• May 21, 2024

Raising the Next Generation

 Raising the Next Generation
Photo: JTI

JTI steps up its investment in new nicotine products.

By George Gay

Having been asked to write about Japan Tobacco International, I immediately headed for the company’s website, where the following question jumped out at me: Who is JTI? Even though I have become used to the fact that, in some jurisdictions, corporations are, from a legal standpoint, treated as though they are individual people, the word “who” struck me as oddly personal. I would have glided past the question “What is JTI?” a point that probably was in the minds of those who constructed the site.

There are some advantages in conferring anthropomorphic status on a company, but the idea can raise negative images too. People grow old, they retire, become increasingly feeble (take my word for it) and eventually die. But, on the other hand, they form relationships and produce offspring.

And, stretching the metaphor toward its breaking point, this, of course, is the direction of travel of JTI. The company still offers, and will for the foreseeable future offer, traditional tobacco products, but a new-generation company is emerging and offering new-generation products (NGPs), including e-cigarettes, heated-tobacco products (HTPs) and nicotine pouches. The relationship between the parent and offspring is still obvious, but the latter will increasingly be making its own way, and the resemblance will gradually fade.

From Words to Action

I write that with some confidence—with much more confidence than I would have had a week ago—because a few days back, the U.K. government announced that “1 million smokers will be encouraged to swap cigarettes for vapes under a pioneering ‘swap to stop’ scheme designed to improve the health of the nation [England*] and cut smoking rates.”

“As part of the world-first national scheme, almost one in five of all smokers in England will be provided with a vape starter kit alongside behavioral support to help them quit the habit as part of a series of new measures to help the government meet its ambition of … [making England] smoke-free by 2030—reducing smoking rates to 5 percent or less,” a government press note said.

What difference, you might ask, does one jurisdiction make in the grand scheme of things when JTI has a presence in about 130 countries? Good question, especially since the press note, in many respects, left the U.K. government sitting on the same old fence from where it was trying to promote vaping as a method of quitting smoking while suggesting that it was going to make vapes less attractive because of the perceived threat they posed to young people. Nevertheless, I think the announcement represented a sea change. In the past, the authorities in the U.K. have been willing to state categorically that vaping is far less risky than smoking, but this is the first time to my knowledge that they have demonstrated they are so sure of this position that they are willing to take what can only be described as decisive—though admittedly limited—action.

And if, as most of the people who read this magazine probably believe, such action, properly implemented for as long as necessary, succeeds in reducing smoking rates significantly from what is already a low base, then England can only become an exemplar that other countries interested in reducing smoking rates will be almost bound to follow.

Even with the World Health Organization raged against NGPs, with the U.S. Food and Drug Administration less than supportive of NGPs and with scientists steeped in conspiracy theories feeling happy to muddy the waters around NGPs, a real-time, real-life, nationwide case study will be hard to ignore, assuming tobacco smoking does, as we’re told, take a toll on economies.

During 2023, significant investments toward HTS will be necessary to establish the foundations for the JT Group’s future earnings growth.

Masamichi Terabatake, president and CEO, JTI

Riding the Wave

Although JTI, as the tobacco market leader in the U.K., will be negatively affected by any reduction in sales of traditional products, it is, at the same time, in a good position to take advantage of any transition that might occur to NGPs in England. There it sells Logic Compact, a closed-tank e-cigarette, and last year it launched in London its Ploom X HTP, an updated version of Ploom S. And it offers, too, Nordic Spirit nicotine pouches, which were launched in the U.K. in 2019.

Looking further afield, in October, Japan Tobacco and Altria signed a joint venture agreement to market HTPs in the U.S. with Ploom-branded devices and Marlboro-branded consumables, for which, according to a Nikkei Asia report in the middle of April, they plan to have FDA marketing approval by early 2025. They also signed a long-term, nonbinding global memorandum of understanding to explore commercial opportunities for a wide range of reduced-risk products (RRPs).

Meanwhile, in introducing JT’s 2022 earnings report, Masamichi Terabatake, president and CEO of the JT Group, made much of the company’s ambitions in respect of NGPs. “We continued to make progress in the … RRPs category, with Ploom X increasing share in the HTS … segment in Japan and the launch of Ploom X in London,” he said.

