Author: Staff Writer

  • Smooth Move

    Smooth Move

    Photos: Hauni

    Hauni, ITM and Focke join forces to offer a new equipment relocation service.

    By Stefanie Rossel

    Claus Peters

    Moving to a new house can be an exhausting experience, but what if you must migrate a tobacco processing line in a factory or even an entire production area?

    With LinkUp Relocation, German original equipment manufacturer (OEM) Hauni, together with its business partners Focke & Co. and International Tobacco Machinery (ITM, which is part of Tembo Group), has introduced a comprehensive service program that takes care of all technical and logistic tasks during the relocation process.

    Customers can choose between several relocation packages ranging from a module that offers inspection of the production floors of the donating and the receiving factories, through dismantling, packaging and installation, to an all-inclusive solution that also includes a complete condition check of the equipment, transport to the new location and an inspection-based maintenance package inclusive of service. All modules can be booked for a single machine as well as for entire production lines.

    While relocation services have long been part of Hauni’s portfolio, the LinkUp program provides a new element: Relocation services now also cover machinery from ITM and Focke. Working with only one relocation partner, customers are hence spared complex procedures with multiple OEMs while the full service is carried out by all three OEMs, reducing project management costs and ensuring productivity at the target site, Hauni says.

    “As the tobacco industry has been experiencing a profound change recently and an increasing number of nicotine products with reduced health risk [have] entered the market, production requirements of our customers have changed accordingly,” explains Claus Peters, group manager of key accounts at Hauni. “A large part of the next-generation products (NGPs) are being manufactured on new, dedicated machinery. In order to make room for sufficient production area in a plant, large-scale equipment relocations are required. Usually, this does not mean single machines but complete production lines, which are called ‘link-ups’ or ‘complexes.’”

    Working with a single relocation partner reduces complexity and saves cost.

    Complementary expertise

    Typically, a link-up is a production unit consisting of several machine brands, which means that in case of a relocation, coordination efforts increase in proportion to the number of OEMs involved. To facilitate matters for customers and offer them an end-to-end solution, Hauni, Focke and ITM therefore teamed up. In this cooperation, Hauni has taken on the role of general contractor, according to Peters.

    The collaboration of competitors in certain fields of expertise is well known from other sectors, such as the aviation industry, for instance. Lufthansa and Air France, for example, are tough competitors in their core business of flying passengers, but that doesn’t prevent them from cooperating in technical areas.

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    Peters calls ITM a “market companion” but admits that there are technology overlaps between the companies in the machinery sector. “However, we jointly wanted to offer our customers added service value along the lines of ‘complementing competences.’”

    As all three manufacturers continue to offer their own relocation services, the added value for customers lies in the area of link-up relocations, according to Peters. “Here, the respective OEMs can advise with their expertise regarding the condition of the equipment to be migrated. During disassembly of the machines, they can make recommendations to increase efficiency or tackle maintenance backlogs, which is essential in order to achieve the scheduled production volume to cater to market needs at the machine’s new location.”

    Preserving value

    Some years ago, many leading tobacco manufacturers shifted production from declining cigarette markets to more promising locations, thereby requiring increased relocation services. While these moves have long been completed, Peters says that relocations as such remain a viable business.

    “We’re talking about extremely valuable production lines, many of which provide the backbone of production over several decades,” he says. “If the present trend is to focus on NGPs and to invest there, our joint service may help to increase the efficiency of existing machines at their new destination, thus leaving our customers more time to concentrate on new installations. Because of the dismantling, a machinery move is the perfect time for maintenance, obsolescence or technology upgrades.”

    The new program has been live since the beginning of 2019 and received unanimously positive feedback from customers, according to Peters. “The complete project management, starting from the procurement of adequate tools and mounting material to transport coordination and monitoring to setup and commissioning from a single source, has been perceived as very comfortable.”

    To describe the advantages, Peters makes an analogy with the construction of a house. “You can do everything yourself and coordinate all subsections inclusive of material delivery and rescheduling under adverse weather conditions. Or you buy a house turnkey, ready from a recognized provider at an agreed and guaranteed move-in date,” he says.

    “Of course, the area of equipment relocation is highly competitive with other service providers who have no OEM background and have built their expertise on trial and error. These suppliers appear to be very cheap at first glance, but you better add something for the risk they/you take. And if you do that and calculate this honestly, your better choice will be the turnkey OEM solutions.”

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  • ‘Male smokers suffer higher Covid mortality’

    ‘Male smokers suffer higher Covid mortality’

    According to researchers in Spain from the Universitat Oberta de Catalunya, men are dying from Covid-19 at twice the percentage rate of women in Spain because men have a higher smoking prevalence rate than women in the country.

    The researchers’ findings, which can be found in the journal Tobacco Induced Diseases, noted that smoking tobacco can upregulate the angiotensin-converting enzyme 2 (ACE2), which Covid-19 uses as a cellular entry receptor by joining itself to ACE2 receptors in the lower respiratory tract of infected individuals to gain access to the lungs.

    The researchers confirm that “existing data suggests that patients with COPD, or chronic obstructive pulmonary disease, or who smoke have a higher risk of becoming more seriously ill from Covid-19, since it increases ACE2 expression in weaker airways, which this type of patient has.”

  • Association Presses on With Challenge Against Ban

    Association Presses on With Challenge Against Ban

    Photo: Taco Tuinstra

    Association Presses on With Challenge Against South Africa’s Tobacco Ban

    South Africa’s Fair Trade Independent Tobacco Association (FITA) announced on April 30 that it will still seek legal action to reverse the government’s decision to ban tobacco and vapor product sales despite the fact that sales were scheduled to resume May 1.

    The government’s National Coronavirus Command Council, following expert consultation and public criticism, believed that keeping cigarettes, vapor products and other tobacco products off retail shelves would not be in the public interest.

    According to South African Revenue Services, the sales ban that began March 26 following the initial country lockdown has led to cigarette excise tax losses of ZAR300 million ($16 million).     

  • A Seismic Shock

    A Seismic Shock

    Photo: Taco Tuinstra

    Investment and strategy analyst Erik Bloomquist assesses the coronavirus crisis’ impact on the nicotine business.

    By Stefanie Rossel

    It’s hard to exaggerate the impact of the coronavirus crisis. The pandemic has not only taken a tragic human toll, but it has also disrupted economic activity on a scale unprecedented in modern history. Supply chains have been disrupted, factories shuttered and workers sent home. Consumers, meanwhile, find themselves with plenty of time but reduced incomes. How will the nicotine industry recover from this calamity? Tobacco Reporter spoke with investment and strategy analyst Erik Bloomquist about the way forward.

    Tobacco Reporter: Tobacco has a reputation for being recession proof or at least recession resilient. How do you expect the industry to fare during the coronavirus crisis?

    Erik Bloomquist: I think the global nicotine industry will hold up well, especially relative to other industries and even in comparison to other consumer staples with the exception of grocery retailers and perhaps alcoholic beverages. The stock market has been relatively quick to appreciate this as shown by the material rebound in tobacco stock prices from the approximate March 23 low. Adjusting for the unique circumstances of the individual companies, some like Swedish Match are nearing all-time highs.

    This robustness is driven by two structural factors that have always underpinned the investment case: the steady consumer demand for the products; [and the] steady need of governments for the taxes generated by the industry. Related to the former are the distribution channels for cigarettes in particular, which tend to be mostly through outlets deemed essential by many jurisdictions (e.g., gas station convenience stores).

    With respect to the latter, governments everywhere are even more pressed for money than before the coronavirus/Covid-19 pandemic, and tobacco specifically is often a key reliable contributor to the government finances.

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    We have seen South Africa ban cigarette sales during its 21-day lockdown. How do you think such instant tobacco control measures will impact the industry’s recession resilience?

