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KEY NOTE CIGARETTES & TOBACCO : May 2003

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This report covers: cigarettes, tobacco, cigars, hand-rolled, cigarillos, nicotine patches, nicotine gum, hypnosis, acupuncture, pipe tobacco, premium brands, mid-price brands, black market, duty paid, non-UK duty paid, low-price brands, cheroots, voluntary agreements, quota systems, forestalling, duty-paid mark,

Companies/brands covered include: British American Tobacco, BAT, Dunhill, Kent, Rothmans, Pall Mall, Winfield, John Player Gold Leaf, Marlboro, Gallaher Group, Benson & hedges, Silk Cut, Berkeley Superkings, Mayfair, Dorchester, Camel, Imperial Tobacco, Lambert & Butler, Regal, Embassy, Superkings, JPS, Swedish Match UK, Swan, Hunters & Frankau, Manchester Tobacco Company, Zig Zag (GB),

EXECUTIVE SUMMARY

The UK cigarette and tobacco market grew by 22.7 percent between 1997 and 2001, to reach an estimated value of £15.52bn. The total volume of products in the market continued to decline, while price increases, including taxation on tobacco products, contributed to a rising market value. However, this was dampened due to factors such as consumers switching to cheaper brands. Smuggled products and goods legitimately purchased from overseas also reduces the market value. Consequently, smuggling has increased in recent years as a result of the relatively high tax levied on UK tobacco products compared to other European countries.

There are four main sectors within the market,— cigarettes, hand-rolling tobacco, cigars and pipe tobacco. Cigarettes have a high level of popularity among smokers and account for the greatest market share, due to their convenience, strong brand portfolio and product range within the UK market. Hand-rolling tobacco sales have increased in recent years as smokers are looking for a cheaper option to manufactured cigarettes. Cigars and pipe tobacco sales have fallen, particularly among the younger age groups. The UK cigarette and tobacco market is dominated by three main companies: Gallaher Group PLC, Imperial Tobacco Group PLC and British American Tobacco PLC. The three companies accounted for 94 percent of tobacco sales for 2001 in the UK market. All three companies operate internationally and have been pursuing an active policy of overseas expansion.

The cigarette and tobacco market continues to come under pressure from anti-smoking groups. The Government has announced specific targets to reduce the number of smokers within groups, particularly young people and pregnant women. The EU is also following a policy to reduce tar levels in cigarettes and ban advertising, as well as attempting to force companies to change on-pack descriptions and branding. This legislation is being challenged by the major tobacco groups and the outcome will have a significant impact on product development in the market.

Key Note anticipates that the value of the tobacco market will continue to show a year-on-year increase to 2006, despite the Government setting specific targets to cut down on the prevalence of smoking, as well as ongoing duty increases and the need to meet rising manufacturing costs.

