Category: Also in TR

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Chewing the fat
Manufacturers, aficionados and researchers talk snus in St. Louis.
By Taco Tuinstra
Snus enthusiasts gathered on May 27–28 in St. Louis, Missouri, USA, for the first Snus Con, a conference featuring experts from Sweden and the United States. Organized by Chad Jones of the popular snus blog www.snubie.com, the event tackled topics such as tobacco harm reduction, regulation and science. It also highlighted a remarkable innovation—Sting Free Snus—and featured several tasting panels.
Snus represents only a small share of global tobacco sales, but the product has a dedicated following, which became clear during the St. Louis meeting. Attendees passionately discussed their beloved smokeless tobacco, sharing news, tips and experiences. Illustrating the attachment some snusers feel to their product, one prospective participant was detained by U.S. immigration authorities after refusing to surrender a snus can containing Cuban tobacco.
The main snus markets are Sweden, with about $1 billion in annual sales, and the United States, with annual sale of approximately $800 million. The product is also gaining popularity in Norway. Due to a misguided risk assessment, snus is illegal in all EU member states bar Sweden—although that may change soon. The European Court of Justice is set to hear a legal challenge to the ban, and industry representatives are cautiously optimistic it will rule in snus’s favor.
Without the disease-causing byproducts of combustion, smokeless tobacco is considerably less harmful to health than are cigarettes. Unlike smoking, it presents no significant risk for emphysema, heart disease and stroke.
Brad Rodu
Brad Rodu, professor at the department of medicine of the James Graham Brown Cancer Center at the University of Louisville in Louisville, Kentucky, USA, kicked off the conference by detailing “the Swedish experience.” Sweden has the lowest rates of lung cancer and other smoking-related diseases in Europe, which Rodu attributes to tobacco consumers using snus instead of cigarettes. The country has the highest rate of male smokeless tobacco use and the lowest rate of male smoking in Europe. “If men in other EU member states smoked at the rate of Swedish men, almost 274,000 lives per year would be saved,” said Rodu.
Regrettably, this enviable state of affairs doesn’t extend to Swedish women, who are less likely to obtain nicotine through snus than are their male counterparts. According to Rodu, Swedish women are more likely to smoke. But while snus is still considered a male habit, women under 30 appear less hesitant to pop a pouch underneath their upper lip. If the trend holds, quipped Rodu, “it would be the first time in history that women adopted a healthier behavior from their husbands.”
Joe Ackerman
Joe Ackerman, director of marketing at Swedish Match North America, spoke about his employer’s vision: “a world without cigarettes.” He described a continuum of risk, with cigarettes residing at the very top and smokeless products near the bottom. “We operate at the safer part of the continuum,” he said. Ackerman marveled at the sheer variety of nicotine products, which had come about in response to concerns about the health effects of smoking.
The cigarette remains the ultimate nicotine-delivery device, he noted. “Without the health concerns about smoking, the other categories would not exist.” Ackerman went on to describe one of Swedish Match’s latest offerings, Zyn, which is currently being marketed in the western United States. A smoke-free and spit-free nicotine pouch, Zyn contains nicotine salt derived from tomatoes and tobacco leaves, along with food-grade ingredients, such as pH balancers and sweeteners. Careful to avoid health claims, Swedish Match markets Zyn as a “clean” product.
Swedish Match’s commitment to responsibility became evident also from the fact that Zyn’s child-safety lid—a first in the industry, according to the company—is sufficiently secure to deter even some adults. “I can kill a bear with my hands, but I am unable to open your can,” a burly audience member complained to Ackerman.
Jonas Yden
Jonas Yden, global director of Skruf Snus, told the story of his company’s meteoric rise. Created only in 2003, Skruf has managed to carve out a respectable niche in a business dominated by centenarians. In its first year of operations, the company packed 400,000 cans of snus; this year, it expects to manufacture 94 million.
While such rapid growth is exciting, it also presents challenges. “We are building the rocket ship while flying it,” said Yden. With machines running 24/7, it is difficult to test new innovations. Yden attributed Skruf’s success to its startup culture, which includes “the freedom to screw up,” and the fact that the company offers to snus users “something other than tradition.” Impressed by the company’s performance, Imperial Tobacco (now Imperial Brands) took a minority stake in Skruf in 2005 and purchased the remaining shares in 2008. As Scruf continues to grow and becomes more corporate, Yden said it must take care to retain its entrepreneurial spirit.
Larry Waters
Larry Waters of SnusCentral introduced himself in the way a heavy drinker might present himself at an alcoholics support group meeting. “Hello, I am Larry, and I am a nicotine addict,” he said to an amused audience. A former smoker, Waters credits snus with the fact that he’s alive today. He started snusing with R.J. Reynold’s Camel Snus—a product that was simultaneously scoffed (for its taste) and lauded (for introducing Americans to the category) throughout the St. Louis conference—and quickly “upgraded” to Swedish snus.
Within one week, Waters transitioned from using cigarettes and snus side by side to using only snus—and like a true convert he couldn’t stop telling people about his experience. He started blogging, reviewing products, sharing tips and commenting on industry developments. “I wanted to create a site where Americans could find everything about Swedish snus—a one-stop shop,” said Waters. In 2009, he visited Sweden at the invitation of snus manufacturers, who recognized the potential of the U.S. market. Unable to contain his excitement at being in the “Walhalla of snus,” Waters kissed the tarmac upon arrival.
Lars Rutqvist
A particularly interesting contribution to the St. Louis conference came from Lars Rutqvist, senior vice president for scientific affairs at Swedish Match, who also managed to quit smoking with snus. Prior to joining Swedish Match, Rutqvist led the oncology department of the Karolinska Institutet in Stockholm. Among other projects, he researched the risk factors for head, neck and mouth cancers.
Rutqvist’s studies quickly confirmed the roles of smoking and drinking but not the link with snus use. Because his findings went entirely against conventional wisdom in the 1990s, the department was reluctant to accept them. “In medical school we were taught that snus is a major risk factor for cancer,” said Rutqvist. But even after rechecking the basic data, he got the same results: Snus was not a contributor to any of the researched diseases. As it turned out, many of the prior studies supposedly linking snus to cancer related to powdered snuff instead.
When Sweden joined the EU, it received an exemption on cultural grounds from the bloc’s snus ban but was required to start printing cancer warnings on cans. Confronted with the new science, the EU in 2001 allowed Sweden to replace the warning with a more generic one. Rutqvist is hopeful that the EU will soon take the next step: lifting the snus ban. While the European Court of Justice rejected an earlier legal challenge, many things have changed since 2004, according to Rutqvist. Not only is the science more conclusive today; the European Commission has, under pressure from consumers, also been forced to accept e-cigarettes in its new Tobacco Products Directive. What’s more, leaving the snus ban in place would be discriminatory now that a regulatory route for novel products has been introduced.
Rutqvist was also optimistic about Swedish Match’s modified-risk tobacco products (MRTP) application in the U.S.—to the extent that he felt comfortable to bet a bottle of whiskey on its approval in 2018. In its MRTP application, Swedish Match asked the U.S. Food and Drug Administration (FDA) for permission to modify snus health warnings to more accurately reflect the current science. Even though the agency denied Swedish Match’s initial petition, it left the door open by allowing the company to submit an amended application.
Rutqvist noted that the level of scientific expertise at the FDA’s Center for Tobacco Products is much higher than that among its EU counterpart, which he said is staffed primarily by career administrators.
During Snus Con, speakers repeatedly stressed the importance of consumers, who are able to interact with authorities in ways that snus manufacturers cannot. Inspired by the World Health Organization’s Framework Convention on Tobacco Control, many lawmakers keep tobacco companies at arm’s length, preventing meaningful discussions and often resulting in ill-informed legislation.
Alex Clark, executive director of the Consumer Advocates for Smoke-free Alternatives Association (CASAA), which is best known for its work on behalf of vapers, stressed his organization’s support of snus users in the U.S. “People know us as ‘the vaping people,’” he said, “but CASAA talks about all alternatives to smoking.”
Rutqvist, too, spoke approvingly of consumer involvement. “I once naively thought that science could solve all problems—but politics trump science,” he said. Fortunately, Rutqvist added, politicians in many countries are beholden to consumers, who are also potential voters. The EU exception for snus in Sweden and the European Commission’s capitulation on e-cigarettes can both be attributed to consumer pressures, according to Rutqvist. “So, consumers trump politics,” he said. “That’s why conferences such as Snus Con are so important.”
The next Snus Con will be held in the summer of 2018. The date and location will be announced at www.facebook.com/snuscon.

July 1, 2017
African anthology
New data underscores the diversity of Africa’s tobacco markets.
By Shane MacGuill
This month, Euromonitor International is adding 20 markets to its direct research coverage, bringing the number of markets under its scope to 100, representing 98 percent of global cigarette volumes.
In this article, the market intelligence company offers a preview of its research findings from Angola, Ivory Coast, Ethiopia, Ghana and Tanzania. These markets share no single unifying constant other than that they have recently been added to Euromonitor’s coverage. In fact, their diversity in traditions and outlooks indicates that the prospects for tobacco are far from homogenous across the African region.