    There are clearly some in the anti-tobacco and anti-nicotine “quit or die” camps that want to take advantage of the Covid-19 pandemic to advance their extreme agendas. While submitted before the coronavirus became a worldwide issue, one especially egregious example is the study “Towards Quantifiable Metrics Warranting Industry-Wide Corporate Death Penalties.” The paper argues that its study shows “[t]he results clearly warrant industry-wide corporate death penalties for both industries [tobacco and coal mining] in America.”

    I would expect some in the anti-tobacco lobby to seize on this combined with concern about smokers’ potentially higher risk from Covid-19. Of course, the irony is that many of those in this camp remain adamantly opposed to tobacco harm reduction with lower risk products that consumers actually like, and they have attempted to conflate nicotine vapor users’ risks from conditions created by prior smoking with harm from nicotine vapor.

    There are also intriguing studies and theories emerging about the potential beneficial effects of nicotine (via smoking or potentially vaping) in reducing susceptibility to the Covid-19 virus. The preliminary report by Konstantinos Farsalinos et al., “Smoking, vaping and hospitalization for Covid-19,” examining available Chinese and USA data provides support for that potential conclusion, though as reviewer Carl Phillips notes, “[t]he result of this analysis is, if true, enormously important. But there is so much uncertainty about the data and so much fundamental material missing from the analysis that we cannot conclude anything based on what is presented.” The analyses are particularly important as the conclusions are counterintuitive given the demonstrable harms associated with smoking and therefore likely greater risk to smokers from the Covid-19 virus.

    My expectation is that measures that are temporary responses will likely remain temporary, driven by the key structural factors (consumer demand and tax needs). For example, the South African ban on cigarette sales will only exacerbate the consumer demand for black market cigarettes, which was already a severe problem. Enforcement of the lockdown in the townships will become difficult as people’s livelihoods are threatened. My guess is that the South African government will belatedly recognize that banning legal sales does not push all consumers to quit and so accelerates a shift to the black market, not to mention the incentive to buy cheaper products when incomes are slashed.

    In light of such tobacco control moves, how do you expect smokers’ behavior with regard to consumption to change in this period of crisis?

    I think smokers may reduce their consumption, and some will no doubt use the event as a catalyst to quit. However, the proportion of consumers leaving the category may be offset by those returning to smoking, whether as a way to alleviate stress or because their preferred alternative (an open system vapor device and nicotine liquid) is no longer easily available.

    How do you think the vapor sector will develop?

    The outlook for nicotine vapor within global nicotine is more complicated since its distribution is more varied with the open systems largely sold through dedicated nicotine vapor shops, some of which are not allowed to remain open, and it as a segment has suffered from increasing uncertainty by consumers about the relative risk benefit versus smoking cigarettes and additional potential Covid-19 risks.

    The pandemic and resulting severe, fast economic slowdown caused by government mitigation measures will put further pressure on the weaker players across global nicotine, particularly in the less established and consolidated nicotine vapor space. Independent nicotine vapor shops not only may have restrictions on the ability of their consumers to purchase from them but on the supplies needed to sustain the business with such a large proportion sourced from China and the ability to restore product pipelines unknown at this point in time.

    How do you think the coronavirus crisis will impact the transition of smokers to less hazardous nicotine-delivery products such as vapor devices?

    I think the pandemic and resulting effects on nicotine vapor offerings, especially those not offered by the tobacco majors or larger nicotine vapor firms, will reduce the transition by consumers to lower risk products. One of the most disappointing results of years of misinformation about the relative risk of nicotine vapor reduced-risk products [RRPs] is the increasing proportion of consumers who believe them to be as harmful as cigarettes—a belief exacerbated by the U.S. Centers for Disease Control and Prevention’s [CDC] poor performance in the 2019 severe lung injury THC vape vitamin E acetate contamination event. This misperception has demonstrably occurred in the USA and U.K., and my suspicion is that similar shifts in consumer belief, to some degree or another, have taken place across the world.

    A Euromonitor survey released in March 2020, “Exploring the Global Nicotine Landscape,” showed that perceptions of the lower relative risk of nicotine vapor by both users and nonusers of nicotine products were declining, i.e., that nicotine vapor was as harmful or more harmful than smoking. The survey also showed the largest driver globally for decreasing or ending nicotine product consumption remained to improve health; if the utility of RRPs in that goal is minimized or nonexistent while the net benefits of continued nicotine consumption remain—likely through cigarettes—it seems likely that many people will continue to smoke.

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    How do you anticipate the global nicotine vapor sector to develop under the current circumstances? Will the crisis be the final blow to the fledgling industry whose image and sales already largely suffered from the “vaping sickness” in the U.S.?

    The global nicotine vapor sector is under the most pressure it has ever experienced with the combination of the Covid-19 pandemic effects, increasing restrictions or bans in many jurisdictions and deteriorating consumer perceptions. Despite this pressure, I expect it will survive, albeit after a period of contraction, consolidation and retrenchment.

    In my view, the most important driver of this is the regulatory environment, and the outlook there is challenging with the U.S. Food and Drug Administration’s [FDA] determination to press ahead with its PMTA [premarket tobacco product application] process for nicotine vapor and the World Health Organization’s [WHO] unfortunately hostile stance toward tobacco harm reduction [THR] and RRPs. Since they are the two most influential health bodies globally—sadly the Public Health England or broader U.K. public health stance on nicotine vapor has not been given as much credence—regulatory restrictions are likely to remain or increase.

    Offsetting this hostility is consumer demand and recognition that in fact RRPs are lower risk than smoking cigarettes and so a better alternative for those for whom nicotine is beneficial. With internet access and webs of THR advocates around the globe, consumers can learn the truth and select lower risk products. The absurd element is that so many of the “public health” establishment are trying to prevent that transition and so entrench cigarette consumption.

    What will the tobacco industry look like a year from now?

    Broadly speaking, dividing global nicotine into tobacco—dominated by cigarettes—and nicotine vapor—whether the aerosol is from heated tobacco or vapor, from an open or closed system—I believe the tobacco businesses will not look materially different. In contrast, I expect nicotine vapor to be smaller in consumption and sales and more consolidated with fewer larger players surviving, particularly in the USA, as the one-year premarket tobacco product application review period ends—for now in September 2021—and the FDA begins enforcement. 

    Shops selling open system nicotine vapor devices and liquid are likely to be especially hard hit by the combination of retail opening restrictions, restrictions on product—e.g., the New York state retail and online sales ban passed at the beginning of April, which prohibits the sale of vapor products in flavors other than tobacco—and lingering consumer concern about risk, whether from the spate of severe lung injury cases or from concerns about vapor and Covid-19.

    More specifically, I expect a couple things are likely to become evident.

    Regulation/taxation will remain the most important driver of the shape of the industry, not least in the USA even with the PMTA submissions for electronic nicotine-delivery systems [ENDS] delayed until September 2020. This importance is also emphasized by the U.S. Federal Trade Commission’s complaint against Altria’s purchase of a 35 percent stake in Juul Labs. Such influence matters in part because of its effect on consumers’ perceptions and behaviors, for instance, the further damage the CDC’s response to severe lung injury cases—also known by the misnomer EVALI—did to the perception of nicotine vapor and because it shapes and limits the offerings for consumers.

    There does appear to be some good news with some countries, such as Italy, France, Spain and Switzerland, recognizing with the help of THR advocates that closing nicotine vapor outlets would force consumers back to higher risk cigarettes. However, there are countervailing examples, such as in New Zealand where some advocates suggest that vapor be “nicotine or chemical free” or even in the U.K., which has not designated nicotine vapor shops as essential and open for in-person purchases, though online and home delivery options remain.

    The criticism of PMI’s [Philip Morris International] donation via its Greek subsidiary of 50 ventilators in response to a request by the government to [the] industry by traditional anti-tobacco/anti-nicotine advocates implies limited scope for improvement in the view of tobacco companies as inherently and eternally unethical for a significant proportion of the tobacco control community.

    Which effects are we likely to see in the market due to the pandemic?

    Although overall demand for nicotine products is unlikely to decrease by much, the severe and sudden cut to many people’s incomes will likely have a secondary effect—downtrading.

