Standing out

| January 1, 2018

How newcomer Skruf took the age-old snus market by storm.

By George Gay

As part of Imperial Brands’ latest preliminary results, chief development officer Matthew Phillips provides a roundup of the company’s next-generation products (NGPs) in which he includes oral tobacco. What he is describing in respect of oral products is mainly concerned with snus, so what he has to say gives you pause for thought. After all, snus has been around for a long time, which leads you to question how it can be seen as an NGP.

I don’t know what Phillips had in mind, but in fact it is not hard to make a next-generation argument for snus. For instance, snus is a fairly new category for Imperial. And just as a story is “news” to somebody who has never heard the story before, even though others might have read it months previously, snus would represent a new product to most of the people of the world because they would be unfamiliar with it.

Some might object, of course, that “next-generation” implies a technological advance, and, indeed, in most tobacco/nicotine NGPs there is a strong technical presence. But vegan cheese is an NGP, and it doesn’t come with batteries and chargers. With snus and vegan cheese, the technology is likely to be confined to the design, formulas and processing.

But for me, the strongest argument for including snus as an NGP comprises its lower-risk credentials. For most people with a close interest in such things, an NGP label on a tobacco/nicotine product strongly implies that the product in question occupies part of the positive end of the continuum of risk, and, in my view, snus sits quite close to nicotine-replacement therapies (NRTs) on this continuum. Snus has a long, well-documented history of reducing risk (far more extensive than that of any NRT), both in the sense that it is inherently safer to use than are other tobacco products and possibly some nicotine products and, importantly, in the sense that it has a track record of providing many smokers with an acceptable alternative to combustible cigarettes.

The trouble is, snus can seem not to be going anywhere. The EU bans it in all countries but Sweden, and in the U.S. the Food and Drug Administration, while not banning it, doesn’t allow the lifesaving potential of this product to be promoted properly.

Amazing pace

But this is not the full picture. Recently, Imperial sent to me a graph showing the increase in production at its Skruf subsidiary, which is almost exclusively involved with snus, and that increase is almost vertiginous. In 2003, its first year of production, Skruf manufactured 400,000 cans, while this year (Imperial’s 2017 financial year to the end of September) it manufactured 94 million cans. “Basically, since day one, we have been growing at what can only be described as an amazing pace,” said Jonas Yden, Imperial’s smokeless category director.

Skruf was started in Sweden by two entrepreneurs, Adam Gillberg and Jonas Engwall, who, while looking to disrupt a category, stumbled on snus, which, in 2003, was ripe for the introduction of something new. Ironically perhaps, given their goal, they took the name of the company and their original brand from an old spelling of a small community in Sweden, Skruv, which, by the way, is a clue to one of the acceptable pronunciations of the name, the other of which rhymes with “hoof.”

Gillberg and Engwall enjoyed immediate success with Skruf, which quickly proved to be such a dynamic brand that they were encouraged to launch it in Norway in 2004, in which year production was to hit 1.9 million cans. In 2005, with production headed for 4 million cans, Imperial bought a minority share in Skruf, and the next year Skruf launched a new brand, Knox, in Sweden, which helped take production to 6 million cans. Two years later, in 2008, Imperial acquired 100 percent of the shares of Skruf, and production hit 11.5 million. In 2012, with production heading toward 40 million cans, Skruf launched in Sweden a low-price brand called Smalands, which is named after the region of Sweden where its factory was located.

All this activity has meant that Skruf has taken a 42 percent share of the snus market in Norway, where the company sells only the Skruf brand, and an 18 percent share of the Swedish market, where Skruf is its premium offering, Smalands is its low-price product, and Knox is its medium-price brand, which, with 14 percent of the market, is what Yden describes as the “volume engine.”

Whole package

At this point, the obvious question is what has driven the sales that have made necessary Skruf’s huge increase in production, which Yden puts at about 10–15 percent a year. It was difficult to pinpoint any single factor, he said, because it was really the whole package that had been successful, including how the company had approached the trade, how it had worked with distribution and how it had worked on pricing. But given the challenges that tobacco regulations raised in respect of communicating with consumers, it was obvious that the product had to stand on its own feet. Skruf had been good at creating high-quality products with flavors and formats that consumers wanted—basically using an “outside in” perspective. And right from the beginning, the company had been clear about doing things differently—standing out. It had launched the first white can on the market, and that had created a buzz because it stood out against older brands whose packaging was normally dark in color. Even now, most of the products in Skruf’s portfolio are white, particularly in Norway.

But innovation isn’t everything, everywhere. Yden said that it was necessary to look at the situation from an individual-market perspective. In Sweden, a traditional market, flavors weren’t a big thing, but in Norway consumers liked flavors and new formats. In Norway there was a need for a higher pace of innovation, and Skruf had hit gold in this market with its fresh mint flavor. That had taken Norway by storm and now represents a “pretty big chunk” of the company’s total portfolio and total sales in Norway, according to Yden.