Angola: Tobacco losing relevance but not volume
Angola, the largest market by value of the five, is one where tobacco has played a substantial role in the past but where smoking is becoming increasingly denormalized. As is the case in other regional markets, traditionally tobacco has been of economic importance in Angola as an employer and revenue generator. But as other sectors expand and government regulations—such as a 2017 law banning tobacco advertising—began to bite, the industry’s importance has declined.
Angola has an estimated smoking prevalence rate of around 17 percent, though this is believed to be decreasing among both males and females (slightly more rapidly among the latter than the former). Nonetheless, with overall population growth, the outlook for cigarette volumes is broadly stable, with the total market expected to remain around 4.5 billion sticks between 2016 and 2021. Widespread availability through kiosks of affordable cigarette brands such as SL, Aspen and Yes is contributing to this volume stability.
The manufacturer of SL and Yes, British American Tobacco (BAT), controls some 65 percent of the market, with Japan Tobacco International (JTI) accounting for a further 20 percent through its Aspen brand. Illicit cigarette volumes represent about 20 percent of total consumption in Angola, with most illicit products being sourced from China.
Unlike some other markets in the region, Angola is home to an active anti-tobacco lobby. Health advocates argue for enforcement of existing tobacco control legislation, as well as the imposition of further restrictions. This means that Angola’s growing population is likely to be balanced by lower prevalence in the short to medium term.
Ivory Coast: Price-conscious smokers fuel growth
In contrast to Angola, use and acceptance of tobacco in Ivory Coast has increased in the past decades and appears to be still growing. Smoking prevalence among males, around 25 percent, far surpasses that of females (less than 1 percent) but is growing in both cohorts. Female smoking is becoming more socially acceptable, and female prevalence is much higher in younger generations than it is in the population as a whole.
Cigarette volumes stood at an estimated 4.7 billion sticks in 2016, and the market is forecast to grow to 5.5 billion by 2021. Despite a rapidly declining share, Imperial Brands still leads the market, with its Fine brand accounting for about a half of all consumption. Smokers in Ivory Coast are price conscious, with more than three quarters of volumes shared between Fine and Craven A, BAT’s low-priced brand.
Between 2002 and 2011, the country went through a severe internal political crisis, with the New Forces controlling the country’s northern region for large parts of this time. During this period, illicit sales of cigarettes grew immensely, especially in the northern part of the country, reaching 30–35 percent of the total cigarette volume sales. Following the country’s reunification in 2011, the illicit trade started declining. Today, it accounts for between 5 percent and 10 percent of total cigarette sales.
The government is doing little to inform consumers about the risks of tobacco or to discourage people from taking up the habit, and this is reflected in growing smoking rates. There is currently little to no domestic civic anti-tobacco organization activity in the country.
Ethiopia: Significant scope for growth
The largest by volume of Euromonitor’s five new markets, the Ethiopian tobacco market is exhibiting strong signs of growth. Historically, tobacco has played a small role in society, being consumed primarily by elders in a traditional manner. However, in recent years the prevalence of tobacco smoking, especially cigarettes, has increased within the country’s towns and cities. Even though tobacco was—and, to some extent, still is—considered taboo by a majority of the society, the social acceptability of smoking has clearly increased in the past decade or so. Prevalence remains relatively low in Ethiopia; according to a 2015 study by the World Health Organization (WHO), 8 percent of males and 1 percent of females were smokers. However, there is reason to expect this rate to continue to grow—at least in the short term—particularly in the absence of concerted government or civic anti-tobacco activity.
Just under 7 billion cigarettes were consumed by Ethiopian smokers in 2016, according to Euromonitor estimates, and this figure is forecast to grow by more than one-third in absolute terms up to 2021. The value of the cigarette market is expected to almost double to $600 million in the same period.
Data points such as these perhaps go some way to explaining why JTI was willing to part with $510 million for a 40 percent stake of the state-controlled National Tobacco Enterprise, which dominates the market, selling four in every five cigarettes consumed there. BAT and Philip Morris International share the remainder of volumes.
Illicit penetration, estimated at above 30 percent of total consumption, is much higher in Ethiopia than in any of Euromonitor’s other five new African markets. Indeed, it is elevated even at a regional level. Driven by demand for lower-priced products among consumers, illicit brands are often sold through formal distribution channels, particularly outside major urban areas.
Ghana: A tale of two (or more) regions
The smallest by volume of Euromonitor’s new African markets, Ghana has a relatively low engagement with smoking, even though there has been a multinational presence in the country since the 1950s, when BAT Ghana was incorporated.
Sales boomed in the 20 years after the country gained independence in 1957, but this growth was not as sustained as it was in other markets. Contributing factors include (eventual) state-ownership of tobacco companies, unfavorable economic conditions (which made products unaffordable and difficult to manufacture) and relatively restrictive regulation.
Best estimates of smoking prevalence in Ghana indicate that the rate is below 10 percent among males and around 1 percent among females, though national estimates are complicated by significant regional variations. Smoking is concentrated in Ghana’s three northern regions, where more than a third of adults smoke—in comparison to the capital, Accra, where around one in 20 do. In areas with lower rates of smoking, tobacco consumption remains relatively socially unacceptable and often publicly invisible.
After a decade or more of volume growth, cigarette consumption in Ghana appears to have peaked in 2012 at just under 1 billion cigarettes. In 2016, an estimated 850 million cigarettes were consumed, and this is expected to decline further up to 2021. Despite ceasing local production in 2006, BAT continues to dominate the market and is the only official importer of cigarette products. Leading brands include Rothmans, Pall Mall and London.
Tanzania: A substantial but declining role for tobacco
Tobacco is of substantial importance to the Tanzanian economy. In 2016, according to the Bank of Tanzania, the country exported $312.7 million worth of tobacco, representing nearly a third of exports including cashew nuts, coffee, cotton, tea, cloves and sisal. The industry still employs thousands of people and is among the top revenue contributors to the government, with annual contributions of about $40 million. Historically, this has impacted attitudes to tobacco and tobacco consumption in Tanzania. In recent years, however, anti-tobacco activism has begun to influence public and government thinking, which, in turn, is becoming increasingly opposed to the product. During the past decade, smoking has become much less socially acceptable, particularly in public spaces.
According to 2013 WHO data, an estimated 16.3 percent of the population aged 15 and older in Tanzania is made up of tobacco smokers, though this rate is higher for male adults aged 25–64, of whom more than a quarter are regular smokers. It is still socially acceptable for men to smoke in Tanzania, albeit increasingly less so. In contrast, it is socially unacceptable for women to smoke, something reflected in an estimated prevalence rate of 2–3 percent. Heightened anti-tobacco and health awareness campaigning, such as that conducted by the Tanzania Tobacco Control Forum, along with enhanced government restrictions are expected to drive prevalence down in the short to medium term.
As a result, there appears to be a secular decline of about 1–2 percent in Tanzanian cigarette volumes, with a market size of about 5.5 billion sticks in 2016 forecast to decline by about 300 million cigarettes by 2021. However, in contrast to other markets in the region, illicit trade penetration is relatively low (around 5 percent), and the value of the legal cigarette segment (a little more than $300 million) is set to grow despite volume losses. The Tanzania Cigarette Company (owned by JTI) will be the major beneficiary of this value growth. It dominated the market in 2016 with more than 80 percent of sales. Portsman, Sweet Menthol, Club and Safari are among the most popular brands.
Shane MacGuill is head of tobacco research at Euromonitor International.
June 1, 2017
A clean slate
Bond Street’s heat-not-burn technology aims to overcome some of the limitations associated with reconstituted tobacco.
By Joseph Matus Fuisz
Joseph Fuisz is an attorney and a graduate of Yale and Columbia law schools. He started and sold Fuisz Tobacco, a tobacco dissolvables company. He works in drug delivery and next generation tobacco products and is an inventor on more than 30 issued U.S. patents, including the largest patent estate in oral thin film drug delivery. Fuisz is a partner in Bondstreet Manufacturing LLC(www.bondstreetwax.com).
Heat-not-burn tobacco is a relatively mature segment that is finally getting attention. This is attributable to several drivers, including an increasing desire for products with reduced toxicants relative to combustibles, the success of the vapor industry (pointing to previously underestimated consumer demand for combustible alternatives) and an increasing understanding of the types of alternative products that engage adult smokers.
Philip Morris International’s (PMI) iQOS is the most remarkable tobacco product launch in living memory. IQOS has achieved a success in Japan—admittedly a nonvapor market—that is the envy of the sector. PMI achieved this by dedication to a platform—the electronic heating of a specialized reconstituted tobacco sheet—that had negligible consumer success in its Accord and Heatbar variants. British American Tobacco has now rushed to join the party with Glo, which follows this same reconstituted tobacco approach.
At our company, Bond Street, we view the reconstituted tobacco approach as counterintuitive. Why lock up components—intended to be aerosolized—in a solid sheet matrix? Moreover, this approach (like any) has inherent limitations. Because reconstituted tobacco sheet requires specific mechanical properties, and because of the nature of film and sheet formulation, there are practical limits on the amounts of glycerin (vapor agent) and flavor that can be included. Moreover, there is the possibility to get unwanted flavor notes from the excipients (typically cellulosic polymer) needed to make the sheet.