    The downtrading dynamic—from premium brands to lower price brands or to RYO/MYO tobacco in some markets or to the black market in other jurisdictions—is likely to be particularly acute in cigarettes since in many countries, more of those consumers tend to be in lower socioeconomic strata and so if [they are] employed in Covid-19 restricted occupations, [they are] especially affected.

    The hit to consumer disposable income could be offset to a degree in countries like the USA where petrol is a significant household cost to the degree the current oil price war and 20-[year] to 30-year lows are passed through to retail customers. But on balance, I expect the downtrading effect to be larger and longer lasting than relief at the petrol pump or in household energy prices. In “dark” markets, the downtrading may exacerbate the erosion of premium brands, though the tobacco majors retain enviable pricing power.

    Since the cost of nicotine vapor is usually less—often much less with open systems—than cigarettes and seen as a viable substitute by many, downtrading pressure would usually, ceteris paribus, push consumers toward vapor options. In my view, the negative perceptions and constrained availability likely mean such a transition will be limited.

    Assistance from governments may modestly mitigate the financial pressure, but restoring consumer disposable income will require employment recovery. Only then is downtrading likely to slow or stop.  Recovery of pre-Covid-19 employment levels implies [that] the shift to cheaper products—whether legal or illegal—will probably last well beyond the containment of the pandemic.

    The tobacco industry recently expanded into the cannabis sector. How do you expect this industry to develop in the coronavirus crisis?

    The cannabis sector has lost its luster, with the stocks down significantly over the last 12 months—U.S. names down around 40 [percent] to 75 percent, Canadian names down around 60 [percent] to 90 percent—in part driven by oversupply for the prominent listed Canadian companies. The coronavirus pandemic is forcing cannabis legislation off the agenda for the time being, for example, New York’s governor stating on March 31 [that] they would not be moving forward on legislation as previously anticipated in January 2020. As well, there are some company-specific problems, such as the revenue overstatement at Cronos in which Altria is a $1.8 billion investor. The mismatch between legal demand and supply suggests there may be consolidation among the Canadian-listed cannabis suppliers too.

    That said, Washington, Oregon, California, Colorado, Illinois, Michigan, New York, New Jersey, Ontario and Quebec have allowed their cannabis retail stores to remain open during the pandemic, so once legally established, the trade appears resilient and politically insulated. Until the pandemic is brought under a semblance of control, legal market development in the USA may be impeded.

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • Reaching for the Stars: Some Thoughts on Tobacco Taxation

    Reaching for the Stars: Some Thoughts on Tobacco Taxation

    Image by WikiImages from Pixabay

    Some thoughts on tobacco taxation

    By George Gay

    Late last year, I enjoyed watching several documentaries celebrating the 50th anniversary of the first moon landing of a manned spacecraft. It was fascinating for somebody such as I, who was a young adult when the first landing occurred on July 20, 1969, to have a mirror held up to a life that I once saw as normal and to be able to compare it with what is normal to me now.

    There have been many changes—some of them good, such as those to do with diversity and certain aspects of technology, and some of them bad, such as those to do with the environment and, though some might disagree with me here, the average weight of people. Some changes, such as those to do with fashion, seem to have been neither good nor bad, just cyclical, if I also consider the intervening years. As I believe Oscar Wilde once observed: Fashion is a form of ugliness so absolutely unbearable that we have to alter it every six months.

    One of the biggest changes, however, has had to do with tobacco smoking. According to the documentaries that I saw, which often focused on mission control, the levels of smoking in the U.S. in 1969 could be described only as heroic—in keeping, I suppose, with the way in which the challenges of space exploration were approached. As far as I could see, the controllers smoked cigarettes, pipes and cigars while they were working and, especially in the case of cigars, when they celebrated the end of a successful mission. Some of the astronauts’ wives were shown smoking at home while their husbands were away, and, when the astronauts returned, people smoked through the various post-mission press conferences. Let’s face it, the rockets the astronauts went up in resembled cigars.

    These days, I guess, mission control would be tobacco smoke-free, and most people would see this as a good thing. But perhaps it’s true that you win some, you lose some. On the basis that if A follows B, then A might—but only might—be caused by B. Is one result of the reduction in smoking the expansion of the waistlines that is so evident from comparing film from 1969 with observation of people today? Did we, in not preparing properly, simply swap one problem for another?

    And is there another possible cause and effect issue? It was simply amazing how quickly the euphoria of 1969 faded as funding for the space program was reduced and exploration took a back seat. Might the story have been different if people had kept smoking at the rate they smoked in 1969 and, thereby, kept supplying tax dollars, and, especially, if federal government cigarette taxes had been increased from what, in 1969, had been a relatively low base?

    Of course, you need to ask yourself whether it would have been a good thing for people to have kept smoking to help keep the space program fully on track. I guess that’s a tricky moral question that could be put this way: Should one group of people—basically, the financially poor—shorten their lives so that another group—basically, the self-styled elite—might be able to escape to another planet once we’ve all trashed this one? But perhaps that question has too much of a payload.

    And anyway, I’m not convinced that the question of continued space exploration hinged on taxation. I think the push toward 1969 was fueled by foresight and the presence in the White House of a man, former President John F. Kennedy, with the charisma to take others along with his ambition, even after his untimely death. In the 1960s, we were probably still hanging on to the idea—possibly only by our fingertips—that science, discovery, exploration—call it what you like—was something worth following just to see where it led.

    Since then, we have been plagued by leaders around the world whose vision has not lifted above the bottom line. Will this science stuff produce more powerful weapons, they ask, and will it make a profit sufficient to satisfy the greed of those who will make the donations to help keep us in power? Generally, in my view, the world has been dragged down by mean-spirited leaders lacking in imagination, leaders who would rather point their rockets at each other than at the stars, who would rather go to war than to Mars.

    Crumbs, I think I’ve lost the thread. Where was I? Oh yes, taxation …

    Taxation is often seen as causing a split between those who consider it a burden and those who consider it a privilege, but, in reality, there is also the great mass of people who bridge these extremes—who often moan about paying taxes but who also rejoice when they see evidence that their tax money has been used to help those in need or to help fund a mission to new frontiers and ideas. I tend to think that paying taxes is a privilege, but I must admit to being incensed at some uses tax revenue is put to, such as making up the shortfall caused by the inadequate wages paid by some of the richest companies in the world. It seems that some of these companies will soon be flying into space—low orbit, high profit stuff, of course—on my taxes.

    Of course, there are many anomalies in the field of taxation, which seems often to slip out of kilter when so-called sin taxes are applied. When you consider that sin taxes have in the past been used to fund wars, you need to question the nature of sin. I mean, you would probably be locked up if you suggested taxing weapons and war to help fund people’s smoking habits. And when taxes are contributed mostly by the financially poor for projects that will benefit the whole community, including the financially well-off, you need to question whether this is the sort of redistribution you can support.

    And the idea of a sin tax can become even more problematic when applied to something such as e-liquids, given that these are products designed to help people transition from the—how can I put this?—original sin of smoking. Sin taxes at this point become joy taxes. You look like you’re having a good time; you need to pay some taxes.

    In fact, so far, the application of taxes to e-liquids has not met with a great deal of success, at least in the countries of the EU that have tried this on, according to a presentation given to the electronic nicotine-delivery systems (ENDS) conference held in London, U.K., in June. Delegates were told that while Estonia managed to collect almost all the e-liquid taxes it was targeting in 2018, Romania managed to collect only about a third of its targets in 2017 and 2018, and Finland managed only about 10 percent in 2017. Italy’s success rate was down at about 2 percent in 2017 and at about 3 percent in 2018. Partly, there seems to be an inverse relationship between what is aimed at and the percentage of that target that is collected. So, in 2018, Estonia sought only €1.3 million ($1.46 million); in 2017 and 2018, Romania sought €5 million and €6.8 million, respectively; and in 2017, Finland targeted €9.1 million. Only Italy seemed to be chasing meaningful amounts of revenue: €227 million in 2017 and €216.5 million in 2018. And look what happened there.

