Category: Print Edition

  • In Memoriam: Dayton Matlick

    In Memoriam: Dayton Matlick

    Dayton Harris Matlick, who devoted more than 80 years of his life to working in tobacco, passed away in February at the age of 88. Dayton founded a publishing company in Raleigh, North Carolina, that produced Tobacco Reporter for nearly 40 years. His company also published Vapor Voice, Tobacconist, Flue-Cured Tobacco Farmer, Tobacco Farm Quarterly, Tobacco Science, Burley Farmer and Pipes and Tobaccos. Other topics his company’s magazines covered included golf, firefighting, emergency rescue, truck driving and a support magazine for those dealing with cancer.

    Dayton was raised in Louisville, Kentucky, on a burley tobacco and beef farm. His most reliable (and favorite) mode of transportation to get to town was by foot—his running talent helped him gain a spot on the track team at the University of Kentucky, where he earned his bachelor’s degree in journalism. He then earned a master’s degree in communications from Michigan State University, where he also taught.

    Dayton’s father, J.O. Matlick, who had little formal education, became a local extension agent and then commissioner of Natural Resources for the Commonwealth of Kentucky. Along the way, he began distributing regular newsletters that eventually turned into magazines. Dayton began writing and editing for his father’s Kentucky Farmer’s Home Journal in 1959. When J.O. suffered serious health problems, the magazines were sold to Harvest Publishing in Michigan. Dayton moved with the publications and became an award-winning journalist.

    In 1981, Harvest decided to divest its agricultural division, which Dayton bought and moved to North Carolina under the name Specialized Agricultural Communications, which eventually got shortened to SpecComm. Tobacco Reporter was a natural fit to the existing titles and was added to the company’s catalog.

    As chairman of SpecComm, Dayton traveled the world and made friends on virtually all continents. He had a particular affinity for the art of pipemaking and thanks to his travels (and the magazine he created dedicated to the hobby) was able to amass one of the greatest pipe collections in the world. He was a tobacco Renaissance man, friends with important tobacco people around the world and interested in every detail about the leaf that captivates so many. In 1994, Dayton set up TabExpo, the most respected global exposition for tobacco manufacturers that continues to this day, which also led to the creation of the GTNF. In 2019, Dayton sold SpecComm to TMA.

    Dayton mentored far too many people in the publishing industry to count and created a legacy that will continue to endure. Dayton was a 10th-degree black belt in Taekwondo and continued to practice the art well into his 70s. He was also a voracious reader, loved science fiction and named several of his beloved dogs after characters from Star Wars.

  • Shaping Tomorrow

    Shaping Tomorrow

    The future envisioned by BAT will partially be created at the company’s new innovation hub in Trieste.

    By Stefanie Rossel

    Photo: BAT

    As its corporate slogan suggests, BAT is working to create a future in which its products offer consumers pleasure at a lower risk than that presented by the cigarettes from its legacy business. Part of that “Better Tomorrow” will be created in the northernmost part of the high Adriatic in Italy, where the company is currently building a new innovation hub.

    Located in Bagnoli della Rosandra, part of Trieste’s free port terminal, the innovation hub spans 20,000 square meters and involves an investment of €500 million ($608.63 million) over five years. For BAT, the Trieste manufacturing plant is the first hub within the group that will focus on the production of reduced-risk products,*† including Velo nicotine pouches, Vuse vapor cigarettes and Neo sticks, the consumables for the company’s Glo heated-tobacco product (HTP).

    In addition to hosting a new manufacturing site, the Trieste factory will house a digital boutique, an innovation lab and a center of excellence for digital transformation and digital marketing. These aim to develop innovative projects relating to marketing, focusing on the personalization of the client experience—the increasingly direct relationship with the consumer, with the task of providing new services and marketing techniques, using advanced software and creating partnerships with international players and innovative startups.

    The project emphasizes BAT’s commitment to both its transformation strategy and Italy. “As consumer preferences and technology evolve rapidly, we rely heavily on our growing global network of advanced manufacturing hubs, innovation super centers and world-class R&D facilities,” said BAT Chief Growth Officer Kingsley Wheaton when announcing the establishment of the hub. By 2025, the company aims to generate £5 billion ($5.92 billion) in annual revenue from its new category products. By 2030, it anticipates having 50 million consumers using its noncombustible products. In February, the number of consumers using BAT’s noncombustible products stood at 22.5 million.