That iQOS receives such positive consumer feedback is a tribute to the strong evolutionary work of its product developers. Akin to the Porsche 911’s inherently challenging rear-engine architecture, the platform underlying iQOS has been coaxed to product excellence despite the peculiar reconstituted tobacco sheet approach.
On Bond Street, we approach the heat-not-burn space from a clean page: Our solution is to employ a wax partition taken from a cured tobacco blend. The wax partition brings over the rich flavors of the blend and nicotine—the elements that consumers want and that make adults enjoy tobacco. This wax partition is mixed with vapor agents and, optionally, with flavors. The patent-pending process and compositions have no unwanted flavor notes because all the components inherently taste good. Nontobacco excipients are solely present for flavor and additional vapor—i.e., to enhance the user experience—not for mechanical properties.
In addition to rich tobacco and other flavors, the Bond Street wax approach compositionally affords unlimited vapor and unlimited flavor. Nicotine levels are controlled as well, from 0.5 percent to 6 percent. Because the composition does not need to be formed into a sheet, new compositions can be readily created.
Perhaps most interesting is the preservation of the blender’s art in the new field of next-generation heat-not-burn tobacco products. Whether making a cigar wax, a combustible replacement or a shisha-type product, the craft of tobacco blending comes through in high fidelity.
Bond Street views its wax platform as having broad potential in various tobacco channels, including combustible cigarette alternatives, cigar alternatives, shisha and blunt-style products.
Our combustible alternative is called iPek, from the Greek “κερί,” meaning wax. IPek is a modern lifestyle brand to compete in the heat-not-burn space for adult cigarettes. The cigarette blend will be sold in Nespresso-style pods that are used in a personal vaporizer. Taste, vapor product and nicotine delivery all compare favorably with the competitive set, as confirmed by sensory evaluation. IPek is offered in tobacco, menthol and adult flavors.
Our cigar alternative is sold under the Havana Wax brand. Bond Street recognizes the challenge of successfully selling heat-not-burn products into this channel that is so deeply committed to flavor and experience—an as yet unprecedented step. Yet we believe the rich flavor of our wax platform makes the cigar market too enticing to pass up.
Govern’s is directed to the sophisticated hookah user. With an ingredient listing nearly identical to shisha (minus the nonvaporizable molasses) our heavily flavored Govern’s should be a dream for the shisha fan heretofore tethered to her shisha pipe and unimpressed by nonsensical attempts to rebadge vapor products as e-hookah.
Our Blunt wax brand is geared to the blunt smoker who wants to enjoy a blunt experience in a contemporary vapor/wax pen.
We believe the future for Bond Street is bright in the exciting trail being blazed by iQOS and Glo around the globe. For a small independent manufacturer, navigating the global markets for heat-not-burn products across multiple channels is a substantial undertaking. We think we’ve chosen the right page to start from, and we are looking forward to the road ahead.
June 1, 2017
Rock solid
Despite mounting anti-tobacco pressures, the top cigarette brands are more valuable than ever.
By George Gay
At the International Food & Drink Event (held March 19–22 at the Excel center in London), Japan Tobacco International (JTI) hosted a stand dedicated to the future of brands, which was designed as a “wake-up call to global food and drinks companies that their brands are under increasing attack of excessive regulation.”
“JTI has been on the front line fighting bad regulation for several years, and as regulators look to hit food and drinks companies with the same punitive taxes, pictorial health warnings and even ‘plain’ packaging—a measure which bans any form of branding on packs—we have experience and expertise that we would like to share,” Jonathan Duce, head of external communications at JTI’s global headquarters in Geneva, was quoted as saying on JTI’s website.
The note went on to say that whether it was a bottle of wine, a chocolate bar or a fizzy drink, excessive regulation not only impacted large product manufacturers but also threatened small businesses, including design and packaging suppliers. Small shops—often central to communities—could be hit hard by ill-thought-through regulation such as plain packaging through struggles with implementation costs and logistical constraints, confused customers who couldn’t find their products, slower transaction times, product inventory issues, and impacted margins. The creative industry was indirectly under attack too, as branding bans would affect their other fast-moving consumer goods clients, while smaller boutique/craft businesses that were becoming increasingly popular would suffer disproportionately from the attack on their brands.
“Regulators are ‘copy and pasting’ tobacco-style regulations into other sectors without any thought as to whether they worked elsewhere,” said Duce. “Australia failed to speed up the already existing decline in smoking rates after banning branding on tobacco packs more than four years ago. In fact, the measure backfired and distorted the whole competitive landscape. It didn’t change whether people smoke—it changed what they smoke. Between two products, smokers now choose the cheapest. This includes illegal tobacco, which has increased by over 20 percent since the introduction of the policy.”
On JTI’s website www.thefutureofbrands.com, there is much information about some of the ways in which regulations that have been used against tobacco products are being applied to other types of products. Indeed, the website quotes Olivier De Schutter, former UN special rapporteur on the right to food, as saying, “Unhealthy diets are now a greater threat to global health than tobacco. Just as the world came together to regulate the risks of tobacco, a bold framework convention on adequate diets must now be agreed.”
The website lists a number of regulations already imposed or being brought in on nontobacco products, of which the following are some. Thailand has imposed pictorial health warnings on alcohol products, Indonesia is considering alcohol plain packaging, France and South Africa have placed restrictions on alcohol advertising and promotion respectively, and Australia has imposed a 70 percent tax on alcopops. A number of countries, including France, Belgium and the U.K., have adopted or proposed special taxes on soft drinks containing sugar, and Hungary has implemented a law imposing such taxes on foods such as prepackaged sweetened products with high sugar content and foods with high fat and salt content. Mexico has introduced advertising restrictions on sugary soft drinks, and Ireland has introduced advertising restrictions on fast food and foods with high sugar content. The Canadian province of Ontario has proposed pictorial health warnings on chips, pizzas, grape juice and chocolate milk, and Chile has imposed 20 percent health warnings on sugary drinks.
Prompting change?
This all sounds very worrying up to a point, but, given that some people champion these sorts of restrictions, it is as well to ask whether they are a good thing or a bad thing, and whether they are universally good or bad. And I guess these questions have to be asked from the point of view not only of the brand owners, their suppliers and retailers but also from that of consumers and society in general.
It could be argued that the pressure put on the tobacco industry over the years helped to prompt the invention of electronic vapor products, and most reasonable people would consider this to be no bad thing I think. So if pressure is brought to bear on these other industries and their products, could it be the case that the businesses that make up these other industries might start casting about for solutions to the health problems that their products help to create?
One thing seems certain: They won’t do so of their own volition. Otherwise they would have done so by now. This is not to say that they are unethical, though some might be; it is merely a question of competitiveness. It would be competitive suicide for one company to change the formula of its products to make them less risky if, in doing so, they were made less appealing to the consumer. Other companies would merely take advantage, and relying on consumer loyalty would be naive. Clearly it is the case that, like the tobacco industry, these other industries need to be the subject of regulation; the question concerns only what sorts of regulation.
But perhaps one of the most interesting questions concerns why JTI is taking the trouble to alert other industries to the dangers posed by excessive regulation. As far as I know, solidarity across industries has not been a feature of tobacco’s experience in the past, and, if a survey carried out earlier this year by the World Intellectual Property Review is anything to go by, things aren’t set to get better. The publication asked its readership whether the intellectual property (IP) sector was fighting a losing battle against standardized packaging. Ninety-three percent of replies answered yes, but the point was made by one reader that it was the tobacco sector rather than the IP sector that was losing. One reader was reported to have said that public health concerns did and should outweigh IP rights, while another apparently said that IP rights did not have greater force than legislation designed to protect public health.
All things considered, it seems to me that there is a certain logic in putting pressure on industries, businesses and their risky products, but I cannot say I’m in favor of the sorts of policies used against the tobacco industry. Increasing taxation, especially in the case of sugary drinks and fast food, would certainly be regressive—as it is in the case of tobacco—because these are the sorts of products mainly consumed by the financially worse-off within most societies. I have never been a fan of bans on advertising and promotion because I do not see these as having a great impact on volume sales, though they can cause existing consumers of a particular product to try a different brand.
As to graphic health warnings and standardized packaging, I have to ask whether the world needs further uglification. Imagine a world where graphic health warnings were applied to tobacco products; alcoholic drinksp; fatty, salty and sweet foods; and sugary drinks. A visit to the supermarket would be a nightmare. Or rather, it wouldn’t, would it? Because we would all gradually block out these images. But then again, what would a trip to the supermarket be like if all of these risky products were the subject of display bans? It would be a logistical impossibility. We would all have to shop online, which would at least have the advantage of disallowing people from squeezing the avocados and then putting them back. I take it that it is not possible to squeeze such items in a virtual way and cause actual bruising.
The way to handle these risky products, including tobacco, is for governments to provide the public with accurate information about their possible deleterious effects and to let people make their own choices. After all, as somebody pointed out long ago: There are no bad foods, just bad diets. In some countries, where illiteracy is widespread, some of that information might have to be delivered via illustrations, but, even so, it should not descend into propaganda.