    That tax collection has not worked out so far is apparently down to the fact that it is reasonably easy to circumvent these imposts, and the conference seemed to be a bit sniffy about e-liquid tax circumventions, suggesting that such activities allowed irresponsible operators to prosper at the expense of the responsible. You can see the delegates’ point, but tobacco, the precursor of nicotine products, has long been a hive of tax circumventions, avoidance and evasions, from top to bottom, from side to side, and to pick on e-liquids seems unbalanced. If we want to talk about tax circumventions, avoidance and evasions, all tobacco and nicotine stakeholders should put their cards on the table.

    A lot of people, not only the libertarians among us, might think that taxing a product just because it creates joy is unfair, but you need to take care how far you go along with such thinking. Some people like to make out that sin taxes lie on a slippery slope down which one slides from tobacco and alcohol to fast food and sugar. But this is a slippery argument because there is a wealth of difference between tobacco and alcohol on the one hand and fast food and sugar on the other. And that difference has to do largely with age limits. In many countries (probably most), tobacco and alcohol may not be bought by people under a certain age, and those of an age who may buy these products are not allowed to supply them to underage individuals. This does not apply, as far as I know, in the case of fast food and sugar, so young people may buy these products, and parents may give them to their children to consume. Remember here that despite what we are told ad nauseum, not all parents know what’s best for their children and are willing to do it.

    The problem, as far as I can see, is that in many parts of the world, there is an obesity problem among children, and, as far as I am told, once a child is obese, she has great difficulty in freeing herself of that obesity and all that it entails later in life. That means that parents are bequeathing to their offspring a problem that those children could carry throughout their lives, and that’s not right. If young people have to wait until they are a certain age before they choose to risk damaging their health by smoking tobacco and drinking alcohol, it seems logical that they should at least be protected from having unsuitable foods foisted upon them before they reach an age when they are able to make their own choices. Now, I don’t know whether that delay should be encouraged by taxation or some other method. My gut feeling is that taxation on its own would not be the best method, but something needs to happen.

    And, certainly, that’s not to say that additional taxes should not be applied to high-sugar, high-fat food and drink, even if they don’t help save the obesity problem. Perhaps it’s time to reverse things and help fund another space mission with those very taxes? It would be fitting, would it not, to have rockets flying off into space powered by the high-octane fuels of sugar and fat.

    George Gay is Tobacco Reporter’s European editor, but his territory spans the globe. Based in London, George has covered the tobacco industry since 1982, initially for a U.K.-based publication and since 2004 for Tobacco Reporter. George’s understanding of industry issues, combined with his keen sense of observation and dry wit, have earned him a loyal following among Tobacco Reporter’s readers.
  • An Ill Wind

    An Ill Wind

    Philip Morris International temporarily halted production at its factory in Bologna, Italy.

    Famous for its resilience in times of crisis, the tobacco industry may be facing its toughest challenge yet in the coronavirus pandemic.

    By Stefanie Rossel

    During past major global crises, the tobacco industry gained a reputation for being recession-proof or at least recession resilient. From the financial meltdown of 2008, which led to a worldwide economic recession, the three leading international cigarette manufacturers, Philip Morris International (PMI), British American Tobacco (BAT) and Japan Tobacco (JT) emerged as winners; while companies in other sectors were struggling, they achieved record sales.

    This time, as the coronavirus pandemic progresses and the outcome of the crisis remains uncertain, confidence appears to prevail too. In a research note quoted by Business Insider in late March, Jefferies analysts said that the outbreak could even encourage smoking as people confined to their homes struggle with boredom and depression.

    From the farmer to the consumer, the coronavirus has impacted all links in the tobacco supply chain.

    They may have a point—witness the reports on panic buying of tobacco products in various countries. During its capital markets day on March 18, BAT declared it had seen no material impact from the Covid-19 crisis yet as consumers continue to make purchases even in harder hit countries. The company maintained its forecast of 3 percent to 5 percent constant currency adjusted revenue growth.

    The forecast robustness may persist for the big players and their core business of combustible cigarettes. Even temporary production stops, such as those at Altria’s cigarette factory in Richmond, Virginia, USA, and PMI’s facility in Bologna, Italy, which makes 50 percent of the company’s IQOS heat-not-burn units, may end up merely denting the companies’ annual results. For other stakeholders in the tobacco industry, however, things may turn out differently as the coronavirus spreads. It’s difficult to imagine that smaller players will be able to weather extended factory closures as well as their bigger counterparts

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    A different animal

    Unlike the 2008 crisis, which was limited to the financial sphere, the outbreak of Covid-19 has reached into every aspect of life, affecting health, personal freedoms and the ability to travel, regardless of geographical location or social status. The total economic damage is yet to be determined.

    In the light of the unprecedented dimensions of the outbreak, companies such as Scandinavian Tobacco Group (STG) have become cautious. In mid-March, the Danish manufacturer of cigars and pipe tobacco suspended its full-year guidance for 2020, arguing that the measures to fight the coronavirus had disrupted tobacco purchase and consumption patterns.  

    Tobacco auctions tend to be crowded places that don’t lend themselves to ‘social distancing.’

    “This leads to a situation where we have significantly less transparency on consumer behavior and consumption, and retail customers are changing behavior as they try to respond to the constantly changing environment,” STG said in a press release. “As the situation develops from day to day in countries around the world, we are currently unable to accurately assess the short-term impact of these developments on our business.”

    Like its competitors, STG may experience supply issues at some point. In mid-March, several Central American countries, including Honduras and the Dominican Republic where many cigar companies have factories, closed all “nonessential” businesses, shutting down all industries except health and food. Closures were announced as temporary, and cigar companies emphasized their large inventories, but what makes the current crisis so extraordinary is that no one can predict when it will be over.

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    Impact on supplying industries

    With shutdowns in most countries, suppliers of nontobacco materials and tobacco manufacturing equipment are likely to be hit too. One of the hardest hit countries, Italy, is home to several prominent tobacco machinery manufacturers. In late March, the government expanded the mandatory closure of nonessential commercial activities to heavy industry.

    What the coronavirus crisis will do to the livelihoods of tobacco farmers, many of whom live in developing countries, is anyone’s guess. Growers who sell at auction are likely to be hit harder than their counterparts who contract with buyers directly. Because auction floors are crowded places that don’t lend themselves to “social distancing,” several tobacco-cultivating countries have delayed the marketing season.

    In the Indian state of Andhra Pradesh, thousands of farmers were worried as an ongoing tobacco purchase auction in Prakasam was suspended for 10 days. They feared that their tobacco bales might spoil in the meantime. Many of the district’s tobacco farmers had hoped to export their produce to China, but most buyers didn’t show up. India is expected to be hit exceptionally hard by the coronavirus crisis. In early April, the World Bank approved a fast-track $1 billion Covid-19 emergency response and health systems preparedness project.

    Malawi and Zimbabwe postponed the opening of their tobacco marketing seasons, which normally kick off in spring. Malawi banned gatherings of more than 100 people and closed auction floors on March 26. The country’s Tobacco Control Commission (TCC) and the tobacco industry agreed to observe the situation for at least one month before deciding whether to resume sales. The Tama Farmers Trust cautioned that rescheduling the marketing season would be disastrous for the local economy, and on April 6, Malawi President Peter Mutharika ordered tobacco markets to be opened and allowed to operate without disruption.

    According to the Foundation for a Smoke-Free World, Malawi is the world’s most tobacco dependent country, despite being only the 13th producer by weight in 2016. In 2019, the country earned an estimated $345.5 million in foreign exchange from leaf exports. In 2017, raw tobacco represented 71.3 percent of the country’s total exports, according to the Observatory of Economic Complexity. Zimbabwe also relies heavily on tobacco, with leaf exports representing 5.5 of its gross domestic product. At the time of writing, the country’s Tobacco Industry Marketing Board planned to open auction floors on April 22.

    Policies toward tobacco and vape shops have been inconsistent, with some countries forcing them to close and others declaring them essential businesses.

