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Quarter 3, 2008

All Is Well For RYO

by Jonathan Bell

The Roll-Your-Own market continues to grow, with the European Union leading the way.

The temperature of the international Roll-Your-Own tobacco product market is not easy to take. National market performances for a specific year can vary wildly, up and down, and over a period of time - a five year sampling period, for example, can also be misleading even as a base for forecasting RYO sales trends. This maverick consumer behavior is due to the reflexive relationship between RYO shelf prices to those of manufactured cigarettes: RYO sales contract or expand depending on the rise or fall in this price differential. Naturally the prices on the two product types evolve differently at different rates in different national markets.

Recent statistics fully support this in Europe. The European Union is especially important, even though it does not include such important European markets as Norway and Ukraine - among other non-EU European nations - by itself the EU represents more than 37% of global, known RYO sales.

The 25 EU States as of 2005 in total were consuming an official volume of 57,888 tons of RYO product. These official figures do not include contraband that is now rising in volume along with prices (taxes) on RYO, or duty free sales, which are significant.

The consumption figures for the EU, sourced by the European Smoking Tobacco Association (ESTA), show the sharply differing sales performance per member state over a period from 2002 to 2005. Nevertheless, they also show during the same period an overall stable EU RYO market after several years of gradual but consistent expansion. RYO, in other words, is OK in Europe and continues to show growth potential there and globally.

RYO consumption in the 25 member EU nations for years 2002–05 (there are now 27 member states, the figures given to not include Romania or Bulgaria) are: 2002, 58.2 thousand tons; 2003, 61.1 thousand tons; 2004, 60.1 thousand tons; 2005, 57.9 thousand tons.

The 15 largest EU member state markets for RYO sales in 2005 are given below in thousand tons volumes. Percentage shown is the difference in volume over the five-year period from year 2002 to year 2005. It is important to view the figures as likely to include pipe tobacco sales as they are part of ESTA. Pipe tobacco sales are marginal, however, compared to RYO sales in these figures.

As noted, price/tax increases for cigarettes at any moment will serve to benefit RYO sales, and vice versa. The figures above, therefore, are sensitive to pricing changes for the products and may actually not be indicative of a long term reflection of the specific national market.

However, they do give general trends for these larger EU member markets. The largest traditional core markets - Benelux, Germany, and Scandinavia (with the exception of Sweden) - are flat or slowly regressive. The growth markets tend to be Mediterranean - France, Spain, Greece, Italy - plus some Eastern European markets, and the UK. UK consumption, it should be noted, does not include the very large volume of RYO product sales to “day-trippers” from the UK by ferry to certain mainland ports.

The most consistent and significant growth in RYO product tonnage sales year to year from 2002 to 2005 are in France, Spain, UK, Greece, and Italy. These can be classed as Europe’s current star performers for RYO.

France, in particular, is a standout as it has the largest tonnage growth. Note that the French smoking tobacco consumption rose by 22.7% over the recent five-year period. All this growth was in RYO products. RYO sales volume in France was 6,535 tons. This marked an unusual slight decline in a robust market, volume being off 0.3%. Sales value, however, for 2007 increased by 2.9%, reaching 989 mn euros.

The leaders on this newly large and profitable market are in order of dominance; Imperial, British American Tobacco, Gryson/Arvic, Altadis, Japan Tobacco Inc, and Philip Morris. Market notes of interest: Gryson has passed Altadis to reach third place as its Fleur du Pays brand proves enduringly successful; JTI with Camel and Philip Morris with Marlboro RYO are new to the market, still relatively small in volume, but showing booming gains. Philip Morris entered the EU RYO market following its recent acquisition of a small Swedish RYO factory.

The gold standard for RYO nevertheless remains in the production by Benelux and German factories, both for domestic and international consumption. Factories in these nations - the “Benelux” comprising the Netherlands, Belgium, and Luxembourg - produce the majority of global RYO product.

In 2006, Dutch factories packaged more than 41.5 thousand tons of RYO, 40% more than they did in 1996. Exports of Dutch-made RYO rose in 2006 to a record 21.7 thousand tons, or more than 50% of factory turnout. For a measure of what this means, the Dutch exports by themselves in 2006 comes to about 40% of what the entire EU consumed in 2005. This does not include the booming growth in Belgian and Luxembourg production and exports.

If RYO business can be said to move like a seesaw, up and down, it can also be said to be one of the tobacco industry’s prevailing growth sectors. Part of its popularity stems too from very significant added value items that associate with the product at point of sale. Consider the rising value of all related RYO industries items such as rolling papers, tubes and filters, blunts, and hand and automatic rolling machines.

Tobacco Products International - Quarter 3, 2008
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