    Swift Realization

    Andrea di Paolo

    To find the perfect location for its hub, BAT commissioned a consultancy to study the options, taking into account considerations such as innovation, technology, research and logistics. Trieste emerged as an attractive choice, according to BAT Trieste Vice President Andrea Di Paolo.

    “It is the most important commercial port in Italy, with a trade volume of 62 million tons, and well connected with Europe and Italy,” he says. “Trieste also boasts the highest number of researchers of any European city; there are a lot of startup incubators in the area. Besides, there are the University of Trieste and other education and research centers of excellence. It’s the right place where a multinational company can set up an innovation hub because it enables us to work with local universities and research institutions.”

    BAT’s project is progressing at remarkable speed. After announcing the investment in September 2021, construction started in January 2022. In June 2022, the company celebrated the halfway mark, with construction 50 percent completed, and in December 2022, the facility started producing Velo modern oral products. The plant is expected to be fully operational in May 2023, and the official opening will take place one month later. “It’s a super-fast project,” says Di Paolo. “In less than one year, we managed to build the factory and start production.”

    The Trieste innovation hub will create 600 jobs directly and 2,100 jobs indirectly over the next five years, and the factory will host 12 production lines. Production will be exported to European countries and elsewhere. Up to four lines will produce Velo, helping BAT cater to a rapidly growing market. Nicotine pouches accounted for an estimated $2.38 billion, or 0.3 percent of the global retail market, in 2021. Toward the end of 2022, that value had increased to $5.86 billion, according to Market Reports World. The nicotine pouch market is forecast to expand at a compound annual growth rate of 31 percent until 2028. In 2021, Velo volumes grew by 328 percent compared to the previous year, according to Euromonitor International. Global volume sales amounted to 1.32 billion units in 2021.

    Digital Offensive

    In the second phase of its hub development, scheduled to be completed by 2025, BAT plans to install six manufacturing lines for new category products, such as HTPs and e-cigarettes. “However, the plan can change rapidly in the next few months depending on demand of products and the capacity we have in Europe,” Di Paolo says. The future aim of BAT is to expand the site beyond this.

    In addition to the innovation hub, the Trieste factory will also house BAT’s new digital boutique, an innovation center of excellence for digital transformation and digital marketing. It is the company’s third digital boutique in the world, having already established such sites in the United States (Silicon Valley) and China.

    The center will provide digital services—some of them based on artificial intelligence—for BAT’s European markets. “Consumers are increasingly connected and live in an ever-evolving digital ecosystem,” explains Di Paolo. “The objective of the digital boutique is to anticipate new consumer trends and turn them into memorable moments for our target audience in the new categories.”

    Carbon Neutral

    In line with BAT’s ambition to make its operations carbon neutral by 2030 and achieve “net-zero” greenhouse gas emissions across its value chain by 2050, sustainability has been a major factor in the design of the innovation hub. According to Di Paolo, the site will be carbon neutral from day one, using renewable energy sources and achieving high levels of energy efficiency through intelligent heat recovery, among other technologies.

    “The facility has been equipped with high-efficiency photovoltaic solar panels that produce over 1,200 megawatt hours (MWh) of electricity per year,” says Di Paolo. “In addition, a wind tree has been installed to make use of the fact that Trieste is a windy place. It generates the electricity for electric vehicle charging outside the factory.”

    Furthermore, an autonomous biomass-fueled power plant will produce over 1,900 MWh of heat. It will be supplemented by a 100 percent renewable electricity supply. The factory also features a strict water management system, which reduces water consumption by dry cooling and harvests rainwater. To minimize the environmental impact of logistics associated with product distribution, BAT is cooperating with the Trieste port authority to determine the optimal routes for shipping.

    “Even at this early stage, the Trieste Innovation Hub is an example to follow for BAT’s other factories,” says Di Paolo.