    Vaping in times of Covid-19

    The impact of the current pandemic will also differ from that of the financial crisis because the tobacco industry has changed significantly since 2008. As global cigarette volumes have fallen, reduced-risk products such as e-cigarettes and heated-tobacco products have gained traction. Adult smokers have taken to vapor devices in large numbers in order to wean themselves off combustible cigarettes, thus creating large vapor markets in the U.S. and Europe. While scientists, meanwhile, more or less agree that e-cigarettes are safer than combustible cigarettes, the sector’s image suffered a blow last year when the U.S. saw an outbreak of vaping-related diseases. Sales of e-cigarettes contracted worldwide although it was quickly determined that the illness was caused by illegal e-liquids containing tetrahydrocannabinol (THC) and there were no similar incidents in other markets where vapor products are subject to stricter regulations.

    The coronavirus pandemic could similarly deter sales as governments are forcing retail outlets to close to prevent the spread of Covid-19. The definition of an “essential business” differs from country to country.

    Interestingly, New Zealand, a country with strict tobacco control measures and the intention to become smoke-free by 2025, permitted Imperial Brands’ cigarette factory to continue production even as it forced vape shops, bakers and butchers to close. The prime minister justified the decision by arguing that Imperial Brands supplied supermarkets, which were allowed to remain open.

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    Even the U.K., normally a beacon of tolerance when it comes to vapor products, treats vape shops as nonessential in the current crisis. In Germany and the United States, the decision to close or open vape shops is made at the state level.

    Italy, which initially also forced vapor stores to close, revised its decision. In some European countries, including Austria, Belgium, Bulgaria, Hungary, Poland and Portugal, buying vapor products online is no longer possible as distance sales have been banned, Ecigintelligence reports. Consumer rights organizations and trade associations have urged governments to exempt vape shops from lockdowns, fearing a relapse to smoking as vapers will not be able to meet their basic needs and have access to specialist advice. Vapor advocates argue that vape shops offer a valuable public health service at a time of stress and uncertainty.

    While sales channels are partly affected, supply shortage may become another issue for the global vapor sector. China manufactures about 90 percent of the world’s vapor hardware. Most of production takes place in Shenzhen and was disrupted when China restricted worker movement in February. By March 25, factories had resumed most of their operations, saying they were implementing new standards and processes to keep employees and customers safe.

    BAT subdsidiary Kentucky Processing has been working on a Covid-19 vaccine using tobacco plants.

    Tobacco’s untapped potential

    Meanwhile, the coronavirus crisis has presented tobacco control activists with another stick to bash the industry. When Greece’s leading cigarette manufacturer Papastratos donated 50 ventilators to a hospital, the move was criticized as “a shameful publicity stunt” by the U.K. anti-smoking organization Action on Smoking and Health (ASH).

    Several studies were released that found that smokers and vapers were at a higher risk of contracting Covid-19 than nonsmokers. Although the correlation between vaping and the course of coronavirus infections was refuted by Konstantinos Farsalinos and others, the studies were reproduced by media all over the world and prompted a group of doctors in the state of New York to ask for a temporary ban on the sale of tobacco and vapor products. Apparently unaware of the low chances of smokers successfully quitting cold turkey, the doctors hoped that acting quickly to reduce smoking would significantly reduce the number of patients who contract the virus and need to stay in a hospital or breathe with the help of a ventilator.

    South Africa went even further and banned the sale of cigarettes during its 21-day lockdown. Drug policy nongovernmental organizations and BAT have urged the government to lift the ban, saying it would force smokers to leave their neighborhood in search of outlets willing to defy the ban, thereby bringing about greater movement of people and more interactions apart from possibly boosting illicit trade.

    The pandemic, however, also presents an opportunity for the tobacco industry. Two biopharmaceutical firms associated with leading cigarette companies have entered the race to create a Covid-19 vaccine.

    Medicago, which is partially owned by PMI, is using a virus-like particle grown in Nicotiana benthamiana, a close relative of the tobacco plant, to develop a vaccine against the coronavirus. In late March, Medicago announced that it was ready to begin preclinical testing for safety and efficacy. The company estimated that human trials would begin this summer.

    BAT subsidiary Kentucky BioProcessing (KBP) is involved in a similar effort. To produce the potential vaccine, KBP cloned a portion of Covid-19’s genetic sequence and injected it into tobacco plants, which developed a potential antigen, the company stated in a press release. The antigen was then inserted into tobacco plants for reproduction, and once the plants were harvested, the antigen was purified.

    BAT is exploring partnerships with government agencies to start clinical studies as soon as possible. Through partnerships with third-party manufacturers, the company envisages to manufacture between 1 million and 3 million doses per week. While KBP remains a commercial operation, BAT stated, the intention is that its work around the Covid-19 vaccine project will be carried out on a not-for-profit basis.

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • Beyond Tobacco

    Beyond Tobacco

    Photos: BAT

    British American Tobacco prepares for a radically different future.  

    By Stefanie Rossel

    Less than a year after taking over as British American Tobacco’s (BAT) new CEO, Jack Bowles has already left a distinctive mark on the company. In September, the maker of Lucky Strike and Camel cigarettes unveiled a comprehensive restructuring program that included the layoff of 2,300 of its 55,000 employees. A fifth of the job cuts were senior roles. Savings delivered by the measure were to be reinvested in the company’s new categories, such as vapor, tobacco-heating products and oral tobacco, BAT said. The goal is to make BAT a more efficient and agile company and to facilitate business processes.

    On the occasion of its capital markets update in mid-March, the company appeared to have reinvented itself: Gone was the tobacco leaf in its logo, replaced by a double swoosh and accompanied by the slogan, “A better tomorrow.” BAT appears to be redefining itself as a consumer goods company.

    “Our strategy puts the consumer first, focusing on understanding adult consumer choice and enjoyment,” explained Kingsley Wheaton, BAT’s chief marketing officer. “We will capture lost consumer moments with a portfolio in tobacco, nicotine and beyond. This will enable sustainable, long-term growth with a clear focus on foresights, innovation, brands, activation, teams and technology. We will become a business that defines itself not by the products it sells but by the consumer needs it meets.”

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    “The redesigned logo, replacing one that hadn’t altered since the late 1990s, helps to emphasize that an increasing part of BAT’s future is likely to be in noncombustible nicotine products such as smokeless tobacco, vapes and tobacco-heating [products],” says Jonathan Fell, principal at Ash Park. “With ‘beyond nicotine,’ it is also raising the prospect of going into areas such as caffeine or cannabidiol/tetrahydrocannabinol products once the appropriate legal and regulatory framework is in place and the company’s scientists have fully substantiated their safety and efficacy.”

    BAT experienced a 4.7 percent reduction in traditional cigarette volume in 2019, according to its most recent annual report. The company’s revenue growth of 5.7 percent to £25.88 billion ($32.26 billion) in 2019 was driven by pricing across the cigarette portfolio and an increase in revenue from traditional oral tobacco and next-generation products (NGPs).

    In light of continuously declining global cigarette sales, tobacco companies have increasingly felt the pressure to adapt their business models to the changing environment. Philip Morris and Japan Tobacco International announced similar restructuring and rationalizing measures in the last quarter of 2019.

    Jack Bowles aims to make BAT a more efficient and agile company

    Faster and more responsive

    Upon taking the helm at BAT, Bowles set out three priorities: driving value from combustibles, improving the performance of new categories and simplifying the business. During the capital markets event, Bowles substantiated forthcoming goals. BAT aims to reduce the health impact of its business by offering a greater choice of better and less risky products with the ambition to have 50 million noncombustible product consumers by 2030. By extending its Quantum project, a business simplification program initiated in 2004, the company aims to generate £1 billion over the next three years—money it intends to utilize to accelerate the revenue growth of its “new category” (NC) business. Next to vapor products, NC includes heated-tobacco products (HTPs) and modern oral products, a category comprising white, tobacco-free nicotine pouches, such as Epok, Lyft and Velo. The company will support its strategy by establishing innovation hubs in London, San Francisco, Shenzhen and Tel Aviv in addition to its R&D centers in Winston-Salem, North Carolina, USA, and Southampton, U.K.