Apart from that, Skruf worked with what it called a living portfolio. It tried to bring new flavors to market each year to test if they worked. If they did, they were retained; if they didn’t, they were delisted and something else was tried to keep things interesting for consumers. This kept the brand alive because things were happening the whole time. But that was in Norway, Yden said. In Sweden the pace was more restrained.

I wondered whether Skruf’s success had been achieved at the expense of other manufacturers or whether the company’s products were attracting new consumers. In fact, it’s a bit of both, plus the fact that the snus category is growing well both in Sweden and Norway. Thirty percent of snusers come from smoking, and these ex-smokers can reasonably be regarded as new customers. And it is also the case that a lot of ex-smokers tend to favor flavored products, which is an area in which Skruf is strong, particularly in Norway.

Skruf’s success has brought it recognition in Sweden, where it has been awarded “super company” status in each of the past six years. These awards are presented by the Swedish version of Bloomberg Businessweek only to companies with specific—high—sales and profit growth.

In-flight construction

But as well as bringing recognition, success has delivered capacity challenges, and, as a result, Skruf has been engaged in what Yden describes as “building the rocket while we’re flying to the moon.” Later he expanded on this and paid tribute to the factory’s workers, who, he said, didn’t necessarily get all the credit they deserved. They had done a tremendous job in increasing their efficiency so that, with the same amount of machinery, they had managed to manufacture a lot more products in a given time.

Despite these efforts, by 2011 Skruf’s production had outgrown its factory, and the company had to build a new one with 7,500 square meters of space. But by 2011, production had reached “only” 28 million cans, whereas it was headed toward 75 million in 2015; so it is not surprising that, for about the past year, Skruf has been adding another 5,000 square meters to its manufacturing facilities, which, like a cigarette factory, comprise a primary department—though one deals also with a pasteurization process—and a secondary department. The shell of the new building was finished in the summer of 2017, and at the end of November machinery was being installed.

Yden told me the company was now “future-proof,” but I got the idea that he was holding some sort of talisman at the time. Skruf had almost doubled the floor area of the factory, he said, and it didn’t take long to install new machinery. So now the company could be a lot more proactive in terms of production planning than it had been before.

That raised the question of whether Skruf might expand its horizons beyond Sweden and Norway. Well, world domination would be nice, said Yden, though he was realistic about trying to sell the snus experience around the world. But even if the snus product has limited travel opportunities, the Skruf brand might have more. In the summer, the company launched a lutschtabak (paste) product in Switzerland under the Skruf name, and that is said to be “doing extremely well given the small size of the category and Switzerland.” The company also launched a new chewing tobacco product under the Skruf name, this one in Denmark, which was said to be “doing OK.”

But Switzerland and Denmark were small markets, even compared with Sweden and Norway, Yden said, and the focus for the foreseeable future would be on core markets, which are now defined as Sweden and Norway. Being an entrepreneurial company, however, Skruf would be keeping its eyes open everywhere there was an opportunity.

While the U.S. is a big market for smokeless tobacco products as a whole, its snus market is comparatively small, according to Yden. The product would have to be adapted before it would achieve in the U.S. the sort of consumer pull that Skruf would want. At the end of the day, he said, the company would love to launch all over the world, and it if it changed the product around just a little it might find at least a few other pockets of interest.

 

Imperial ‘thrilled’ with Nerudia acquisition

Although the huge and rapid success enjoyed by the Imperial Brands-owned Skruf can best be described as “amazing,” in one sense the story is about a strategy that Imperial has long followed—one in which it has been comfortable and successful in expanding its portfolio of product types, in this case snus.

This strategy—this ambition if you like—was on show earlier this year when Imperial, through its vapor technology company Fontem Ventures, acquired Nerudia, a company that seems set to help Fontem and Imperial move in the new directions being encouraged by attempts to switch smokers to less harmful products.

It was early days in the acquisition story when, in November 2017, Tobacco Reporter was in contact with Titus Wouda Kuipers, the CEO of Fontem Ventures, but his enthusiasm for the new venture was clear.

“We’re absolutely thrilled to have made this acquisition,” he said.

“Nerudia is a well-established and respected business, and its founders have an impressive track record of developing innovative e-vapor and nicotine products.

“The [next-generation products] category is evolving incredibly quickly. High levels of innovation and fast-paced product development are very important in order to attract and retain consumers in the face of major competition.

“Product innovation is at the heart of our ambitions at Fontem, and Nerudia’s proven expertise will provide a significant boost to our capabilities in this area.

“As a research and development company, Nerudia’s strengths lie in the front end of the innovation process—that’s to say, coming up with new ideas and scrutinizing them thoroughly, part of which involves a deep understanding of the intellectual property landscape.

“At Fontem, we already have good capabilities in the latter parts of the process … taking a concept to mass manufacturing and through to market launch. So it’s an extremely complementary acquisition, and we look forward to making the most of the exciting opportunities that lie ahead.”—G.G.

 

 

 

 

 

 

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