    *Based on the weight of evidence and assuming a complete switch from cigarette smoking. BAT states that these products are not risk-free and are addictive.
    † BAT notes that the products it sells in the U.S., including Vuse, Velo, Grizzly, Kodiak and Camel Snus, are subject to regulation by the Food and Drug Administration and that the company will make no reduced-risk claims relating to these products without agency clearance.
    Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.
  • The Gamechanger

    The Gamechanger

    Photo courtesy of Hindustan Adhesives

    Hindustan Adhesives says its new tear tape is 100 percent sustainable without compromising strength, flexibility and runnability.

    TR Staff Report

    Hindustan Adhesives, part of the fast-growing Bagla Group of companies from India, is a leading global supplier of packaging materials, such as tear tapes, carton sealing tapes and POF shrink film.

    Founded and led by Managing Director Madhusudan Bagla, the company has been active for more than 30 years and has supplied its products to more than 30 countries, with a focus on innovative and environmentally friendly packaging.

    Hindustan Adhesives specializes in the production of tear tapes ranging in width from 1.6 mm to 12 mm and ranging in length between 5 km and 120 km. Available in several colors and designs, these products include self-adhesive tear tapes, up to six-color printed tear tapes, carton tear tapes, heat-activated tear tapes, holographic tear tapes, sustainable tear tapes and specially engineered paper tear tapes.

    Recently, Hindustan Adhesives launched a new range of sustainable tear tapes dubbed The Gamechanger.

    The product was developed in response to bans on single-use plastic in India and other countries. Keen to promote sustainable manufacturing and consumption, India’s federal government in August 2021 amended the country’s Plastic Waste Management Rules from 2016, prohibiting a number of single-use plastic items with high littering potential.

    The legislation took effect July 1, 2022. To comply with the new requirements and at the same time keep their customers satisfied, Indian cigarette manufacturers required a tear tape that would not only be 100 percent sustainable but would also be cost effective and have the same strength and clarity as existing tear tapes.

    Madhusudan Bagla

    “As single-use plastic bans come into effect globally, packaging makers are looking for new ways to eliminate plastics and incorporate more sustainable elements into their designs,” said Bagla. “At Bagla Group, we have also been identifying new ways to help our customers design sustainable packaging solutions while maintaining the performance of traditionally plastic-based tear tapes.”

    Replacing a 30-year-old widely used product is a tall order, however, and required changing the mindset of customers who had become accustomed to the strength, flexibility and smooth runnability of the established tear tapes. Compared with their plastic counterparts, many existing sustainable tear tapes had limitations in those areas.

    Bagla was determined to overcome those limitations. After numerous trials, changes in recipes and processes, his company developed a product that was not only sustainable but also had qualities similar to those of the MOPP 26-micron tear tapes. Thus, The Gamechanger was introduced in India.

    “They thought we couldn’t do it, but we surprised our customers and competitors alike,” said Bagla, who went on to express his appreciation for the tobacco companies’ support, guidance and feedback “without which this product would not be possible.”

    The base film is derived from renewable resources and is compostable according to DIN EN 13432:2000-12, DIN EN 14995:2007-03 and ASTM D6400:2012-01 as well as D6868 and ISO 17088: 2008, among other certifications. It is also formulated to comply with EU legislation for most food contact applications.

    Hindustan Adhesives started developing The Gamechanger in 2021 and commenced trials on customer machines in January 2022. During the development process, the company overcame several challenges. One was the lead time of the base material. The disruption to international transportation due to Covid-19 and other factors caused shortages. Through clever planning and strategizing, Hindustan Adhesives managed to prevent disruptions to its customers.

    Another challenge was the process. The sustainable tape has different requirements than standard MOPP tape in terms of adhesives, which requires some equipment and operator adjustments. This is where Hindustan Adhesives’ experienced R&D and quality control teams came in. The marketing team, in turn, was instrumental in distributing the product for sampling, testing and visual inspection.

    “Our team went to each and every customer’s factory and ensured smooth running by giving various tips and tricks,” said Bagla. “I am immensely proud of our team and thank them for all their efforts, right from purchasing raw materials to making the product and selling it.”

    After identifying all opportunities for improvement and optimizing the product, Hindustan Adhesives released its product in India. The Gamechanger quickly captured 100 percent of India’s sustainable tear tapes market, with Hindustan Adhesives selling the product to all cigarette manufacturers in the country, according to Bagla. Since the single-use plastic ban took effect, the company’s overall tear tape sales have increased by 60 percent.