“2022 marked the first year of the newly combined tobacco business structure, which has successfully strengthened our business fundamentals and capabilities through various initiatives. More is to come, especially regarding HTS—our RRP investment priority over the 2023–2025 business plan—with the acceleration of Ploom X market launches. This will support our 2028 ambition to reach break-even in the RRP category, by achieving an HTS segment share in the mid-teens across key HTS markets. During 2023, significant investments toward HTS will be necessary to establish the foundations for the JT Group’s future earnings growth.”

Increased RRP investments are seen as the route to building a future of profit growth. And investments are set to be significant. According to the Nikkei Asia report, JT is aiming to spend $2.25 billion during the next three years on its heated-tobacco operations, two-thirds of it on marketing beyond its core Japan market. It is understood to be planning to launch this year Ploom X on more than 10 markets where HTPs are already established and at least 20 markets by the end of 2024.

Terabatake told Nikkei Asia that the company’s ambitions for expanding its heated-tobacco investments overseas had been held up by a semiconductor shortage, which meant there were not enough heated-tobacco devices. But, he added, “For 2023, we are back on track for procurements, and we are able to secure more than twice Japan’s supply volume compared to last year.”

It is worth noting, however, that JTI has not been neglecting its traditional tobacco operations, and, indeed, in the second biennial report on the Tobacco Transformation Index, which, published last year, detailed the findings of two further years of research into the efforts made by the world’s 15 largest tobacco companies to reduce the harm caused by the consumption of their products, the JT Group’s “Product Sales category score was … negatively impacted by the company’s increasing (CAGR 2019–2021: plus-0.8 percent) HRP [high-risk products] volume sales.”

And JTI, unsurprisingly, is not happy when those volume sales are put under threat, as can be seen from the considerable space it devotes on its website to the illegal trade in cigarettes.

Calling a Spade a Spade

Up to a point, I find it encouraging how JTI is willing to call out bad policies for what they are. In one section of its website, it is blunt in pointing out that in imposing extreme regulations on the sale of tobacco products, many countries are creating more problems than they are “supposedly solving.”

While some try to deny the obvious by saying that sales of illicit cigarettes are not boosted by high levels of cigarette taxes, JTI says on its website that the introduction of ever-steeper tax increases has criminal gangs “rubbing their hands with glee.” It makes the point that consumers who are suddenly priced out of the legitimate market are driven toward the cheaper illicit tobacco options available on the black market.

JTI does not say this, but, to me, it is self-evident that if a government raises the price of a product to which it says consumers are “addicted,” knowing those consumers are aware of a cheaper source of that product, that government is not making a serious attempt at reducing smoking, just an attempt at reducing recorded, tax-paid consumption.

It is important to note that JTI is not against regulation of the tobacco and nicotine industries. Indeed, it says at one point that it “supports regulation that conforms to the Organization for Economic Co-operation and Development’s principles of Better Regulation.”

“These principles can be summarized as openness, participation, accountability, effectiveness, coherence and proportionality,” it says.

Nevertheless, it calls out, too, the “misguided” moves toward display bans and “plain packaging” despite a lack of evidence that these policies achieve their stated health goals.

Again, JTI does not say this, but the idea of a government’s ordering graphic health warnings on cigarette packs as a means of putting people off smoking, and then requiring those packs to be placed behind closed doors, seems incoherent. The only people likely to see those graphic warnings on a regular basis are those who are already committed to smoking, so the policy of requiring display bans seems largely aimed at making the life of retailers more difficult.

I don’t agree with everything JTI has to say about the illegal trade, and there is something that appears on its website that, like the “who is JTI?” question, jumped out at me. I point it out only because I believe it is worth thinking about. The following is part of what appears below a heading that reads, “Illegal tobacco helps organized crime infiltrate local communities”: “In March 2021, an enforcement operation conducted by Russian Law Enforcements resulted in the seizure of one illegal cigarette factory in the Krasnodar area; 10 tons of raw tobacco used in the illegal production; 7.3 million counterfeit cigarettes; and 428,000 cigarette pack blanks.”

A lot of what appears on the website concerns the claim that the purchase of illicit cigarettes supports organized criminals and terrorists. The question arises, however, as to whether, in an increasing number of countries, the purchase of licit cigarettes does much the same.

*The reason why this initiative by the U.K. government applies to England only is that responsibility for health matters is largely devolved to the “parliaments” of Northern Ireland (the Assembly), Scotland and Wales (the Senedd).