment and harm reduction. Read more on page 39.