As valuable as ever
On the other hand, another way to deal with the brand issue is to let governments regulate as they think fit because it won’t make any difference. In March, Brand Finance issued a press note titled “Tobacco Brand Values Hit New Highs in Spite of Regulation.” According to the note, more than 80 percent of tobacco brands are growing in value.
Brand Finance said that each year it values the brands of thousands of the world’s biggest companies. “Brands are first evaluated to determine their power/strength (based on factors such as marketing investment, familiarity, loyalty, staff satisfaction and corporate reputation) and given a corresponding letter grade up to AAA+,” it said. “Brand strength is used to determine what proportion of a business’s revenue is contributed by the brand, which is projected into perpetuity to determine the brand’s value.”
The company made the point that during the past 15 years, an accelerating tide of regulation had swept over the tobacco industry. There are now significant restrictions on when and where consumers can buy and use cigarettes in most markets of the Organisation for Economic Co-operation and Development and many in other markets too. “The advent of plain packaging is an even more fundamental threat, putting the very existence of tobacco firms’ brands at risk,” it said. “In its strictest form, it will prevent companies from differentiating themselves and from communicating quality and unique features to consumers. This could ultimately commodify the product, leading to a race to the bottom in terms of price and quality.”
But so far so good, I guess. Brand Finance went on to say that despite the apparently existential threat of this regulation, the world’s top tobacco firms were managing to increase the value of their brands. “Marlboro, the world’s most valuable tobacco brand, has achieved an all-time record brand value of $32.4 billion,” it said. “A decline in Western markets is being offset by growth in other parts of the world such as China, Indonesia and Africa where regulation remains weaker. Marlboro is also successfully extending its brand into new products. Many of the major tobacco brands were slow off the mark to embrace e-cigarettes; however, Marlboro’s iQOS system and HeatSticks are now proving hugely popular, demonstrating the brand’s power.”
Brand Finance’s CEO David Haigh said Marlboro’s success was by no means an isolated case, with the brand values of major names such as Pall Mall, L&M, Newport and Winston all growing this year and the likes of Parliament, Sampoerna and Chesterfield enjoying double-digit growth. “Despite the well-founded health concerns and mounting regulation, the value of these brands for their owners and investors remains robust,” he said. “The day when the value of tobacco brands goes up in smoke is a long way off.”
I don’t think that this is at all surprising, partly because of the brand mergers that have been introduced. But in any case, when tobacco advertising restrictions and bans first came in, the theory was that the well-known and respected brands that were on a market before it went dark would continue to dominate that market after advertising was banned. A lot of people said that this dominance would last for 10 years, but I think that was an underestimate. And I think the same will apply in the case of standardized packaging. It is often said that standardized packaging is unbranded, but this is clearly not the case. The branding is limited, but, importantly, the brand name is still there. The consumer who turns up at her local tobacco retailer and cannot see the brand names of cigarettes because they are so small or because displays have been banned can, unless she has a lot of time on her hands, rely only on her memory, and her memory will be loaded with the biggest brand names. Where branding is severely limited, the products that are likely to suffer are the least-known brands. And new-brand launches become extremely difficult.
And I don’t get the argument that smokers will opt for the cheapest brands simply because of standardized packaging, unless the “quality” of the top brands hangs only on their packaging. Smokers and the consumers of other under-threat products might go for the cheapest brands, but this they will do rather as a result of having to survive in a broken economic system where shortsighted companies use redundancies as a profit tool or offer only insecure jobs that pay starvation wages. One of the biggest dangers to brand values has to come from the actions of companies in general and even from some of the owners of those brands, not from regulation.
June 1, 2017
The heat is on
As the success of iQOS continues, Philip Morris International gets ready to launch its other reduced-risk products.
By Stefanie Rossel
Jacek Olczak
Has Philip Morris International (PMI) found the magic bullet the tobacco industry has long been searching for? The company’s first-quarter results suggest it is well on its way toward the smoke-free future that has become PMI’s declared goal.
Amid lower-than-expected cigarette shipment volumes, the company’s heat-not-burn (HnB) platform iQOS remained the shining light. PMI sold 173.6 billion cigarettes in the first quarter of 2017, 11.5 percent fewer than in the previous year’s quarter. However, sales of iQOS consumables, (commercialized as Heets and HeatSticks) ballooned to 4.4 billion units from 453 million units.
PMI’s HnB device continues to show impressive growth. The product also fits nicely with PMI’s broader strategy of divesting low- to no-margin volumes in favor of the premium end of its portfolio, says Wells Fargo Securities analyst Bonnie Herzog.
Japan, where iQOS was tested in 2014 and rolled out nationwide in 2016, remains the largest market for the reduced-risk product (RRP). Today, its performance continues to be the prime driver of PMI’s results in this market, according to chief financial officer Jacek Olczak.
The national market share of iQOS increased by 5.4 points in the first quarter to 7.1 percent, driven mainly by Marlboro Heets, which also helped grow the entire Marlboro share, including combustible cigarettes, to 17.1 percent. The performance is even more remarkable when viewed against the backdrop of industry volumes declining by 7.4 percent in Japan.
IQOS is also doing well in its other launch markets. In the first quarter of 2017, it reached national market shares of 0.5 percent in Italy, 0.9 percent in Switzerland and 0.4 percent in Portugal. In Germany, where iQOS was introduced in Berlin, Frankfurt, Wiesbaden and Munich last summer, the product reached a combined share of 0.8 percent in the last week of March, Olczak said.
The product is currently available in key cities in 24 markets. The most recent launches took place in Lithuania, Colombia, South Africa, Poland, Serbia and France.
New territory
That PMI is entering unchartered territory became obvious in several launch markets. In New Zealand, one of the most heavily regulated markets for tobacco products, the health ministry declared iQOS consumables—but not the device—illegal because they supposedly violated a 1990 law prohibiting tobacco products intended for uses other than smoking.
Arguing that the law was not developed for heated tobacco and e-cigarettes, PMI has continued marketing iQOS to registered adult smokers through an “invitation-only” website. At press time, the health ministry said it was still investigating the matter.
Taxation has been an issue, too. Russia, where iQOS has been test-marketed since 2015, has created a new tax category for heated tobacco products. Heets are now subject to an excise of rub4,800 ($82.1) per kilogram, according to ECigIntelligence. The rate is expected to rise to rub4,992 in 2018 and rub5,192 in 2019.
In Israel, two lawsuits accompanied the launch of the product. In March, the country’s health ministry announced that iQOS would be exempt from tobacco regulation until the U.S. Food and Drug Administration (FDA) decided on the company’s modified-risk tobacco product (MRTP) application. Given that the FDA’s assessment could take until 2018 or even longer, this implied that iQOS and Heets would be exempt from tobacco excise taxes, could be sold in Israel without health warnings and could be used in public for a considerable time.
Alleging favoritism, Israel’s domestic cigarette maker, Dubek, filed a lawsuit. The second petition, presented by third parties, including two health groups, asked for iQOS and Heets to be recognized as tobacco products. In early April, the justice ministry decided that, in the absence of an FDA decision, iQOS should be sold as a tobacco product, subjecting it to all restrictions on tobacco marketing, advertising and public smoking.
Seeking FDA approval
By the year’s end, PMI aims for iQOS to be present in 30 to 35 markets. High on the list is the United States, where the company has submitted not only an MRTP application but also a premarket tobacco product application (PMTA), which would allow PMI to market iQOS independent of the MRTP process. If the FDA approves the PMTA, the product would be marketed by Altria, the parent company of Philip Morris (PM) USA. Herzog predicts that iQOS will be launched in the U.S. this year.
Due to tax hikes, bans on tobacco marketing and smoking in public places, as well as growing health awareness, smoking in the U.S. has been declining since the 1960s. In 2015, prevalence stood at 15.1 percent. The figure is expected to further decline by around 3 percent annually until 2040, according to data published by the Centers for Disease Control and Prevention.
PMI is the first company to seek FDA approval to market an HnB product as being less harmful than traditional cigarettes. If the claim is approved, it would be a game changer for Altria and PMI. Not only would PM USA obtain a substantial marketing advantage over other RRPs, including e-cigarettes, but such a decision would also facilitate entries into other markets. The assessment, however, will take time. At the time of this writing, it was still unclear whether the FDA would even accept PMI’s application of 2 million-plus pages. Several MRTP applications have been filed with the FDA, but the agency has yet to sanction a modified-risk tobacco product.
Increasing capacity
Herzog is optimistic about the potential of iQOS. “Based on current success, we expect PMI to achieve critical mass—i.e., a 2 to 3 percent smoker share—within 12 to 24 months of entry into any given market, in line with PMI’s expectations,” she commented in an investor’s note. IQOS, she added, was resonating strongly with adult consumers. “Smoker conversion rates are exceptional across markets at 70 to 80 percent, and adult smoker awareness is growing—it now stands at 70 percent in Japan compared to 90 percent awareness of conventional Marlboro cigarettes.”
