How kiosks are cashing in on tobacco companies
"The ban on cigarette advertising has played into the hands of tobacco companies. In fact, they were even happy about it "- convinces Mykola Balaban, co-founder of one advertising agency in Kyiv.
In the fall of 2012, immediately after the law banning advertising became effective, his team has offered one of the tobacco companies to implement a project that would allow evading the ban partially. It includes lobbying for changes in legislation, arranging manufacturers’ branded places for smoking and positioning it as an initiative for the improvement of a city.
Tobacco company rejected the offer.
"We did not foresee one thing - cigarette manufacturers were quite pleased with that novation, because it saved them a lot of money. Their basic customers are always "caught" in the points of sale, and the new law absolutely did not hinder to do so", - says Mykola.
Company representatives explained that external and media advertising of cigarettes had no significant impact on their profits - added, in the best case, 1-2% sales volume. However, they still had to spend crazy budgets on that - just because the competitors advertised and you cannot lag behind them.
These words are confirmed by Maxim Zakrevskyi (name is changed upon request of the source – Editorial office), staff of the company Japan Tobacco International.
"The ban of advertising did not significantly affect the company's profits. What really hits us is a rise in excise taxes. When they were first raised, sales volume fell by 15%, "- he explained.
That was before the ban on tobacco advertising, and remained so after its introduction.
Thus, according to Maxim, the ban of displaying - that is what the tobacco business is really is afraid of.
"So far our company has no action plan in case of a ban for displays. Perhaps there is one already in high offices, but lower-ranking staff has not been informed yet. It is encouraging that due to situation in the country it is totally unclear when such a law could be passed. If all of a sudden it is going to develop this way soon, I think, [they] will hand over a certain amount [of money] to the right people in Verkhovna Rada (Parliament) and this is how it will be completed"- said Maxim.
He forecasts that a law banning displays could work if serious fines would have been set for its breach. Such as those for selling cigarettes to juveniles - now it is UAH 6800.
"Almost no cigarettes are sold to minors, because owners are afraid of fines or bribes for mercy from them. So I’m sure: if they start imposing fines for displays, it will disappear from points of sale, and tobacco companies would hardly be able to talk out the owners of this decision".
A lot is clarified by developments on Russian market – on June 1, 2014 Russia became the 10th country in the world that banned the display of cigarettes in the windows.
"If the ways to circumvent the law will be found, those, in case of something, will be applied in Ukraine", - said our other interlocutor, Sviatoslav Mykolaichuk, current staff of “Metropolis” (monopolist of wholesales of cigarettes in Ukraine - Editorial) and formerly employed by the British American tobacco, Philip Morris Ukraine and Gallaher (British tobacco company, which in 2006 was acquired by Japan Tobacco International - Editorial).
Ukrainian anti-tobacco organizations do not hide that they are going to lobby for the adoption of a similar law banning displays. [Experts] are already working on its development - this was conveyed to "Telekritika" by Andriy Skipalskyi, Coordinator of the Center for Tobacco Control.
"Telekritika" has found representatives of the largest tobacco companies in Ukraine who have agreed to share on how their work is arranged with points of sale/retail outlets: how much is paid to owners of kiosks for placing equipment in the windows, how they are instructed on evading of advertisement law and on what terms do sales promoters and consultants work.
HOW IS EVERYTHING ARRANGED
Each tobacco company has sales representatives or agents. Their main tasks are to provide point of sale with a sufficient number of cigarettes of own manufacturer and to increase their sales volumes.To solve the second problem there are several tools in the arsenal of sales representatives:
- placement of commercial equipment that will attract attention to certain brands of cigarettes;
- display of cigarettes in the most favorable locations of window: at eye-level of consumers, over the cashier’s desk, to the right of the sales window (in kiosks);
- specific display of cigarettes;
- promoting of cigarettes by salesperson in POS;
- promoting of cigarettes by consultant and promoters.
Every agent assigned to several tens to a hundred of points of sale. Once a quarter, six months or a year - depending on the rules of a particular company - sales representative receives a certain amount of equipment which he has to place at points of sale, and a certain amount of money for it.
Also, the sales representative is required to watch that cigarettes of his company occupy the most favorable places in the windows and quantitatively dominate the same of competitors. Monitoring of displays is conducted weekly, and "trades" with salespersons are being held even to add a few extra packs of manufacturer on the window.