    But Hindustan Adhesives’ commitment to sustainability does not end after the product has been manufactured; it also includes getting certifications from national and international bodies. Over the past 15 months, the company has earned certifications from the Central Pollution Control Board of India and the Central Institute of Petrochemicals Engineering and Technology in India.

    Following its success in India, Hindustan Adhesives is already looking at opportunities abroad. “We have captured the domestic market through our efforts in innovation and development,” said Bagla. “We would now like to introduce this product globally so as to do our bit for the global environment.”

    As part of its efforts to promote its sustainable tear tape internationally, Hindustan Adhesives will be participating in TabExpo Bologna, May 10–11. Encouraged by the product’s success in India, Bagla is confident that international customers, too, will soon understand why the company’s new tear tape is called The Gamechanger.

  • A Never-Ending Fight

    A Never-Ending Fight

    Photo: Yuri Arcurs/peopleimages.com

    The illicit cigarette trade continues to plague the tobacco industry in the Balkans.

    By Vladislav Vorotnikov

    Over the past decades, the illegal cigarette business has been flourishing in Serbia, Montenegro and Bosnia and Herzegovina, causing pain not only to the Balkans but also to the European Union. In recent years, the battle against nonregistered tobacco plantations and underground cigarette factories has seemingly intensified, but complete victory remains beyond the horizon.

    Serbia is the largest tobacco market in the Western Balkans. In 2022, legal sales stood close to $2.2 billion compared to roughly $900 million in Bosnia and Herzegovina and $95 million in Montenegro. It is estimated that smokers account for 40 percent of the population in Montenegro and 30 percent in Serbia as well as in Bosnia and Herzegovina.

    The size of the illegal tobacco market in the Western Balkans is one of the hallmarks of the region. Its share varies significantly across the region. Illegal products account for 6.5 percent of tobacco consumption in Serbia, 20.3 percent in Bosnia and Herzegovina and 27.9 percent in Montenegro, a survey conducted by international nongovernmental organization the Global Initiative Against Transnational Organized Crime (GIATC) showed. Some other analysts put the size of the illegal sales in Serbia at 15 percent.

    The picture is believed to be similar in Albania and Northern Macedonia, where no comprehensive studies aiming to calculate the share of illegal tobacco products in retail sales have been made in the past several years.

    Satellites Against Criminals

    Serbia is a pioneer in using satellite technologies in fighting against illegal tobacco plantations.

    In 2022, law enforcement agencies seized 142 tons of illegal tobacco leaf and tobacco products in Serbia, the tobacco administration of the Serbian finance ministry said in its annual report. This is lower than in the previous years, which indicates that the battle against tobacco plantations has finally started paying off.

    The positive developments are attributed mainly to new technologies that the state phytosanitary inspection employs with help from tobacco factories, said Goran Pekez, director of corporate affairs of Japan Tobacco International’s (JTI) Serbian office.

    To battle against illegal plantations, the Serbian authorities took measures unprecedented for this part of the world. The government has launched a group of satellites to survey the terrain with the aim of identifying all plots where tobacco leaf is illegally grown, Pekez said. Serbia is a pioneer in using satellite technologies in fighting against illegal tobacco plantations.

    Using space technologies is expensive, but the efforts already bear fruits. “The success of the satellite system can be seen in the results of the control measures, which are showing improvements every year. In the last five years, illegal tobacco plantations in Serbia have been almost eradicated,” Pekez said, estimating that during this period, roughly 800 tons of illegal tobacco were seized, preventing damage to the Serbian budget of around $453 million.

    When discovered, all illegal plantations are destroyed in order to prevent illicit tobacco from ending up in the supply chain. Still, some officials, acknowledging the positive impact of the satellite imaging, argue that it is unlikely to completely take down the illegal tobacco business in the Balkan region. One of the problems is that satellites primarily search for large tobacco farms, frequently overlooking smaller plantations.

    In 2022, Serbian tobacco producers donated four drones and accompanying equipment worth $1.2 million to the phytosanitary inspections to improve control of illegal tobacco plantations in the country, Pekez said.