Favorable taxation of the consumables is expected to further contribute to the success of the product. At present, tax rates on HeatSticks are between 20 to 30 percent lower than those on combustible cigarettes, says Christopher R. Growe, managing director at Stifel Food and Tobacco Equity Research. “We believe this could add significantly to profitability for PMI, as the product tends to sell at the same retail price as the combustible products. We believe this opportunity represents upside to the company’s estimate of $720 million to $1.2 billion in annual profits from RRPs.”
More than 2 million adult smokers worldwide have already switched from combustible cigarettes to iQOS, PMI’s chief executive officer Andre Calantzopoulos said at the company’s annual shareholder meeting on May 3. In March, the company announced that it would invest approximately €300 million ($323.72 million) to convert its Papastratos cigarette factory in Greece into a manufacturing facility for the tobacco sticks to be used with iQOS. Located near Athens and expected to be fully operational by January 2018, the factory is expected to produce 20 billion units annually. PMI aims for an annual capacity of 100 billion units by the end of 2018.
The company also has a HeatSticks factory in Bologna, Italy, and a small-scale development center in Neuchatel, Switzerland.
The addition of production capacity will reduce per-unit production coast, according Herzog. She expects iQOS to generate $500 million in operating profit in 2018, increasing to around $15.5 billion by 2025.
Progress at all levels
In the meantime, PMI’s other RRP platforms are making progress, as well. Platform 2, to be commercialized under the name Teeps, is also an HnB product. Unlike iQOS, which heats tobacco using an electronically controlled blade, it features a carbon heat source that, when ignited, transfers heat to a patented tobacco plug.
Teeps is said to be more similar to a combustible cigarette than iQOS, which may make it an even more attractive alternative for smokers. It will also come with Marlboro-branded consumables and is scheduled for city tests and a possible national launch this year, according to Herzog.
Platforms 3 and 4 contain nicotine but no tobacco. Branded “Steem,” Platform 3 generates a nicotine-containing vapor using nicotine salt. When a consumer draws on the mouthpiece, a chemical reaction between nicotine—a weak base—and a weak organic acid takes place to produce a vapor containing nicotine salt. PMI acquired the Steem technology in 2011 from Jed Rose, of Duke University, and other inventors. The company expects to test the product in 2017.
PMI’s Platform 4 is called Mesh. It is a closed-system e-cigarette that features a new heating technology. Instead of using a wick and coil, as is common in most e-cigarettes, the Mesh atomizer has an embedded stainless steel mesh with more than 1,300 tiny holes in its cartridge. According to PMI, this increases the surface area in contact with the e-liquid and allows the e-liquid to be heated more precisely.
Mesh cartridges are manufactured, assembled, pre-filled and pre-sealed in a fully automated, Good Manufacturing Practices-compliant process in Europe, thus meeting strict regulatory requirements and addressing concerns of vapers regarding product quality, safety, consistency and origin. Mesh has been developed by Nicocigs, a U.K. vaping company that PMI acquired in 2014. The product is currently being tested in Birmingham, U.K.
Reflecting on the company’s progress toward a smoke-free future, 2016 was a pivotal year, according to Calantzopoulos. To date, PMI has hired more than 400 scientists and invested more than $3 billion in the research and development of RRPs.
The company has published the results of its scientific assessments of iQOS in more than 200 peer-reviewed publications and is talking with regulators around the world to make a case for its heat-not-burn technology.
To support its efforts, PMI has also increased transparency. In April, the company presented its Intervals website, an inhalation-toxicology repository for RRPs. The proof-of-concept data-sharing initiative hosts comprehensive, annotated data sets generated by PMI as part of its development and assessment of reduced-risk products.
June 1, 2017
Rolling with the punches
Developing customized, flexible and efficient solutions, machinery makers are meeting the challenges of an industry in transition.
By Stefanie Rossel
The pace of change in the tobacco industry has accelerated significantly in recent years. The decrease of global cigarette sales volumes continued in 2016, amounting to an estimated 3 percent; in China, sales volume reportedly even shrank by 8 percent. New regulations, such as the revised EU Tobacco Products Directive, which was implemented in May 2016, are forcing tobacco companies to focus on compliance.
This year started with British American Tobacco’s takeover of Reynolds American Inc., another mega-merger that is likely to lead to further rationalization of production sites and perhaps further concentration among the tobacco giants. As demand for combustible cigarettes declines worldwide, cigarette alternatives continue to show impressive growth rates.
Ian TIndall
In response, cigarette manufacturers have started repurposing their factories. In March, Philip Morris International (PMI) announced a €300 million investment ($319.59 million) to convert its Papastratos factory in Greece from a cigarette-making facility into an iQOS “tobacco sticks” plant.
Unsurprisingly, investments in traditional tobacco making and packing equipment have been lower in the past few years. “We are all certainly operating in a very challenging environment,” says Ian Tindall, innovation and marketing director at Molins. He remains optimistic, however. “Despite the consolidation of the industry that we all hear about, there are still many independent players who continue to invest, albeit in a more modest scale than some of the big multinationals. They see the value of working with established and reputable suppliers, and so there is some space to operate.”
And even beyond smaller tobacco companies, the machinery sector still offers considerable opportunity; it just takes the right strategy to seize them.
Molins, for example, identified the need for a full end-to-end offering for the mid-speed market where reliability, robustness and quick brand changes are key. “We have introduced the Alto and Octave making machines to compliment the Forte filter maker, and then introduced the Optima hinge-lid packing machine to give true make-pack capability from a single supplier,” says Tindall.
New business models
At the same time, Molins reorganized its business into a “one-stop shop.” “We have amalgamated Langen Group, Molins Tobacco Machinery, Molins Technologies and Cerulean into a single company: Molins,” says Tindall. “This has immediately added to our offering comprehensive testing capabilities that can be delivered to our customers through the Cerulean brand. We can now deliver a total make-pack-test line and even a whole laboratory for regulatory testing if needed. This merging of companies has also given the customer access to a greater number of field engineers and, when considering special projects, a larger number of scientists and development engineers. We believe by offering more support to our customers we can allow them to concentrate on what they do best, and this brings success for both us and them.”
TMQS of Germany has also gone through a transformation. Starting out as a supplier of spare parts in 2001, the company today describes itself as a solutions provider.
“While we are not focusing on providing new machinery as our main field of business, the important point for us is to deliver whatever is required in terms of improvements, leading to a better machinery usage, improved embedding of machinery into their new surroundings, modernized and enhanced data collection, and usage of systems and anything else providing benefit for a factory in its specific situation,” says TMQS sales manager Norbert Schulz-Nemak.
“All this needs to happen with a very high value-for-money ratio, and it must be done with an open-minded approach. Barely any project is like the other, which is due to the specifics of every machine and the required outcome.”
While acknowledging the challenging business environment, Schulz-Nemak believes it also provides opportunities. For example, equipment suppliers can participate in the consolidation process by developing solutions for new production processes or simply by helping factories save money.
“This can range from small solutions like an improved version of a ledger drive for cigarette and filter making via very tailored processes of sub-assembly repair or maintenance with optimal content for the exact requirements or an active diameter control for cigarette and filter makers up to high-tech solutions for very specific products in diverse markets,” he says.
Opportunities prevail
The equipment market is saturated due to the consolidation among the cigarette companies and the subsequent shifting of manufacturing capacities into fewer factories producing larger volumes. However, such developments may also mean good business for machinery suppliers. “These additional manufacturing capacities usually go along with the need for a bigger variety in brands for the receiving factories as long as local brands are shifted to different factories. This could also mean that new machinery is required as space is limited but capacities are to be increased. And even if no new machinery is required, specific standardizations or modernizations may need to be projected in order to bring all machinery to the factory standard,” says Schulz-Nemak.
Even as cigarette volumes continue to decline, the variety of brands is increasing as consumers demand more individualized products. For cigarette manufacturers, this means shorter production runs and more frequent brand changes. “As multinationals continue to develop new variations of existing brands and try to develop new brands, we are also seeing a resurgence in format change parts for the MK9 Classic and orders for new machines,” confirms Tindall. “This mid-speed machine is known as the ‘workhorse of the industry,’ and over the years has shown to be perfect for any cigarette variant.”
He says that these changing consumer requirements might spawn a new type of “boutique” cigarette producer targeting very specific markets. “To us, this niche is one we have targeted and fulfill well.”
Joining forces
Tobacco machinery suppliers have also embraced digitization, automation and interconnectivity. Molins’ latest equipment is capable of communicating with other parts of the production line, including makers, packers and testing equipment. It is ready to take advantage of developments such as data mining and metrics.
According to Schulz-Nemak, most of TMQS’ solutions are able to share data with the next-level management information system (MIS). “This enables our customers to embed these units into their own MIS and its data to be used for process evaluations or as one basis for higher-level systems.”
These days, tobacco machinery suppliers often cooperate with IT companies.
Working with a partner, Molins can deliver plant-wide quality-assurance data systems, such as Nexus, which has been deployed successfully. “This adds value to the manufacturing chain by ensuring that products are being made to the appropriate quality specifications and that the product is adequately verified,” explains Tindall.