    While acknowledging that the coronavirus crisis was likely to make NC growth in the first half of 2020 difficult with the company having postponed product launches, Bowles nevertheless expected to make further progress this year toward BAT’s aim to produce revenues of £5 billion through novel products by 2023–2024.

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    Consolidating brand properties

    In 2019, BAT increased its NC revenue to £1.3 billion, which represents 37 percent growth compared to the previous year and more than double the revenue from two years ago. BAT sold 226 billion vapor units and 9 billion HTP units in 2019, up 19 percent and 32 percent, respectively, over the previous year. With a plus of 188 percent, modern oral products saw extraordinary growth. The company sold 1,194 million pouches in 2019.

    In November, BAT began to streamline its NGP portfolio to further accelerate the growth of its NC business, thereby creating three global brands. Vapor products will be branded as Vuse and HTPs will continue to be branded as Glo whereas modern oral products will be marketed under the Velo brand. The brand consolidation, taking place in phases, is set to be completed by the end of 2020.

    BAT’s flagship Vype brand will also be migrated to Vuse, currently a brand manufactured by R.J. Reynolds Vapor Co., a subsidiary of Reynolds American Inc. (RAI), which BAT acquired in 2017. Launched in 2013, Vuse once was the U.S.’ most popular e-cigarette, reaching a market share of 33 percent in 2015 before Juul overtook it in 2017. In 2019, Vuse recovered some of the lost territory, claiming a market share of 14 percent. Growth was driven by the launch of Vuse Alto, a pod-mod type vaporizer. In October 2019, RAI submitted a premarket tobacco product application (PMTA) to the U.S. Food and Drug Administration (FDA) seeking market authorization for a range of Vuse flavors. At the time of writing, the FDA’s court-ordered May 12 PMTA deadline was likely to be extended by 120 days because of the coronavirus pandemic.

    Fell is confident that BAT will be able to pursue its growth strategy in the U.S. despite the nationwide restrictions on e-cigarette flavors that took effect in February. The ban applies to mint and fruit flavors that are offered in cartridge-based e-cigarettes, such as the pods sold by Juul Labs. Menthol and tobacco flavors continue to be allowed as well as fruit flavors delivered by disposable vapes, vapor devices with an open-tank system and their respective e-liquids. “BAT has been gaining share of the U.S. vaping market, helped by the success of its Vuse Alto device and also because, relative to major competitors, a smaller proportion of its portfolio has been hit by the flavor ban,” says Fell. “In the short term, the growth of the overall vaping category could be impacted by the challenges and ongoing uncertainty posed by the May 2020 PMTA deadline, which may now be extended due to the Covid-19 outbreak. But in the long term, BAT should be in a very strong position to compete energetically in the U.S. vape market and certainly has the resources to meet the increasing regulatory demands.”

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    Jonathan Fell

    Pushing forward

    BAT’s Glo has been sold in Japan and South Korea—the world’s leading HTP markets—along with Eastern Europe, Russia and Canada, among other markets. To support the expansion of Glo across Europe, the company in 2018 started a €800 million ($875 million) five-year investment program in its Romanian factory.

    With around 70 percent of global industry volume, Japan is by far the largest market for HTPs. The segment in that country is currently led by Philip Morris International (PMI), which debuted the category in 2014 with the launch of IQOS and holds a 71.8 percent share. BAT launched Glo in Japan in 2016, and the product held a 20.1 percent category share in 2018, according to Reuters. To narrow the gap with IQOS, BAT in 2019 launched three new Glo variants in Japan: Sens, Pro and Nano. A fourth version was supposed to be introduced around press time.

    “I think we will see increased efforts in this category, starting with the launch of Glo Hyper—with larger tobacco sticks and a device which uses induction heating—in April,” says Fell. “Rather than stressing it wants to be a leader in HTP specifically, BAT is very committed to its multi-category approach,” he adds. “It is well ahead of PMI in vaping and smokeless and will offer a choice of modern oral tobacco, vapes or tobacco-heating [products] that [are] relevant to consumer needs in individual markets. Hence, BAT says it wants to go ‘from a distant number two to a very strong number two’ in HTP.”

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • New Dispensing Technology Prevents Tube Crushing

    New Dispensing Technology Prevents Tube Crushing

    Photo: Republic Tobacco

    Republic Tobacco has developed a new patented technology for dispensing cigarette filter tubes with newly designed E-Z Dispenser gravity feed cartons for King and 100 mm Sizes. Filter tubes are fragile and can be easily crushed while taking them out of a traditional box. Crushed tubes are unusable for consumers.

    The E-Z Dispenser box design provides a solution allowing cigarette filter tubes to be dispensed one at a time without damage. The new cartons continue to open the conventional way, by pulling open the top lid or they can be used in the new gravity feed mode. 

    The gravity feed is easily engaged by pulling down the corner flap as shown on the front of each carton and pulling out the viewable tube. Tubes will continue to drop down into the corner as each tube is taken out. By removing them at the filter tip end from the gravity feed dispenser, surrounding tubes won’t be crushed. 

    This new technology will be available in Gambler, Tubecut, TOP and Premier brands.

  • Dealing With Disruption

    Dealing With Disruption

    Photo courtesy of the Avant Garde E Liquid vape bar

    The U.S. tobacco industry prepares for the “new normal.”

    By Kenneth Robeson

    The impact of the coronavirus pandemic and economic shutdown on the tobacco industry has been, as with most other industries, both unavoidable and traumatic.

    But the shock to its system having been weathered, the business endures. The job now for executives in various segments of the industry is figuring out how best to adapt to the altered landscape that the scourge has left in its wake.

    “In tobacco, the short-[term] to medium-term impact is likely to be rather limited, but the attitudinal and behavioral changes engendered—in particular, increased emphasis on lung health, discrete consumption and mood management—will amplify tobacco’s underlying longer term challenges,” says Shane MacGuill, senior head of tobacco for Euromonitor International.

    Time spent in forced lockdown will ultimately result in a variety of outcomes in different markets depending on regulations and traditions, MacGuill suggests, “and may impede consumption in some and facilitate [consumption] in others.” However, Covid-19 is a respiratory illness “and there is increasing focus on whether smoking may be a factor in driving more severe outcomes amongst infected populations. The evidence for this is mixed and unclear currently.”

    That and other challenges to various segments of the tobacco business are formidable but will ultimately prove surmountable.

    Altria suspended manufacturing in Richmond after detecting cases of Covid-19 among its workforce

    Manufacturers

    “Manufacturers are the most impacted as we cannot produce any longer at this time since all the companies, including the ones overseas, are shut at this moment,” says Ed Kashouty, the owner of cigar maker Hiram & Solomon, which is based in Nicaragua, has offices in Brick, New Jersey, USA, and distributes across Florida. “We are feeling the same impact on our industry as others, depending on our situation.”

    Cigar lounges remain closed in many states, with others operating strictly as pick-up centers. “It is a big loss for the owners themselves,” Kashouty laments. “Our sales force is not working as no sales are coming from cigar lounges. This is something new for us that we [have] never experienced before, so we have no plans at this moment besides surveying day by day.”

    Like their counterparts in other industries, tobacco companies are stepping up to do their share. Altria Group announced in late March that it had committed $1 million to support immediate local coronavirus relief efforts in its headquarters’ community of Richmond, Virginia, and its other manufacturing and grower communities. “This is an unprecedented time, and it’s critical that businesses step up to meet the challenges in the communities where we live and work,” said Billy Gifford, Altria’s vice chairman and chief financial officer, in a statement. Executives have also made a commitment to pay manufacturing employees their regular base wages during a temporary two-week suspension of certain plant operations and to evaluate additional pay continuation beyond that timeframe as needed.