TABLE OF CONTENTS

1. Market Definition	2
REPORT COVERAGE	2
MARKET SECTORS	2
Cigarettes	2
Hand-Rolling Tobacco	2
Cigars	3
Cigarillos	3
MARKET TRENDS	3
Prevalence of Smoking	3
Table 1: Prevalence of Smoking in Great Britain by Sex and Age ( percent of adults), 1990, 1998 and 2000	4
Giving up the Habit	4
Table 2: Proportion of All Adults Trying to Give Up Smoking and Method
Used ( percent), 1999 and
2001	5
Smuggling and Cross-Border Trade	5
Table 3: Lost Revenue (Excise Duty and VAT) of All Tobacco Products Through Legitimate
Cross-Border Trading and Tobacco Smuggling
by Value (£m),
1997-2000/2001	6
The Supply of Tobacco	6
Table 4: UK Consumption of Cigarettes and Tobacco by Volume (million and 000kg), 1997-2001	7
MARKET POSITION	7
The UK	7
Table 5: Indices of Total Consumer Expenditure and Spending on
Cigarettes and Tobacco (index 1997=100),
1997-2001	7
Overseas	8
2. Market Size	9
THE TOTAL MARKET	9
Table 6: The UK Cigarettes and Tobacco Market by Value at Current Prices
(£m at rsp), 1997-2001e	9
BY MARKET SECTOR	10
Cigarettes	10
Table 7: The UK Cigarettes Market by Value at Current Prices (£m at rsp and percent),
1997-2001	10
Premium Brands	10
Mid-Priced Brands	11
Low-Priced Brands	11
Hand-Rolling Tobacco	11
Table 8: The UK
Hand-Rolling Tobacco Market by Value at Current Prices (£m at rsp and percent), 1997-2001	12
Cigars	12
Table 9: The UK Market for Cigars by Value at Current Prices (£m at rsp and percent),
1997-2001	12
Pipe Tobacco	13
Table 10: The UK Pipe Tobacco Market by Value at Current Prices (£m at rsp
and percent), 1997-2001	13
Overseas trade	13
Imports	13
Table 11: Imports of Cigarettes and Tobacco by Value (£000), 2000 and
2001	14
Exports	14
Table 12: Exports of Cigarettes and Tobacco by Value (£000), 2000 and
2001	14
3. Industry Background	15
RECENT HISTORY	15
NUMBER OF COMPANIES	15
Employment	16
Distribution	16
Table 13: Retail Distribution of Tobacco Products by Type of Outlet by Volume ( percent), 2000	16
HOW ROBUST IS THE
MARKET?	17
LEGISLATION	17
Quota Systems	17
Duty-Paid Marks	17
Advertising Bans	17
KEY TRADE
ASSOCIATIONS	18
International Tobacco
Growers’ Association	18
The Tobacco Alliance	18
The Tobacco Manufacturers’ Association	18
4. Competitor Analysis	19
THE MARKETPLACE	19
Table 14: Market Shares for Cigarettes and Tobacco in the UK by Company
by Volume ( percent), December 2001	19
MARKET LEADERS	19
British American
Tobacco PLC	19
Gallaher Group PLC	21
Imperial Tobacco
Group PLC	22
Swedish Match UK Ltd	24
OTHER COMPANIES	24
Hunters & Frankau Ltd	24
Zig Zag (GB) PLC	25
OUTSIDE SUPPLIERS	25
Table 15: The Global Unmanufactured Tobacco Market by Country
by Volume (tonnes),
2001	25
ADVERTISING AND
PROMOTION	26
Table 16: Main Media Advertising Expenditure on Cigarettes, Cigars and Tobacco (£000), Years Ending December 2000 and
2001	26
5. Strengths, Weaknesses, Opportunities and Threats	29
STRENGTHS	29
WEAKNESSES	29
OPPORTUNITIES	30
THREATS	30
6. Buying Behaviour	31
CONSUMER PENETRATION	31
Table 17: Penetration of Cigarettes and Tobacco Products ( percent of adults),
1995-2001	31
By Sex	31
Table 18: Penetration of Cigarettes and Tobacco Products by Sex
( percent of adults), 2001	32
By Age	32
Table 19: Penetration of Cigarettes and Tobacco Products by Age
( percent of adults), 2001	33
By Social Grade	33
Table 20: Penetration of Cigarettes and Tobacco Products by Social Grade
( percent of adults), 2001	33
By Region	34
Table 21: Penetration of Cigarettes and Tobacco Products by Region
( percent of adults), 2001	34
7. Current Issues	35
LEGISLATION	35
EU Directive on Tobacco
Control	35
Vending Machines	35
Tobacco Advertising	36
ISP Exemptions	36
Marlboro Rights	36
New Brands	37
8. The Global Market	38
GLOBAL TRENDS	38
Table 22: Global Unmanufactured Tobacco Consumption by Country by Volume (tonnes),
2001	38
Global Marketplace	38
The European Tobacco
Sector	39
Table 23: The EU Tobacco Market by Country by Volume (million and tonnes), 2000	39
DEVELOPING MARKETS	40
Vietnam	40
Malaysia and South Korea	41
India	41
9. Forecasts	42
INTRODUCTION	42
Table 24: Total Household Expenditure and Index (£bn and index 1997=100),
1997-2001	42
FUTURE TRENDS	43
Demographics	43
Table 25: The UK Population by Age Group (000), 1998, 2001 and 2006	43
Market Division	43
Europeanisation and Globalisation	44
Product Development	44
Forecasts 2002 to 2006	4
Table 26: The Forecast UK Cigarettes and Tobacco Market by Value
at Current Prices (£m at rsp), 2002-2006	44
10. Company Profiles	45
British American
Tobacco PLC	46
Gallaher Group PLC	48
Imperial Tobacco
Group PLC	50
Swedish Match UK LTD	52
11. Further Sources	54
Associations	54
Publications	55
Directories	55
General Sources	56
Bonnier Information
Sources	57
Government
Publications	58
Other Sources	58
Understanding TGI Data	67
Number, Profile,
Penetration	67
Social Grade	68
Standard Region	68
Key Note Research	69
The Key Note Range
of Reports	70

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Last updated by Amanda Porteous February 2004