Companies flogging anything from ice cream to eye shadow tend to invest more in marketing their premium consumer brands, as they make higher returns.
But when it comes to tobacco, customers are more attracted by value than brand, according to RBC Capital Markets research.
At FTSE 100-listed tobacco giants British American Tobacco and Imperial Tobacco, the cheaper brands are growing quicker than the premium ones, which could be detrimental to the company, warns RBC.
They’ve even produced this chart, which shows that the fancier brands aren’t growing as quickly as the cheaper ones (although the analysts confess that they are non-smokers – which would explain Lucky Strike’s positioning as a mid-market brand surely).
(Source: RBC Capital Markets, from company reports)
“In other sub-sectors of consumer staples we have become used to disproportionate focus on, and generally disproportionate growth from, high end brands: think of Diageo’s Reserve Brands or Nespresso at Nestlé. This should mean that the companies concerned enjoy modest, but progressive, mix benefits as those premium brands increase their participation,” says RBC.
“In tobacco the opposite seems to be happening. Those brands which management is prioritising in terms of growth sell at a lower price than their ‘non-growth’ counterparts (definitively for Imperial Tobacco, possibly for BAT).”
While it’s important to note that volume doesn’t directly equate to profits, it doesn’t look great for their business models if they’re forking out more on marketing their slower growing products.