    In an online statement, Japan Tobacco International USA in Teaneck, New Jersey, noted that it is taking precautionary measures “beyond government restrictions and [has] put in place additional health and safety processes in all [its] supply chains, R&D centers and distribution networks to make sure we protect our employees and reduce the risk of disease transmission in every area of our business.” Executives promised that they are “taking every possible step, within local restrictions, to minimize business disruption and the adverse effect it could bring to communities, consumers and our customers around the world.”

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    Retailers

    For convenience stores, a major channel for tobacco products, the key is adaption.

    “You only have to look out your window to see that there are fewer drivers on the road,” notes Jeff Lenard, vice president of strategic industry initiatives for the National Association of Convenience Stores in Alexandria, Virginia. “That naturally places challenges on convenience stores that often cater to time-starved commuters or those seeking a quick pitstop off the highway.”

    With so many fewer drivers, Lenard continues, there has been “a huge transition from immediate consumption and impulse purchase—83 percent of the items purchased at a convenience store are consumed within the hour—to a planned excursion that is as much to stock up as anything.”

    Convenience stores have seen a decrease in fuel sales and in-store traffic, Lenard continues, “but for now, tobacco sales have largely held. However, those impulse sales that went along with the tobacco customer are decreasing.” He concedes that it is difficult to predict how future sales will play out “with new restrictions announced on a daily basis by local, state or federal officials.”

    The coronavirus has impacted tobacco in a couple of ways, suggests Erin Breeden, merchandising manager for Hat Six Travel Center in Evansville, Wyoming. “First, when the people were panic buying, they did not leave out their tobacco. They overbought and bought us out of almost all main line items. Secondly, we were impacted when the Altria packing plant closed, and allocations were put on all our distributors.”

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    Eric V. Patterson, merchandising manager for Beacon & Bridge Market in Flint, Michigan, says he expects the industry to see “some pretty soft numbers” for the next several weeks. “The first week that there was major public reaction to the coronavirus, we saw an uptick in tobacco sales from people panic buying. However, sales have since declined over the prior year because our everyday customer is making fewer trips—lack of need along with the shelter-in-place-order.” 

    Patterson sees sales stabilizing and potentially increasing in the convenience store sector the longer the country keeps nonessential businesses closed. “The reason I say that is because one of our primary competitors in the tobacco category, tobacco/cigar shops, are not considered to be essential businesses.”

    Steve Sandman, who earlier this year joined Pixotine Products as chief operating officer, agrees that consumers are stocking up on essentials, “and nicotine users consider their product of choice essential. We’ve seen explosive growth in Pixotine Nicotine toothpicks as [consumers] are able to use them inside their homes during the lockdowns that are occurring.”

    Sandman says it is important that retailers carry “more-than-usual inventories as folks stock up and use more products as their daily routines are unusual now.” He adds that the industry “could see more sales declines in vaping and cigarette smoking due to the increased risk associated with the coronavirus.”

    Tobacco sales are down around 20 percent, reports Debbie Divine Cornell, manager of retail operations for Divine Corp. in Spokane, Washington, and she does not see a turnaround happening any time soon. The family-owned company, founded in 1956, operates a dozen Fasmart convenience stores across the greater Spokane and Spokane Valley areas.

    Cornell and her colleagues are keeping tobacco orders to a minimum and have more “other tobacco products” (OTPs) available, most notably ZYN, the smoke-free, spit-free, tobacco-free nicotine pouch produced by Swedish Match. “I think it may push to more consumer OTP products,” she said. She recommends that retailers lower their prices for the time being. Overall, she favors “lower prices and increased back-end money for retailers” as well as “increased promotional buy downs on top sellers.”

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    Supply chain

    Supply chains have been and continue to be disrupted significantly, Ryan Mathews, president of Black Monk Consulting in Eastpointe, Michigan, points out. “Distribution points are closed. Drivers are getting sick. Warehouse workers are not immune to Covid-19, and all that will continue to have a negative domino effect. Supply may be interrupted, but the real issues will be cost, ease of access and, I would assume, a degree in new products. And that doesn’t even begin to address decreased demand.”

    In structural terms and for the near future, says MacGuill, there is sufficient manufactured product in global supply chains to withstand even lengthy periods of production shutdown, “at least with regard to the predominant cigarette category.” On the demand side, the bulk of tobacco consumption is not discretionary, “and therefore the majority of tobacco consumers will continue to use it at some fundamental level, even if there is an element of moderated behavior.”

    Ahead

    Unfortunately, the effects of the coronavirus will almost certainly outlive the pandemic itself.

    “It would seem to me that since both [the] corona[virus] and tobacco attack the lungs, the pandemic isn’t likely to be too good for the industry,” Mathews suggests. Executives, he adds, also have to look at their customer bases.

    “Drive by any food service operation or high school or bar and you will see bunches of smokers huddled together, pariahs from the nonsmoking world,” Mathews says. “Well, those food service workers are underpaid to start with, and many aren’t working, and the high schools and bars in many states are closed. So the money to buy the product and the venues to enjoy it have both suddenly become more limited.”

    Normal, says Mathews, “isn’t even on the horizon yet, so I wouldn’t bet too much that it will come charging back to save the industry.” He calls it too late for contingency planning. “Elvis has left the building. Much better to focus on new strategic thinking.” The industry’s wisest approach going forward, he hints, might be a more subdued one. “In a regulatory world where everything is up for grabs and all eyes are focused on the virus and public health, it might be best to keep a lower profile.”

    “Surely,” says Kashouty, “for a few months, we are going to see the worst and are hoping for the better. All our future projects are on hold now as all manufacturers are closed, and we fear that some will not be able to ever open again.”

    Supply chains from China and South America are shut tight, he adds. “Few shipping channels are still operating with major delays in delivery times.” Thus far, there has been only minimal impact on consumers “as they are still getting what they need from either supermarkets or online sales.”

    Over the next few years, the most significant fallout from Covid-19 in the tobacco industry will come from the severe economic downturn it will cause, MacGuill points out. “Additionally, in a wider sense, permanent changes in consumer behavior such as purchasing patterns and the inhabitation of public and private spaces could have a substantial impact on tobacco and nicotine use.”

    MacGuill feels there is a “significant” likelihood that the crisis “will drive demand for other substances beyond, and in competition with, nicotine.” In addition, companies should be aware of the likelihood of temporary changes in regulation, “particularly around supply and distribution, permanently becoming part of a post-Covid reality.”

    Smoke shops will suffer the most, Patterson suggests, because they were not judged to be essential businesses and will lose share to both convenience stores and dollar stores. Still, he remains optimistic about the future.

    “Once major tobacco companies are back to full operational status,” he concludes, “I think the disruption will go away.”

     

  • Nipped in The Bud

    Nipped in The Bud

    Photo: Milkos | Dreamstime.com

    India’s ban on vaping comes with unintended consequences.

    By Stefanie Rossel

    A small but burgeoning product category was blighted when India prohibited the import, production, advertising and sale of vapor products in late 2019. The nationwide ban came after several states and union territories had implemented similar restrictions on electronic nicotine-delivery systems (ENDS) in previous years.

    “This was the culmination of a five-year effort to ban e-cigarettes, which began in 2014 when the central government set up three panels to advise on the way forward,” explains Samrat Chowdhery, founder and director of the Association of Vapers India (AVI). “The way these committees were constituted—staffed with anti-tobacco harm reduction [THR] tobacco control experts and government officials—the outcomes were pre-decided and all three recommended a ban.”

    Since then, the government had been turning on the screws. Opposition by consumers and later the vapor industry delayed the process but failed to prevent Parliamentary action. “Because of this uncertainty from the start, the e-cigarette market in India grew haphazardly without the involvement of major industry players and much below its potential,” laments Chowdhery.

    Reliable data on India’s fragmented vapor market at the time of the ban are hard to obtain. Euromonitor reckons that around 0.06 percent of Indians used ENDS in 2018—a figure Chowdhery calls “conservative”—up from the 0.02 percent the World Health Organization (WHO) estimated for 2016–2017.