    The legal tobacco industry continues to invest in Serbia. In December 2022, JTI inaugurated a new production line at its Senta facility. (Photo: Goverment of Serbia)

    Deep Routes, Strong Ties

    Currently, the illegal tobacco trade negatively impacts the economies of each Balkan country, but it has not always been that way. In the 1990s, cigarette smuggling became a means of survival for Montenegro, which extremely needed money to fund armed forces during the Balkan War. The turmoil of those bloody years laid the ground for what some analysts describe as the largest illegal tobacco industry in Europe.

    “Many of the high business and political elite today are still connected to cigarette smuggling,” the GIATC survey discovered, adding that a share of illegal cigarettes is destined for local markets, but large quantities are also smuggled to the European Union and some other countries.

    For example, in 2021, law enforcement agencies discovered a channel through which at least 840 million counterfeit cigarettes, known in the Balkans under the common name cheap-white, had been smuggled from Montenegro on fishing boats and small cargo ships to the Mediterranean. The Montenegrin port of Bar is currently known as the key European hub for cigarette smuggling.

    “The region’s proximity to lucrative markets in Western Europe, its links to North Africa and Turkiye and increased traffic from Latin America and Asia, combined with vulnerabilities linked to corruption, create ideal conditions for criminal networks to engage in such trafficking. The problem seems to be growing,” the GIATC said in another report focused on the Balkan region.

    “Seizures are abundant, but regionally integrated port-oriented security responses remain scarce despite multiple police operations,” it added.

    In addition, the illegal tobacco business in the Western Balkans keeps evolving. While the authorities have seemingly succeeded in fighting against nonregistered tobacco plantations, there are reports about the growing smuggling of raw tobacco, primarily from China. Tobacco smuggling in the Balkans is controlled by organized criminal groups also involved in drug traffic.

    Many of the business and political elite today are still connected to cigarette smuggling.

    Mold, Waste and Animal Excrement

    In the fight against illegal cigarettes, consumers also play an important role. In Serbia, a large share of customers buys counterfeit cigarettes from resellers, Pekez said, attributing this to a considerable price difference with legally manufactured tobacco products.

    Consumers remain loyal to illegal cigarettes even though the possible danger to their health from counterfeit products manufactured in underground factories and workshops, which has been widely covered in recent years by local media.

    “We emphasize that these products, which are not subjected to [sanitary] control and do not meet the standards common for tobacco products, can be dangerous to health—they can often contain numerous harmful ingredients—mold, waste and even animal excrement,” Pekez said.

    The widening gap between counterfeit and legal cigarettes largely determines consumer preferences. A rise in excise rate has doubled the size of the illegal cigarettes market in Bosnia and Herzegovina during the past five years, the GIATC quoted from a source in the local government. Currently, prices also rise in Serbia, which is targeting to put its legislation in line with European regulations.

    From Jan. 1, the price of all types of cigarettes in Serbia will increase by roughly $0.09 per pack due to a rise in excise rate to 33 percent. Under the excise duty schedule adopted in 2020, it will continue to increase gradually until 2025.

    Tobacco Giants Scale Up in Serbia

    Despite the wide presence of counterfeit products on the market, Serbia is the only country in the region where three major global tobacco companies have factories. In Serbia, tobacco has been grown for centuries. Currently, the largest legal tobacco plantations are located in South Pomoravlje and Vojvodina. Several cigarette factories are running in the country, including Philip Morris International; Nis, formerly known as Tobacco Industry Nis; BAT Vranje, previously named Tobacco Industry Vranje; as well as JTI Senta and Monus Cigarettes.

    In December 2022, JTI inaugurated a new production line worth $16 million at its Senta factory and announced a new five-year investment cycle in Serbia worth $51 million.

    “When a Japanese investor comes to a country to invest in it, other investors from around the world also feel comfortable about investing in that country,” Serbian Prime Minister Ana Brnabic said during the opening ceremony. “That is why Japanese investments are so important in these difficult and challenging times.”

    JTI is the only foreign company that is purchasing locally grown tobacco. The new production line will double the capacity of the Senta factory and boost its export potential.

    Other market players also invested in their local operations. In 2020, BAT Vranje started the production of cigarettes under the Dunhill brand.

    The production of Dunhill in Vranje was called to increase BAT’s market share in Serbia and was in line with the company’s strategy to expand its presence in Southeastern Europe, the company said at that time. In addition, new investments were expected to bolster cigarette export from Serbia. The company estimated that it exported a third of its production in Serbia in 2020 compared to only 10 percent in 2016.