TMQS works with Shenzhen Hualong Xunda Information Technology Co. “They develop complete solutions for whole factories that enable a full reporting and a management of the manufacturing processes on the click of a button,” says Schulz-Nemak. “Everything can be connected—from sensors within the machines providing status messages about the condition of functional groups via information on parts usage on each machine to develop a preventive warning system about potential upcoming breaks based on real usage data via material usage, real-time visualization of all machines in a virtual factory to a full management information system informing about all key parameters of the manufacturing process, ranging from primary to secondary operations and further,” he says.
Staying flexible
In times of industry transition, flexibility is key. “Our firm belief is that, by changing with the industry we can be better placed to meet the demands of consumers and regulators,” says Tindall. “This requires Molins to be an agile partner in changing to meet market demands, and this is reflected in the products we have been bringing to market.”
Schulz-Nemak notes that a concentration of production capacities is usually accompanied by the target of cost reduction, while the quality of the manufactured goods is expected to remain at least at the same level. “TMQS is set up to deliver exactly this, he says. The company, he says, offers direct cost savings, cost savings through standardization and cost savings through technical solutions that, among other benefits, reduce downtime.
This approach, says Schulz-Nemak, allows TMQS to look toward the future with confidence. “The requirements will keep changing,” he predicts. “We are ready for this ongoing challenge.”

May 1, 2017
Elusive potential
India’s promise to the cigarette industry is likely to remain where it has been for a long time—on the horizon.
By Shane McGuill
It is remarkable that a country whose people purchase billions of dollars of tobacco products every year is regarded as a sleeping giant by the cigarette industry. Indian consumers spend more than $20 billion annually on tobacco products (ranking the country 11th in the world), and the rolled manufactured cigarettes (RMC) market stood at 90 billion sticks in 2015, making it the world’s ninth largest. Yet in the context of a 1 billion-plus population, these figures are modest, attaching to the Indian market a seemingly perpetual sense of latent-but-never-quite-realized potential. Indeed, in many ways, the story of tobacco in India is characterized by changes that never arrive.
That is not to say that the consumption of tobacco in India is a marginal pursuit. However, tobacco use in India is significantly more diffuse than that in virtually any other world market. According to the Global Adult Tobacco Survey (GATS), one-third of the India population were daily users of tobacco in some form in 2010. Most of these—20 percent of the population—used chewing tobacco. The remainder was split between smokers of bidis and RMC, with the former having close to twice the level of use of the latter.
In the context of rising disposable income and improved logistics, a long-awaited shift in patterns of Indian tobacco use has been increased uptake of cigarettes. However, while the years between 2010 and 2016 have seen a dramatic shift in usage, it was not in the prevalence of cigarette smoking, which has remained stable. Instead, according to industry sources, on the back of increased restrictions and increased pricing, by 2015 bidi consumption overtook the use of chewing tobacco as India’s dominant mode of consumption.
The government of India intends to restrict the practice of selling cigarettes per stick, which accounts for 70 percent of cigarette consumption.
The driving force behind this shift as well as the lack of traction by RMC is India’s excise and tobacco-control regime, which is rapidly becoming one of the world’s most restrictive. In the past five years alone, India has sought to prohibit the smokeless tobacco category, introduced sweeping graphic health warning regulations and has increased excise taxes on tobacco products dramatically (though not always proportionately across categories). In the aggregate, legislative and excise tightening has benefited the hand-rolled bidi category with declines evident in smokeless tobacco consumption and elevated volume losses in RMC, the segment that dominates in other markets.
Excise evolution is especially problematic to the RMC segment because it has significantly increased the unaffordability of a product segment that has been striving to migrate lower-income consumers from competing tobacco products. The average Indian must work in excess of 2.5 hours at the average wage to purchase 20 cigarettes; in neighboring Pakistan, the equivalent figure is just over one hour, while Japanese and South Korean smokers on average earn quickly enough to afford a pack of 20 cigarettes every 15 minutes.
While the level of excise increases on the cigarette segment has varied year-on-year both in absolute terms and in terms of the balance of stick length segments by which the government levies taxation (13 percent net in 2015, 10 percent in 2016 and 12.5 percent in 2017), since 2012 excise has increased by more than 100 percent. In a fixed-price market, such as India, this goes in toto onto the pack price of lower-priced (usually shorter stick length) brands, with manufacturer margins absorbing some of the increases on premium (usually longer stick length) products. This level of unit price increase has not only acted as a barrier to migration into the category but also facilitated a shift out of it—into the illicit trade or back into the lower-priced bidi segment. The illicit tobacco trade has grown from 10 percent of the total market in 2001 to more than 20 percent in 2016. The price increases have also likely impeded increased uptake from demographics with limited disposable income, such as female smokers or adult smokers under 30.
A further effect of the excise evolution has been an increasing polarization in the market between stick lengths, with fewer consumers seeing the value in opting for products other than either 64 mm (downtraders) or 84 mm (those inclined to trade up). There has been some speculation recently that the government will seek to rationalize India’s excise regime on cigarettes, as recommended by the World Health Organization, away from stick length buckets.
Developments on the regulatory side have been scarcely less striking. India’s packaging legislation has progressed rapidly to stand now (after lengthy legal wrangling) at requiring full graphic warnings covering 85 percent of both the front and back of packs. Indian manufacturers briefly suspended production in 2016 in protest at the imposition of the measure. The federal government is also preparing to enforce nationwide public smoking restrictions. The impact of such restrictions will inevitably vary by region, but it is likely to be significant in major urban areas and will reduce consumption frequency, not least because of the effect on street stalls and kiosks where cigarettes are largely purchased and in the environs of which they are typically consumed.
In the medium to longer term, further regulatory action is probable. Around 70 percent of India’s RMC is purchased as single sticks because low-income consumers purchase as their daily revenue flows allow. The government has promised action to enforce a ban on these transactions, which are complicated by regular excise increases and which blunt the impact of health warnings. In the slightly longer term, India is a strong candidate for the introduction of standardized tobacco packaging.
Going nowhere: India’s tax regime continues to favor non-cigarette tobacco products.
The Indian RMC market continues to be dominated by domestic players, and in effect it is a duopoly with the conglomerate ITC (in which British American Tobacco holds a 29.74 percent stake) enjoying a retail volume share of 79 percent, followed by Godfrey Phillips India (GPI, which has a relationship with Philip Morris International) with 11 percent. Other domestic players, including VST Industries, share a further 8 percent of the market, with strong presences in certain regions of the country.
In general terms, the involvement of international tobacco manufacturers in the Indian market is limited by government restrictions on foreign direct investment (FDI), and these appear poised to amplify. FDI in cigarette manufacturing has been prohibited since 2010, while other forms of engagement, such as trading relationships and licensing, have been legal. It is under this rubric that GPI manufactures the Marlboro brand on behalf of Philip Morris International (PMI) with the product then distributed and marketed by a PMI-controlled sales operation. In March of 2017, it was widely reported that the Indian government is considering further restrictions on this type of arrangement (though not retroactively), which would have the effect of impairing future expansion by international companies in the Indian tobacco market.
With respect to the manufacturers’ retail partners, newsagent tobacconists and kiosks remain the leading distribution channel for cigarettes, accounting for around 70 percent of volume sales. There is a high density of these outlets, which are embedded in communities and typically benefit from a cohort of loyal consumers living locally. Given restrictions on the advertising of tobacco products to consumers through other media channels, point-of-sale display advertising represents the core marketing and promotional platform for manufacturers. The dominant players concentrate on creating branded material for kiosks and tobacconists, for which operators are compensated.
This type of material primarily takes the form of paper hoardings at point of sale, along with display cabinets and logo-specific hoardings displayed on the front and side of stores. Furthermore, manufacturers also pay to decorate stores with specific brand colors to attract consumers in India’s major urban areas.
Packaging and advertising regulation of the type in force in India tends to mitigate against frantic new product development, but innovation is nonetheless visible, particularly at the premium end of the market. Products incorporating features such as flow filters and packaging innovations have been launched in recent years. Capsule products have also begun appearing, notably across price points. Flavor in general remains niche, accounting for around 1 percent of the market, but is expected to grow in coming years as a range of menthol and other flavor variants, such as Marlboro Kretek, continue to hit the marketplace.
Looking ahead, consumer expenditure on tobacco in India is forecast to increase by more than 50 percent to $32 billion by 2021, as the influence of taxation in all product segments is felt. However, as enhanced regulations, such as pack warnings, public smoking restrictions and potentially even an increase in the legal smoking age, continue to bite, it is difficult to see considerable growth in the RMC segment. Euromonitor International currently forecasts a compound annual growth rate volume decline of about 3 percent in cigarettes between now and 2021, with value evolution also on an only marginally more moderated downward trend. In the same period, India’s per-smoker consumption of cigarettes (already one of the lowest in the world) will decrease further. In essence, another half decade of unrealized possibility.
May 1, 2017
Poised for growth
H.B. Fuller invests in new products and facilities to help its tobacco customers succeed in an increasingly challenging environment.
By George Gay
Currently, there is much talk within and outside the tobacco industry circles about the so-called tobacco endgame, but such talk is far from the lips of Stuart Jenkinson, the business director for converting at H.B. Fuller. “We are still investing, and we shall continue to invest in this market to develop new products to support our customers,” he told me last month during a telephone interview that also included two of his colleagues. “Now, we know there are challenges in the market, but our commitment is to help our customers continually improve their manufacturing processes.”