"Block, frame or layout of the target brand of cigarettes (the most popular brand of the company - Editorial) should be near cash register or cash window at eye level of a buyer/consumer. The second priority brand is on the right from it; the third is on the left. Price tags have to block inscription "Smoking kills" - Maxim Zakrevskyi from Japan Tobacco International explains the basic requirements for displays.
Each agent enters in a special program of reporting the description of POS before and after his visit: where and how many packs of cigarettes of his company are there, as well as of the same of his competitors were placed, how many is now, installing of which equipment was agreed, etc.
Later it is correlated with the results of the sales in a particular POS and [they] determine the effectiveness of the work done.
"Earlier agents were independently collecting information about sales in their POS. But it wasn’t possible in every case. With “Metropolis” coming to the market everything became easy - now they are themselves sending detailed reports on each POS to all tobacco companies,"- says Sviatoslav Mykolaichuk.
These reports contain information on the number of cigarettes of each brand that was sold in each retail outlet/POS in Ukraine that partner with "Metropolis." You can track the dynamics of your own sales and the sales of competitors, to see where new POS opened and vice versa.
HOW MUCH DOES IT COST
"One POS earns from a thousand to ten thousands hryvnia a year for placement of the equipment of tobacco companies. Usually, about some dozen POS belong to one owner, so in the total he receives a solid reward. I recently signed an agreement for sixty thousand hryvnnia with the owner of a chain of ten kiosks. In his every POS we set up a branded case and three boxes in each window "- shares Maxim.
He is working in one of the major cities in eastern Ukraine and there are 150 points of sale assigned him, out of those - less than half are getting money for placing the equipment.
In kiosks and shops with small revenues the equipment is placed for free. Their owners are interested in having cases, racks, frames, lights branded for certain brands of cigarettes - it stimulates sales and allows saving on purchase of equipment for retail outlet/POS.
"If POS sells a thousand packs of target brand of cigarettes a month, we are willing to pay eight or nine thousands hryvnia for placing equipment there. There aren’t so many POS like that, so there is a real war for them between the sales agents of various tobacco companies"- says Maxim.
Remuneration for the placement of equipment is paid officially by tobacco companies - the owners sign a contract on "receipt of the range of tobacco products", which provides for payment of a respective fee.
"These sums are a kind of compensation to owners of kiosks, because they earn a little directly for selling of cigarettes. Maximum margin, which they are allowed to set, is seven per cent. This is a miser"- Sviatoslav Mykolaichuk from “Metropolis" justifies the owners of retail outlets.
WHAT KIOSK OWNERS ARE CASHING IN ON
A few years ago the owners of retail outlets were paid pay significantly less often and lower amounts, recalls Sviatoslav.
"I remember one of my last tasks from Gallaher was to place hundred branded cases for cigarettes in POS of five towns in Eastern Ukraine within a quarter. I’ve got a budget of a thousand dollars for this, ten dollars per one point. Nowadays such amounts sound funny. Kiosks in rural areas can receive three thousands [hryvnia] a year, and five [thousands] in a small city"- he said.
He says that the owners of kiosks started behaving impudent right after the ban on tobacco advertising. When [they] realized that the display of and company’s equipment remained virtually the only way to promote cigarettes, which means that the tobacco companies will have to pay
"Now it’s almost unreal to agree with the point of sale about free placement of equipment, if it has more or less decent sales performance. They are trying to take money from everyone"- Maxim Zakrevskyi confirms the words of a competitor.
It is impossible to conclude the "exclusive contract" on placement of equipment of only one company in the POS. Moreover, the fact that you agreed on the placement of a block or case does not necessarily mean that tomorrow it cannot be replaced by equipment of the competitor.
"Today I’ve placed a light frame in the kiosk, paid ten dollars for a month of its presence. When I come tomorrow, there’s competitor’s frame in its place. Again I pay, but this time fifteen dollars, and your [frame] is back in place. Unfortunately, it is normal practice"- says Sviatoslav.
Maxim adds that one isn’t always able to beat down the competitors. Over the past year he has repeatedly faced a situation when rival company with significantly smaller market share was outbidding the most favorable places from his company for 15-20 thousands hryvnia.
"Thus, they paid this big money just for taking our place. Additionally, they’ve paid also for a placement. When [we] first confronted with such aggressive policy, we were shocked. Of course, nobody’s going to beat such amounts. The most enterprising owners are trying to get a similar order and collect smaller amounts from other companies, not just tobacco’s. Note that they also receive money from the manufacturers of chewing gum, sweets, beer, mobile operators"- says the man.