    Since emerging in the country in 2003, PMI has invested over $800 million in the Serbian affiliate, remaining one of the country’s largest investors. The Nis factory is one of the most advanced operations in PMI’s global network of factories.

    PMI saw its export from Serbia grow by a factor of 20 times between 2010 and 2020. Aleksandar Jakovljevic, managing director of PMI for Southeast Europe, said that the Nis factory had grown from a facility meant for the market of Serbia into a large regional and global production center, from which products were exported to more than 50 countries of the world.

    In other countries of the region, however, things are not so bright. In 2022, Fabrika Duhana Sarajevo in Bosnia and Herzegovina, one of the oldest tobacco factories, suspended operation due to financial difficulties. The supervisory board of Badeco Adria, owner of the factory, decided to close it down as losses in the previous three years totaled €3.8 million. In 2021, Novi Duvanski Kombinat Podgorica, a tobacco factory in Montenegro, also stopped operation, citing excessive administrative pressure as the main reason for this step.

    Despite the challenges associated with the illegal tobacco business, Serbia is expected to keep expanding cigarette production and export in the coming years, taking advantage of low production costs and its advantageous geographical position. A decisive victory against counterfeit cigarettes could fuel that growth, though it is unlikely to happen in the foreseeable future.

  • A Taxing Issue

    A Taxing Issue

    The uncertainty surrounding the EU unmanufactured tobacco tax is making it increasingly difficult for logistics companies to operate with a sense of security. Photo: Taco Tuinstra

    Freight forwarders struggle with uncertainty as the EU debates whether to tax unmanufactured tobacco.

    By George Gay

    Erik Van Neuten

    Shortly after Erik Van Nueten, a director of Andromeda Tobacco Forwarding and Logistics, joined the Andromeda group in 2006, Tobacco Reporter ran a story on the company’s tobacco division headlined “Outsourcing the hassle.” The heading, which sprang from a comment by Van Nueten, referenced the fact that the company’s tobacco-trader clients could concentrate on what they were good at, buying and selling tobacco, while leaving the rest—the hassle—to Andromeda, the rest being worldwide services such as handling, storage, pest control, transportation, repacking, relabeling, sampling, sample dispatch and the not-inconsiderable associated paperwork.

    Unfortunately for Andromeda, and other companies working in tobacco logistics, while the hassle factor in 2006 was challenging enough, it has increased hugely during the past three years, particularly in the EU, where it might be raised to yet another level in the future.

    It would be crass to describe the Covid pandemic as having been a hassle, because it was and is a tragedy that has taken the lives of millions of people worldwide, that is still taking lives and that has caused major economic damage that, for most people, has meant many and greater hardships. Nevertheless, looked at purely from the point of view of tobacco logistics, Covid has been a hassle, though one that is fading. During a telephone interview toward the end of January, Van Nueten told me, for instance, that the availability of ships and containers was improving and that shipping rates, while still relatively expensive compared with those being charged two years to three years ago, were coming down slowly to acceptable levels, albeit from the ridiculously high levels ushered in by Covid.

    That seems to be the good news. The bad news is that, for various reasons, those shipping rates are unlikely to return to close to where they were.

    Taxing Unmanufactured Tobacco

    In the EU, in parallel with the Covid pandemic but not connected with it, another issue has been brewing during the past three years and more. Van Nueten told me the European Commission was discussing whether unmanufactured tobacco (UT), which is the main tobacco commodity Andromeda deals with and the only tobacco commodity it deals with in the EU, should be subject to excise tax. No proposal has yet been put forward, nor is it known when this might happen. The commission has been reviewing the EU Tobacco Excise Directive (2011/64/EU) and was scheduled to publish proposals in December. But I was told that publication is unlikely during the first half of this year and that, given any decision would require unanimity among member states, discussions could stretch the time frame for any implementation.

    As I understand things, in part at least, the commission wants to include UT within the scope of the excise directive so as to be able to include it also within the scope of its Excise Movement and Control System, which is the computerized system it uses to monitor the movement of excise goods within the EU. I am told that, to achieve such inclusion, the commission needs to create a new fiscal category for UT with a dedicated tax rate. Apparently, the commission could propose a zero percent tax rate for UT, but, even if it did, because the directive provides for only a harmonized minimum level of tobacco taxes throughout member states, individual states could choose to apply higher tax rates.

