Lambert & Butler firm Imperial Tobacco has said economy cigarettes now account for around 20% of the total UK market as nicotine junkies turn to cheaper smokes to fuel their habit.
The global tobacco giant, which holds over 45% of the 44.2 billion cigarette a year UK market, said consumer downtrading "appears to have accelerated" following the increase in VAT in January.
Smokers are also rolling their own cigarettes to save money, with the UK fine cut tobacco market growing 18% to 4,850 tonnes on an annualised basis. The firm said its JPS Silver and Windsor Blue brands continued to grow in the six months to March 31, and now account for around 40% of the low cost segment.
Imperial said consumers were already economising before the recession hit, driven by higher taxation, but this trend "picked up some pace" in the economic downturn.
The firm grew UK revenues 7% to £448 million in the half year as volumes grew and prices improved. Operating profits were also up 7% to £295 million. Overall, Imperial said its loose tobacco volumes grew 9.5% as it capitalised on downtrading in the European Union.
Cigarette volumes were 3.7% lower in the first half, at 146.9 billion, as market weakness in the US, Spain and Russia hit performance.
Imperial said when its fine cut tobacco and cigarettes were combined, volumes were down 2.1%, which it said was a "pleasing performance".
The Bristol-based company saw revenues rise 4% to £3.4 billion, while adjusted pre-tax profits were up 15% to £1.2 billion.
In a sign that some smokers are feeling better off, Imperial said its Cuban cigar business continued "to show signs of recovery" especially in Western Europe, Asia and the Middle East.
The firm said its overall cigar business saw volume declines, particularly in the US, but these were offset by pricing and operational efficiencies.
On a reported basis, total revenues were up 8% to £13.4 billion, while the firm swung to a pre-tax profit of £974 million, following last year's losses after the acquisition of Gauloises maker Altadis.
Imperial said it expects cigarette volumes to be stable against the second half of 2009, with a slight decline overall for the financial year as a whole.
The company, which also makes Embassy cigarettes, said its global Davidoff, West and Gauloises Blondes brands continued to show strength.
Chief executive Gareth Davis is set to retire on May 12 and will be replaced by chief operating officer Alison Cooper.
Mr Davies said the firm had achieved "an excellent performance in a challenging environment".
Shares in the firm rose around 2% today. Martin Deboo, of Investec Securities, said the firm's results were "modestly ahead of expectations".
He added the company's outlook expectations were in line with forecasts.
Imperial is fighting new UK rules meaning large retailers will not be able to display tobacco products from October 2011, extending to small retailers in 2013 under the Health Act 2009.
This week the firm said it is seeking a judicial review to challenge the legislation, which it claimed was "misguided" and would fuel illicit trade.