Jenkinson made his comments during a conversation about a new adhesive that H.B. Fuller has developed. Ipacoll 2616, which is a water-based cigarette tipping adhesive designed for double roller application systems, was developed to deliver consistently and across a wide performance window ultraclean and secure bonding, along with production efficiencies.
Jenkinson and his team decided about a year and a half ago that this was a product they wanted to develop. “We do a lot of the work in our labs in Nienburg [Germany], where they have a specialist tipping rig, which is where we start the new product process,” he said. “And then we engage with the [original equipment manufacturers] and other machine manufacturers to make sure that the product works on their standard equipment and anything that could be new in the marketplace for this application. We then go to specific customers to ensure that it works before we do a full launch, as we will do now.”
What came out this process is a product that Andrzej Dabrowski, H.B. Fuller’s business manager for tobacco in Europe, the Middle East and Africa, described as providing high-performance bonding while running very cleanly on high-speed machines. It is a product that even inexperienced machine operators found easy to handle, he said, because it could be put on a machine and, with the settings having been made, left to operate efficiently at different machine speeds and with different papers.
For companies working in more than one location, it offers also the advantage that H.B Fuller is able to produce it with the same raw materials and to exactly the same formulation in many of its factories around the world. And its clean running is of an order that means that tobacco manufacturers can cut by a significant amount the time their machines are stopped for cleaning.
The clean-running issue was taken up, too, by Jude Liddle, marketing manager for the converting business. “Cutting the cleaning time is an example of how H.B Fuller is always looking to move its products on,” she said. “The company has other good tipping products, so it was about assessing their performance and understanding where that performance could be pushed. In addition, H.B Fuller listens to what its customers are looking for, and, in most markets, that is efficiency—making machines work harder for longer.”
New products and materials
So far this year, H.B. Fuller has announced the launch of two new tobacco industry adhesives, the other being a hot melt designed to work on all filter types, filter materials and filter machines, including filter combiners. HM 8229 E can be used with the full spectrum of filter types, including combined filters, high porous plugwraps, stiff/rigid plugwraps, recessed filters and capsule filters.
Dabrowski said that the new adhesive performed well on the thicker materials that are used on some of the new types of filters on the market and that are more difficult to bond than are thinner papers. It is a completely different hot melt from others that are available. It uses new raw materials that provide a very high hot tack, which means it is able to bond securely to difficult surfaces even if it has not cooled down fully.
This ability to work with difficult materials, he added, is important because, whereas in the past such special filters were manufactured by a limited number of companies producing a limited number of products, now the number of such filters is rising, and they are being produced by an increasing number of companies.
According to a press note issued in February, the new filter adhesive’s ability to penetrate deep into filter paper means that it provides a secure bond and ensures filter integrity throughout the production process and a cigarette’s life. And, the note said, because it can be used across the range of filter types and filter machines, it can help to simplify filter making operations by reducing production complexity, a point emphasized by Liddle. “What we looked at doing with the new hot melt was to widen the performance window,” she said. “So where a manufacturer might have had to use a couple of filter hot melts, he can now use just one. It’s a wider performance window that covers a lot more of the market needs in terms of filter types and paper types, so our customers can achieve complexity reduction in respect of the number of products they have to buy.”
Industry cigarette factory line
New facilities
As well as developing new products, H.B Fuller has been investing in new and expanded facilities. “I think the key recent investment for us as a global company is the factory that we built in Indonesia and that was opened in October,” said Jenkinson. “That factory will be supporting the tobacco market in the region where, obviously, Indonesia is a particularly interesting market in terms of volume.”
Jenkinson said that the new factory, which focused on the tobacco and hygiene businesses, was built on a greenfield site to very high standards. “It’s a question of transplanting best practice that we’ve learned over the years, and that is why the new factories we put in are always to the highest standards,” he said. “It doesn’t matter where they are geography-wise. We have our high standards, and we expect them to be translated around the world.”
H.B. Fuller said in a press note last year that the new manufacturing facility, built on 30,000 square meters of land in Surabaya, Indonesia, had strengthened the company’s presence in the Asia Pacific region, where it already had manufacturing facilities in China, Japan, Malaysia, the Philippines and Australia.
“This could not have come at a more opportune time, as a recent report indicated that significant growth in emerging markets is driving product development and expansion opportunities for consumer goods manufacturers in key countries, including Southeast Asia,” the press note said. “In fact, it is estimated that, by 2025, approximately 50 percent of global consumption will take place in emerging markets.”
It’s not surprising then that H.B. Fuller has also completed recently an expansion of its facilities in India, which Jenkinson described as comprising a regional center of excellence. The Indian manufacturing plant, which has a capacity of 24,000 tons per annum, was built in 2011 at Shirwal, about 65 km from Pune.
The expansion, which constitutes the first phase of a further $20 million investment in India and which officially opened in March, includes an expanded R&D center and new business office. This expansion, the company said, strengthens its commitment to customers in India and neighboring areas. Through the addition of its new business office in Pune, as well as its new state-of-the-art R&D center, spanning 5,000 square feet of the Shirwal manufacturing plant, the company is able to help its customers solve problems and create new solutions more rapidly than ever before.
“We are pleased to be expanding our footprint in India,” said H.B. Fuller’s president and CEO, Jim Owens. “We are optimistic about the new opportunities our new business office and R&D center will provide us—and our customers. By having a state-of-the-art facility and adhesive experts on the ground in India, we will help accelerate innovation in the region and help drive customer performance,” said Owens.
The new R&D center features dedicated areas for conducting experiments, running demonstrations and training customers on its hot melt, water-based, anaerobic and cyanoacrylate technologies. And its proximity to the production floor increases collaboration between the company’s R&D and operations teams. At the same time, the new business office houses 50 employees in customer support and administrative roles.
Jenkinson made the point that the increase in the facilities and the number of people working out of the Indian facility implied, in part, that H.B. Fuller saw the neighboring region as a hub for it to continue to grow. Indeed, also in March, the company announced the official opening of a new office in Dubai, United Arab Emirates, to support the company’s growing base of customers in the Middle East.
The new office in Dubai serves as the operational base for Harsh Gupta, regional general manager for India, the Middle East and Egypt, who is said to be setting up new teams to support customers in these regions and the company’s growth strategy. “H.B. Fuller is known for offering high-quality, high-performing products with exceptional technical support,” said Gupta. “The way we will create competitive advantage in the Middle East is by being more nimble and targeted than our other large competitors. Compared to some of our smaller competitors, we have global scope and strength to take new consumer product ideas and make a global impact.”
So, what’s next in the pipeline? Well, Dabrowski mentioned that H.B. Fuller was already planning its next investment and suggested that a new product was expected to be announced in about six months’ time.

May 1, 2017
After the storm
The European Union has now fully implemented the Tobacco Products Directive, including its rules on vapor products.
By Peter Beckett
Peter Beckett is managing director at PolicyMatters, a leading compliance consultancy specializing in the Tobacco Products Directive. He was head of policy for the Electronic Cigarette Industry Trade Association from 2013–2016.
Two and a half years after it was agreed in Brussels, the deadline for notifying existing products in the EU rolled around on Nov. 20, 2016. The intervening period saw frenzied preparatory meetings and attempts to understand what the Tobacco Products Directive (TPD) meant.
While clarity has been forthcoming in some areas, there was precious little in others: What level of detail would be required on the toxicological profiles of ingredients? What methods should be used for emissions studies? Who would actually look at this data once it had been submitted? We still did not really know the answers when D-Day came along, and in many cases we still don’t.
What was known was that a good effort had to be made to submit justifiable data on ingredients and the known toxicological data on them—emissions studies, quality management. Ingredient disclosures proved to be one of the hardest hurdles to clear. Flavoring companies were understandably nervous about simply handing their intellectual property over to the hundreds of small and medium-sized companies asking for it. Relationships had to be built between these companies and the ever-growing number of TPD consulting companies, and in the end, most of the major suppliers to the industry provided the data companies needed for submission.
Once the ingredients disclosures were obtained, the next step was sourcing reasonably priced toxicological research and emissions services. Many started out seeking the best, but thousands of pounds for a comprehensive emissions study and thousands more per day of a toxicologist’s time added up quickly.
By the time submissions were due, prices had fallen substantially as laboratories took to reducing the number of replicates per emission, meaning each product would only be sampled once rather than three times. At PolicyMatters, we solved the toxicology question through automation, partnering with regulatory software experts at GegaHelix so our clients can use literature searches that are automated and therefore a fraction of the cost.
And as soon as you had all of that—plus a few other dossiers on nicotine delivery, leak-free refilling and production systems—all of this needed to be submitted to the country where it was to be sold using a centralized system created by the European Commission. This process is not as easy as it sounds.
No one who was involved will forget the two-week lead-in to deadline day. About 10 days out from Nov. 20, the e-TrustEx portal—an email-like web interface that was supposed to allow you to upload your notifications—crashed. It stayed offline for nearly a week.