    With online platforms being the key purchasing channels, according to Euromonitor, the Indian vapor industry comprised mainly small businesses—retailers, wholesalers, e-liquid manufacturers and a few vape shops, according to Chowdhery. “Devices were not made in India, relying solely on imports from China,” he says. “Still, the outlook for the market was good, slated to grow at 60 percent per year until 2022, following Euromonitor’s India report.”

    The devices available catered to middle-class and upper-class segments of the population, who are predominantly cigarette smokers in their 20s to 50s. “This is, however, not to say that vaping technology cannot work for the lower, i.e., bidi-smoking segment,” says Chowdhery. “Devices like the CE6, despite not being manufactured in India—which would bring their cost further down—were available at price points bidi smokers could afford. India is among the largest producers of liquid nicotine, which would allow e-liquids to be made quite cheap. If the industry was encouraged to innovate in this space, more price-friendly solutions could be developed. We did not see a lot of conversion from smokeless tobacco to vaping, though there are some instances. One reason could also be affordability as smokeless products are even cheaper than bidis.”

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    Lost opportunity

    Samrat Chowdhery

    In its argument for a ban, India’s government took its cue from the WHO, which supports the prohibition of vapor products and neglects their potential for THR. According to government officials, the ban was enacted amid concerns of youth uptake of vaping—a theory refuted by leading health experts and not fully supported by population data.

    India’s approach is hard to comprehend from a public health perspective, given the number of tobacco users in the country. According to the WHO, India is home to 120 million smokers, representing about 12 percent of the world’s smokers. Only China has more smokers. Most cigarettes consumed in India are bidis, hand-rolled, inexpensive cigarettes that contain more nicotine, carbon monoxide and tar and present a greater risk of oral cancers than conventional cigarettes. An estimated 1 million Indians die from smoking-related diseases each year, the WHO says.

    In addition, India has about 200 million users of smokeless tobacco, including various forms of chewing tobacco snuff and tobaccos that are applied to the teeth and gums. The most popular forms are khaini, zarda, naswar and gutka. While generally perceived as being less hazardous than combustible cigarettes, these products present several health issues. According to a Business Wire report, India’s oral cancer rate is the highest in the world.

    Tobacco, however, is an important economic sector in India, which is the world’s second largest producer and third largest exporter of leaf tobacco. The industry employs roughly 46 million people. According to the Tobacco Board of India, tobacco products contribute more than inr430 billion ($5.65 billion) annually to the government’s tax revenue.

    Contrary to the situation in most countries where combustible cigarettes dominate tobacco consumption, cigarettes and bidis together accounted for only 8 percent of India’s tobacco market in 2018, according to Research and Markets. Nonetheless, cigarette smokers bear an overwhelming share of the tobacco tax burden in India. In the smoked tobacco segment, legal cigarettes accounted for around 10 percent of consumption but approximately 86 percent of tax revenues. Cigarette taxes in India are among the highest in the world. Statista estimates that revenues in the cigarette segment will amount to $13.78 billion in 2020.

    According to Research and Markets, the cigarette market is dominated by ITC with a market share of 84.27 percent (2018). The Indian government has a 28 percent stake in the company. The situation in India is complex, according to Chowdhery. “The Indian government is a major shareholder in the country’s largest cigarette maker, ITC, which likely sees vaping as a threat to its established core business,” he says.

    “Then there are influential tobacco control groups funded by Bloomberg Philanthropies and backed by [the] WHO, which hold a highly prohibitionist mindset. Smoking, primarily cigarettes, which are also the primary market for vaping products, generates a significant amount of tax, which the government relies heavily on. Further, awareness about THR is quite low, starting from the top as was evident from the low-quality debate in Parliament when the vape ban bill was discussed. These factors combine to make a powerful force against vaping, which will take some serious effort to counter,” says Chowdhery.

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    Into a black market

    In recent years, the AVI has been pushing back against restricting access to reduced-risk tobacco alternatives, Chowdhery says. “Our efforts are mainly in three categories: legal, lobbying and awareness. In 2016, we moved court against the vape ban in the state of Karnataka and over the next three years filed similar challenges in other states, which had the cumulative effect of delaying the ban for almost two years as the state machinery was forced to reverse positions and find new ways to implement a ban. More recently, we filed another challenge against an ad hoc order of the civil aviation ministry that has led to confiscation of vape devices from air travelers, despite consumption not being banned. We have also reached out to lawmakers to sensitize them to THR as an intervention strategy and have also launched public-facing awareness programs. A small study was done to evaluate the effectiveness and affordability of vaping for bidi smokers with encouraging results.”

    He observes that morale among vapers is low in the wake of the ban, but resilience is building. While some vapers have left advocacy groups, others have become more dedicated to fight the ban. “There are some, especially those who had recently switched and were still on the journey to completely transition to vaping or those who do not have access, that have gone back to smoking,” says Chowdhery. “This is an extremely negative outcome. But there are also many who are trying to figure out alternative means. These are bleak times. The state machinery is in full swing to further demonize vaping and turn public opinion against it while the devices themselves are hard to find.”

    The ban is likely to fuel an illicit e-cigarette market. When states prohibited vapor devices, some started importing vapor products under the “electronic products” category. Enforcement of regulations in India is weak—witness the difficulty authorities have had enforcing state bans on gutka, which is used by more than 25 percent of India’s population.

    Yet there are key differences between the gutka and vapor business, according to Chowdhery. “The gutka industry is primarily run or backed by politicians or those with deep connections, he explains. “It was widely used before the ban so there was a large consumer base; it was not competing with another product, as vaping competes with cigarettes; and the gutka ban left loopholes that were easy to exploit: Gutka makers now sell the areca nut mix and tobacco separately, both of [which] are not individually prohibited. None of these hold for e-cigarettes. It is true, however, that enforcement is lax in India, and as long as there is demand, there will be suppliers to fulfill it.”

    While the ban is recent, Chowdhery is already witnessing a change in market dynamics as established businesses exit and newer, smaller ones adapted to a prohibitionist environment take their place. “This is likely to continue for some time until a new structure emerges, which will also be influenced by enforcement actions and the willingness of the authorities to take them,” he says. “But if the experience of other low-[income] and middle-income countries [LMICs]—Brazil, Mexico, Thailand, etc.—is any indicator, it won’t be long before there is a thriving black market in India. Consumer interests, however, are not best served through this means as there is little control on quality, standards and prices.”

    Missing the target

    In 2017, India set itself the target of “relative reduction in prevalence of current tobacco use by 15 percent by 2020 and 30 percent by 2025.” With tobacco control focusing almost entirely on cigarettes, which account for only a small share of tobacco consumption in India, Chowdhery says it is unlikely that India will achieve its goal.

    “It is evident that a vape ban is both a lost economic and health opportunity,” he says. “After the government ban on e-cigarettes, vapers have been forced to either go back to smoking or resort to a black market, both of which are detrimental to the nation’s health policies and the ban itself. One the one hand, 120 million smokers are deprived of an effective means to quit or reduce harm. On the other [hand], with no quality control over the black market, chances of vapers consuming tainted products and untoward fatalities in the process is a real concern.” 

    Chowdhery does not expect the situation to improve soon unless the courts intervene. The AVI is hoping regulators will allow for some “carve outs” from the ban.  

    “In the meantime, the gap between nations that allow or promote vaping and those like India that have banned it will grow in terms of smoking decline rates and tobacco-related mortality and morbidity,” says Chowdhery. “THR awareness, too, is likely to increase, and demonstration of vaping working for the poorer sections, the bidi smokers, could help convince policymakers of its benefit. Acceptance of THR in smokeless tobacco use, for instance snus replacement for gutka and khaini users, could help expand its application to smoking.

    “The vaping ban is in place; it is a reality we have to accept, and overturning it will be a slow, determined process, though we do have encouraging examples from Canada and the United Arab Emirates, which revised their positions,” concludes Chowdhery. “But it is more likely that things will get worse before they become better as there is now a trend in LMICs, pushed by [the] WHO and Bloomberg Philanthropies, to opt for bans [rather] than regulations.”

    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.