    And it is at this point that these deliberations seem to collide with business reality. The sorts of uncertainties inherent in the current situation, which have already taken root in the EU, mean it is becoming increasingly difficult for Andromeda and other companies working in the field of logistics to operate with a sense of security. Although Van Nueten would prefer to see the traditional system retained with excise applied to tobacco products, he said the logistics industry could, given time, adapt to a new system. What was difficult was the present situation, which was unclear and made transporting tobacco through the EU frustrating and risky.

    Although Brussels is still discussing whether to subject unmanufactured tobacco to excise tax, some states have already acted as if such a provision exists.

    A Matter of Definition

    Although Brussels is still discussing whether to propose the inclusion of UT within the scope of the EU excise directive and thereby allow member states that wished to do so to tax UT, some states have already acted as if such a provision existed. I was told by somebody who didn’t want to be named that, during the past 18 months or so, two trucks containing UT were stolen in separate incidents while in transit within the EU and that the companies that had issued the original customs documents for the tobacco were held liable for import duties, excise and VAT, an amount thought to be in the region of €4.6 million ($4.95 million) per truck. I later learned that these were not altogether isolated cases.

    These incidents, which seem quite alarming within a region that is supposed to boast a harmonized tobacco tax regime within a single market, probably have their roots in a 2017 EU Court of Justice case involving Eko-Tabak and Generalni reditelstvi cel (General Directorate of Customs, Czech Republic) in which the court was asked to consider the confiscation of goods belonging to the former, which the latter had ruled to be manufactured tobacco subject to excise duty. The case basically involved the definition of “smoking tobacco” within the EU directive, which the court ruled had to be broad and to take into account whether the tobacco could be smoked after simple processing by means of crushing or hand-cutting.

    As a result of this ruling, and despite the fact that the directive applies only to manufactured products, some member states started considering some UT to come within the court’s definition and therefore be subject to excise tax. And clearly, for as long as some states continue to consider UT to be taxable and others don’t, those responsible for transporting tobacco within the EU are going to suffer. Under current arrangements, taxable goods intended for transit need to have special documentation raised by authorized entities in the country of shipment that is then cleared in the country of destination upon arrival. This seems to indicate that if UT were sent from country A, where excise was applied to such a product, to country B, where no such excise was applied, the arrival could not be cleared. And if the tobacco were to be sent in the other direction, no documents could be raised in country B though they would be required in country A.

    Probably, I guess, there would be administrative tricks that could get around these problems in the short term, and hopefully they will disappear with the proposals put forward by the commission in revising the excise directive, which will hopefully include those aimed at reinvigorating the concept of a harmonized market, in part by tightening up the definition of UT.

    What to Do?

    Nevertheless, two major questions seem to arise. What are logistics companies expected to do in the meantime? There have to be some interim arrangements that mean they can operate efficiently, secure in the knowledge that what they are doing is within the rules.

    The other question has to address why a system that seems to have been working well should be changed. Well, the answer in some people’s eyes seems to be that the court ruling provided a necessity for change—change that would ensure that member states got their cut, though they don’t put it quite like that. Such change would address the problem caused when UT is stolen during transit through the EU, taken to an illicit factory and ends up as a product in the illegal trade, without taxes having been paid on either the unmanufactured or manufactured tobacco.

    In turn, such a way of looking at things raises at least a couple of interesting issues. Firstly, it seems to cast doubt on the idea that the EU, through such initiatives, is pursuing illegal traders at least partly because of health concerns for those who might smoke illicit cigarettes. At its base, the idea is about taxing the tobacco whether or not it gets into the hands of the illegal market; it is about revenue. The other issue is that applying excise to UT could be seen as partly legitimizing the activities of illicit manufacturers. If such a manufacturer steals a truck of UT on which taxes have been paid or are due and turns it into products, those products, I guess, enter the market as excise paid. Even the theft might be disputed by a smart lawyer willing to claim the tobacco fell off the back of a truck.