Panic ensued. Compliance companies that had been working on the directive for years began contacting clients and going back on promises they had made to submit notifications by deadline day.
Three days out from the final deadline the system mysteriously started working again. The U.K. Medicines and Healthcare products Regulatory Agency (MHRA) received 1,000 notifications in a single day, but with so much time lost, the IT creaked under the weight of companies rushing to submit their notifications.
A visibly exhausted Beryl Keeley, the MHRA staffer charged with running the U.K. e-cigarette notification scheme, gave a speech at the E-Cigarette Summit in London. The agency could barely contain its frustration with the commission for the mess it made of the submission system. But she promised that the MHRA would give some leeway to late submitters in an email.
That email came as a relief to many; now, if the portal failed and you had good reason for being late, you could simply email the MHRA and tell them, and they would assume you had registered by the deadline. But that was only good for the U.K.—other EU countries made no such declarations.
So the race was still on. Every PolicyMatters client got their submissions in on time—even the ones that asked for our help at the last minute—but by the end we had sleep-deprived teams working on notifications in the U.S., Europe and China.
The e-TrustEx crash was compounded by the fact that the European Commission had provided inadequate software for companies to create the notifications in the required format. They need to be written in XML—which is a kind of computer code—and the XML is validated once it is submitted. In order to make this possible, the commission provided companies with an XML creator app that would spit out submissions that could then be validated by the system.
Unfortunately, this new government-created computer system performed in the same way as most new government-created computer systems do: poorly. Getting all the data entered took hours for each product variant and was not a fun job. The app also had a nasty habit of crashing in the middle of a session and changing certain values within submissions without notifying the user.
We managed to partially circumvent this by modifying the XML creator app so that it would allow us to make copies of notifications we had already prepared. This saved us and our clients hundreds of man-hours on data entry.
By the time all was said and done, 10,000 vapor products had been notified in the U.K. alone, netting the MHRA north of £1.5 million ($1.86 million) in fees. Today, the number of products stands at almost 15,000 and growing.
A number of companies have experienced problems post-notification. Some submitted using the wrong submitter ID; others used proxy services to submit and now have no idea exactly what they have submitted and no way of prizing the information out of the companies they hired in good faith to make sure they complied with the notification requirements.
And there remain new products to be submitted. One great advantage of the TPD system as opposed to that in the United States is that new products can be launched six months after they are notified.
On May 20, all those products that were not notified or those that do not meet other requirements such as the 10 mL maximum bottle size or the 20 mg/mL nicotine limit must be removed from the market. Market surveillance agencies across the EU have been briefed on the importance of this date, so we can expect vape shops to be inspected to make sure that they are complying with the law.
The industry has grown stronger as a result of going through this pain barrier. They have learned how to engage lawyers and consultants and laboratories and scientists, and they have learned the importance of record keeping and maintaining good relationships with regulatory bodies. And now that we are much clearer on the parameters, future Tobacco Products Directive notifications and compliance will be significantly easier and more straightforward.

April 19, 2017
Counterfeit claims
Fake news runs rampant in the vapor industry.
By George Gay
I cannot guarantee that what you are about to read doesn’t include fake news. Partly this is because, not being part of the social media, I’m not certain what fake news is. I had assumed that it was either misinformation, lies or information that, while correct, was no longer new to most people. But having interrogated a member of the Twitterati, I now understand that it is also new information that doesn’t accord with the worldview of the reader.
Given this, I guess the future lies with tailored online news services that deliver to your inbox each day “news” that fits with your prejudices, which you will have described to the service provider and which that provider will have gleaned from snooping on your buying habits and other internet activities.
Although this might sound futuristic and to some dystopian, it is not entirely new. Most people in the U.K. will be aware that one newspaper there will present the news in a way that is different from the way that another newspaper will present the “same” news. Each will present the news as it accords with the generality of the prejudices of its readership, and, of course, the people who buy a particular newspaper will do so because they feel comfortable with the prejudices of the newspaper’s proprietors.
In fact, it could be that news services of the future pandering to the whims of individuals might pose far less danger to the establishment than those that now pander to the whims of groups of people. Individuals can be a nuisance, but groups of people all thinking in the same way can get out of hand. It has happened in the past.
And talking of the past, it is interesting to note that some of the recent debate around fake news and media lies has tended to indicate that once there was a golden period in the past when all news represented the truth. But, of course, the word propaganda didn’t pop into the dictionary during the past few years. The news has been manipulated for as long as news has been disseminated, and no doubt in the future the news services aimed at individuals will be hacked and manipulated.
There are all sorts of reasons why the news is manipulated, but one of the most destructive is that to do with the manipulator’s purporting to act in the best interests of the reader. The tobacco world has been steeped in such manipulation. Some media outlets seem to accept at face value government propaganda about cigarette tax hikes being aimed at “encouraging” smokers to quit and therefore improving their health, whereas the truth is that mostly such taxes and other imposts are levied on cigarettes to fill holes in the budgets that nonsmokers are not willing to fill.
Then there are the rat-droppings-in-illicit-cigarettes stories, and others about how the illegal trade in cigarettes feeds terrorism. Both of these are much-loved by some media outlets because they make great headlines, but they hang on to the truth by their fingernails. At the same time, fake news about oral tobacco has clearly lost its grip.
But probably the most obnoxious flaky fakery is that published as stories that seek to denormalize smokers. What government or organization would seek to denormalize perhaps a quarter of a country’s population? If in a civilized society an attempt were made to denormalize a quarter of the population based on their ethnicity or faith, people, quite rightly, would take to the streets whether they were part of that group or not.
And where the tobacco industry has gone, so goes the nicotine industry. Some days the fake news about e-cigarettes and vaping seems to be in greater abundance than actual news. In part this is fueled by the great lie, perpetrated in the EU and the U.S., that e-cigarettes are tobacco products by dint of their including, in the main, nicotine. At least in the U.S. it can be claimed that this idea has come about through “deeming” regulations; so in a way the U.S. Food and Drug Administration (FDA) isn’t saying that e-cigarettes are tobacco products, just that the FDA deems them to be tobacco products. But how can it be possible to build a stable body of regulations on the basis of a product’s being deemed to be something it is not?
Welcome to the world of vaping, where fake news often approaches the surreal. Recently, Michael Siegel, a professor in the Department of Community Health Sciences at the Boston University School of Public Health, alluded to the surreal nature of the e-cigarette debate on his blog, The Rest of the Story. Referring to an article published in March in JAMA Pediatrics, Siegel said that the U.S. surgeon general was continuing to lie about tobacco in e-cigarettes. In the JAMA piece, the surgeon general reportedly claimed that e-cigarettes were “now the most commonly used form of tobacco among youth in the United States, surpassing cigarettes, chewing tobacco, cigars and hookah.”
Siegel said the article referred to e-cigarettes as a form of tobacco and to vaping as a “form of tobacco use.” “There’s just one problem with the surgeon general’s claim that vaping is a form of tobacco use: It’s not true,” Siegel said. He went on to say that even if the surgeon general wrongly believed that consuming any product that contained nicotine was a form of tobacco use, then he was still lying to the public. “Under that definition, e-cigarettes are not the most commonly used form of tobacco among youth,” Siegel pointed out. “Potatoes are.”
It is through blogs such as The Rest of the Story that the truth seems to emerge, and perhaps gradually people will start to obtain their news from blogs and social media whereby an individual gradually starts to follow only those people that she trusts.
I’m not sure that this is the way ahead, but I’m sure that it will happen unless the mainstream media changes its ways. One of the problems with the mainstream media is its fixation on what it sees as being objective. But its objectivity is odd—at times just a veneer. Often a story will appear with a headline that asks a question such as, “Is vaping as dangerous as smoking?” These stories then go on to discuss this question by asking a number of people from each side of the debate for their views, which often are little more than opinions. So I suppose the idea is that if you take such people’s opinions and throw them together you build an objective piece. I don’t think this is possible. Additionally, some of these pieces will include sentences such as, “Vaping has shot up by 12 percent.” “Shot up” here is an unnecessary intrusion by the writer. Having presented the figure of 12 percent, the reader can figure out whether this represents a shooting up.
In the case of some stories, the question arises as to whether they should have been published when they were, or whether changes should have been made to the way in which they were presented. A perfectly good piece by Linda Searing in The Washington Post was headlined: “Like smoking tobacco, vaping may increase risk of heart disease.” It went on to report on a study published online at JAMA Cardiology and at the end mentioned a couple of caveats: The study involved a small number of people and investigated only cardiovascular effects. It involved steady, longtime users of e-cigarettes; whether the findings would apply to occasional users was not tested.
The question is, given the small sample and the overwhelming importance of vaping in the fight against smoking, should the piece have been left until a time when more comprehensive data were available? Wow, some will say, with justification, this sounds like a call for the suppression of news. Okay, I admit it, but then the headline should have been changed to something that cannot be read as implying that vaping could present a similar level of risk to that of smoking. And the caveats should have been worked in close to the start of the story.
Granted, it is not the job of mainstream journalists to encourage vaping, but neither in my opinion should they discourage its uptake. Often, people glance only at headings and intros, and such a heading is going to stick in the mind.

April 19, 2017