HOW COMPETITORS AND THE LAW ARE CIRCUMVENTED
Struggle for a space on the windows with the money is only one way to beat the competitors. There are also smaller tricks resorted to by agents of tobacco companies.
For example, there’s a kiosk of small size. It has space to put up only one branded case for cigarettes. A company that installs it first wins. However...
"It is possible to buy one or more shelves in the competitor’s case for your own cigarettes. Or install some your block or other small structure from within a kiosk in the cashier’s zone that will cover visibility of competitor’s case from buyers/consumers"- Sviatoslav shares his experience.
As to evading the law on banning tobacco advertising, tobacco companies had no special problems with that.
"Frames and lightings, cartons of cigarettes in a large pack, entire display of boxes of the same brand - it is an advertisement, for the important task of it all is to draw attention of the clients exactly to these cigarettes and entice them to buy those.
After all, the frames itself have no logos of brands, and cigarette packaging took over the whole function of advertising"- says Maxim.
Shortly after the introduction of the law on banning of tobacco advertising the representatives of tobacco companies were given task to advise sellers and owners of kiosks on novation.
In fact, the instruction was reduced to a simple thesis: lawyers and marketers of tobacco companies have found indirect advertising options that are not contrary to the law. So all they offer to place and install is legal.
"It was explained to salespeople as follows: lighting frames is not advertising, but lighting of storefronts. Frames are just have to be lit up at night, but do not blink - otherwise it will be easier to prove that they are still used for advertising. Displaying multiple packs in a row of the same brand is a way to store the inventory, say, you do not have where and how to keep it elsewhere"- Sviatoslav recalls the instructions most often given to salespeople.
WHAT’S CHANGED IN THE PROMOTER’S WORK
"Fundamentally nothing has changed. We stopped handing out gifts – various lighters, caps, cigarettes and began to be called consultants, not promoters" - says Serhiy Grynko from Lutsk, who worked six months as a promoter of British American Tobacco. He had started when there was no legislative ban on the activities of promoters, has been completing after its introduction.
Training precedes the promoter’s work – one must memorize all cigarette brands of manufacturer, their target audience, features, plus – competitors’ brands, which are analogues of the company’s brands.
"We were obliged to approach every customer who pays attention to the cigarette stand. [We] asked what he/she smoked, if the brand named of competitor’s, suggested our analogue. First of all, it was necessary to promote new and little-known brands, and then the well-know ones"- continues Serhiy.
He says that about 15% of buyers/consumers, whom he’d addressed, were convinced to buy cigarettes of British American Tobacco. At least twenty "successful contacts" was the requirement per day (work term meaning "purchases made through promoter" - Editorial). Checks served as a proof of the work done - I had to take those from a client or ask the cashier for a copy.
"Promoters often helped each other - if someone had not enough checks, and the other one, on opposite, exceeded the norm, then without problem extra ones were handed out to colleagues" - he said.
Inspections of work, according to Serhiy, were constant and strict. Controllers were coming from Lutsk office, and from Kyiv. They could simply observe your work form aside, pointing out errors, and could come as mystery shoppers.
If the promoter did not manage or did not systematically perform the norm, then [they] had educative talks with him/her, repeated training and arranged more checks. He/she was paid 25-30 UAH per hour.
"In our city promoters on cigarettes earn almost twice more than for work with other goods" - says Natalia Som who had worked for two years as a Supervisor (Manager) of promoters of the company Philip Morris Ukraine in Lviv region.
Under her supervision there were 15 girls promoters. [They] worked mainly near kiosks, receiving for work up to two hundred UAH per day.
[They were] reporting not with checks, but by sales volumes.
"Before starting work, [we were] writing down the number of packs of our cigarettes in the point of sale, in the end of the day we counted how many were left. Later [we] were summing up in a week or two of work - sometimes sales volumes increased by 10-12%"- shares woman.
She says they had no strict control and regular inspections of the promoters. Work norm is also about twenty successful contacts per day.
"If near some point of sale there were no sales for a few hours, promoter was calling, and I’d send him/her to work in another place" - says Natalia.
Owners of retail outlets didn’t take money from the tobacco companies for work of promoters.
"I worked with kiosks and small shops. And managed to negotiate with them for free. But in the big stores and shopping malls [you] cannot make it for free – there’s hourly pay there"- explains the supervisor, but refuses to disclose the amounts.