Vaping breathes new life into an industry going up in smoke
Smoking rates are at an all-time low, but tobacco companies are seizing the opportunity to move with the times
The boss of one of Britain’s biggest cigarette makers surprises us with a refreshingly candid admission. “I have smoked,” says Daniel Sciamma. “But I quit a couple of years ago.”
His comment is a telling indicator of the tobacco industry’s direction of travel, away from traditional cigarettes and towards so-called next-generation products (NGP).
Vaping presents the tobacco titans with arguably their biggest existential threat yet, but also a huge opportunity. And this was exemplified by the sudden departure of British American Tobacco (BAT) chief executive Nicandro Durante last Thursday.
Billions have been wiped off BAT’s market value since the start of the year as it grappled with a new landscape, one proliferated by disruptive, and popular, vape-only brands. BAT’s shares are down a touch under 30% on the year. Rival Imperial Brands is down nearer 20%, but boss Alison Cooper will hardly be feeling secure.
Frenchman Sciamma is the UK head of Japan Tobacco International (JTI), which swooped on British cigarette giant Gallaher in 2007, paying £9.7bn and stubbing out the illustrious brand after 150 years. At the time it was the biggest overseas takeover by a Japanese company. JTI bobs between being the country’s favourite or second-favourite tobacco company. Owning three of Britain’s top five brands (Amber Leaf, Benson & Hedges and Sterling), JTI regularly trades the top spot with Imperial Brands.
Both have just over 40% of the British market – at home, at least, their sales dwarf larger international rival BAT.
We have been granted exclusive access to JTI’s leafy Weybridge UK headquarters, with tours of its vaping research laboratories and testing facilities. Crudely put, vaping can be split into two sectors: e-cigarettes, in which a nicotine-laced liquid generates a vapour; and products that heat rather than burn tobacco. There are about 25 million e-cigarette consumers globally in a market currently worth $6.3bn net of taxes. The heated tobacco has four million customers and is worth $3bn.
About 90% of global heated tobacco sales are in Japan, where e-cigarettes are banned. For context, the global tobacco market is worth about $750bn, with conventional cigarettes representing about 90% of this. About 5.5 trillion cigarettes are consumed a year.
This week Public Health England dealt the traditional tobacco market a fresh blow. Just 14.9% of the population now smokes, an all-time low, and health chiefs said smoking will be all-but “eradicated” in England by 2030.
With traditional tobacco volumes in decline, NGPs are growing at pace. BAT, for example, believes the market will have doubled in size between 2016 and 2021.
After the US, the UK is the world’s second-biggest vaping market. JTI estimates there are 2.9 million British e-cigarette users. The market is currently worth £588m. Some hope it will be a watershed moment. Parliament’s science and technology committee last month controversially called for a relaxation of rules on e-cigarettes.
The spectre of vaping on buses or in the office angered many. But MPs’ broader conclusion was that e-cigarettes are being overlooked as a useful tool to wean people off cigarettes.
The report, which critics argued was subjected to significant lobbying from the tobacco industry, followed not-too-dissimilar conclusions drawn by Public Health England.
Sciamma says: “When a public body like Public Health England goes out to say we think e-cigarettes are 95% safer than traditional cigarettes, you have to assume they have good reason to do so. They draw their conclusions from multiple sources. That means you get out of the noise and you skim everything to get to the conclusion that they believe is the proper one.”
JTI’s sprawling headquarters are tucked away from sight and next to popular family attraction Mercedes-Benz World, and the buildings look benign and boring. Once through security, it feels like the elephant in the room is not being addressed. Posters on the walls telling staff to “take the stairs, instead of the lift”. Fliers in the canteen ask: “Have you considered a walking meeting?”
While the exterior has the look of an insurance company back office, inside is more like a pharmaceutical manufacturer. Labs are split between wet and dry rooms, academics in white coats, 3D printers and robots. Smoking machines have been adapted to take drag after drag on vaping products instead of cigarettes.
Sciamma says growth in vaping over the past five or six years has been “invigorating”, adding: “It certainly triggered a lot of energy.” Such energy has not solely been from traditional companies. A raft of vape specialists, some big, some small, present a big threat to the largest five companies: BAT, Imperial, Philip Morris, JTI and Altria.
Brokers from RBC Capital Markets delivered a stark warning this month: “It feels like the tobacco industry is going through a fundamental change and no one – not the tobacco companies themselves and certainly not investors nor analysts – has an idea how it’s going to play out.”
The rise of vaping “has the potential to drastically alter both the sales and margin profiles” of the tobacco market, the broker claims. Juul is the one name that gives the quintet the most sleepless nights. In June, the San Francisco-based company reportedly raised $1.2bn, a financing round that values the vape-only company at $15bn.
Juul has 68% of the US vaping market, according to June figures compiled by Nielsen.
The money was earmarked for international expansion until the US Food and Drug Administration (FDA) lobbed it a curve ball this month, sending letters to the top five vaping brands giving them 60 days to explain how they will address the problem of widespread youth access to products.
Four big tobacco brands also have to respond, but the move was seen as positive for the traditional tobacco companies. “Anything that slows down Juul’s market share is a positive,” wrote Jefferies analyst Owen Bennett.
One outcome is that only Juul products could be banned. Another is all vaping products could be outlawed. Bennett explains: “While all names would take a volume hit, the biggest impact is likely to be on Juul.
“Without the support of youth, Juul will be going head-to-head with big tobacco to capture adult smokers. Where do you communicate with the majority of adult smokers? It is your traditional distribution channels, your convenience stores. The majors dominate this space ... Juul would need to offer significant incentives, in our view, to get a fair share of shelf space.”
Big tobacco firms also have chunky balance sheets, ones that can survive the ups and downs of a market in its infancy. Sciamma says: “What JTI can offer is that capacity for innovation. That is something companies like ours can do ... Many of the things our teams are working on today may not see the light of day for two or five years. Maybe some of them, the majority possibly, will not see the light.”
So will vaping overtake the traditional tobacco market?
“The jury is always going to be out,” he says. “It is going to be up to vapers as to whether the product is something they want to buy.”
The staff inside the old Gallaher building hardly cut the caricature of tobacco tyrants that Hollywood would put forward. But for all the talk of vaping, cigarettes are the mainstay of what JTI does. Does this make for awkward social introductions outside work?
“Generally speaking, common courtesy prevails,” says Sciamma. “Sometimes you can have a reaction, a bit of surprise. I’ve been working for this company for more than 20 years. I am incredibly proud of what we do. We are an incredibly responsible company. Yes, we market a product that can cause some health problems. But we do this very responsibly. We do this within the tightest possible framework.
“People don’t smoke because of the tobacco industry. There is a tobacco industry because people smoke. And then the question is whether you would rather have these products marketed within a controlled, law-abiding way, or whether you would want them marketed differently.”
– © The Sunday Telegraph