    It seems to me that we are again being driven toward ridiculously complex reactions because of an unwillingness to trace a problem back to its cause—unfair levels of taxes being applied to combustible cigarettes. If the aim is to reduce the illegal trade in cigarettes, significantly reduce the taxes on them and remove laws requiring licit cigarettes to be unappealing while heavily promoting alternative, low-risk products.

    *While acknowledging that all opinions and errors in this piece are his, the writer would like to thank the following for their help in explaining some of the background and intricacies associated with the commission’s discussions on tobacco excise: William Meyer, senior EU affairs manager, and Peter van der Mark, secretary general at the European Smoking Tobacco Association.

    A Rational Approach: Controlled Atmosphere Systems are Gaining Traction in the Fight Against Tobacco Pests

    In the main article accompanying this sidebar, I finish with my usual rant on what I see as the absurd complexities smuggled into efforts to reduce the illegal trade in tobacco products. So, as a way of introducing some balance, in this piece I would like to contrast such efforts with those being used to combat another problem in which rogue players cause economic damage along the tobacco supply chain. It seems to me that the tobacco industry has in recent years approached the issue of tobacco losses to insects in a rational, proportionate and evolving manner.

    That’s not to say everything has been fixed. It hasn’t, and new problems could arise in the future, as those who have read the companion piece might suspect. If, as seems possible, excise taxes are applied to unmanufactured tobacco in the EU, there will be an even greater incentive for protecting tobacco. Otherwise, tobacco beetles and moths will not only be eating their way through tobacco but also through the excise paid on that tobacco. And while bureaucrats seem keen on complexity, I think they will draw the line at issuing excise rebates on receipt of evidence provided in the form of well-fed beetles.

    Ten years ago, it was said that tobacco worth about $800 million was being lost annually to insects, and so, in an email exchange at the end of January, I asked Rene Luyten, a director of b-Cat, whether the situation had improved or deteriorated since then. He replied that he had no idea about the value of losses but added that he knew that tobacco owners did not sit back and allow problems to overwhelm them. They were always looking to improve the way they protected their tobacco from insects, and that was irrespective of the costs of producing tobacco at any particular time.

    One of the improvements that was made saw, in 2011, controlled atmosphere (CA) systems, which had been used in respect of other commodities and various products for 15 years or more, starting to gain traction with tobacco people—those involved in warehousing, shipping, trading and manufacturing tobacco. Further impetus was provided in 2012 when Coresta issued a guideline for the treatment of tobacco beetles with CA, a guideline that was revised to include the tobacco moths the following year. Used properly, CA offers enormous benefits because it kills all tobacco beetles and moths in all their life cycle stages; it can be used for all types and varieties of leaf tobacco without affecting taste and color, and it can be used for tobacco products.

    Luyten told me that demand for new CA chambers was currently good around the world, as was demand for extensions of installations made previously by some of the early adopters of this technology. And demand is coming from both large and small companies because installations can be geared to the size of the business. On the modest end of the scale, b-Cat, which has been involved in the CA business for more than 50 years, has installed a system with the dimensions of a single 40-foot container while at the other end of the scale it has built a system with a capacity of 63 40-foot containers spread through nine chambers.

    Of course, many leaf tobacco export countries still use chemical insect treatments, mainly because of the high volumes they need to handle and the resulting costs. But because of issues to do with insect resistance to phosphine gas treatments, which became such a huge problem before the adoption of CA systems, manufacturers tend to use CA as the final treatment adjacent to their manufacturing sites. They also tend to favor CA treatments because of issues concerned with the environment and sustainability, issues that drive the part of the continuing R&D effort at b-Cat that is aimed at automating processes so as to minimize energy usage. —G.G.

    George Gay is Tobacco Reporter’s European editor, but his territory spans the globe. Based in London, George has covered the tobacco industry since 1982, initially for a U.K.-based publication and since 2004 for Tobacco Reporter. George’s understanding of industry issues, combined with his keen sense of observation and dry wit, have earned him a loyal following among Tobacco Reporter’s readers.
  • A Future Without Plastics

    A Future Without Plastics

    Photo courtesy of Greenbutts

    With its new environmentally friendly technology, Greenbutts wants to tackle the challenge of filter litter.

    By Stefanie Rossel

    Of the more than 5 trillion cigarettes produced globally each year, the majority ends up in the environment after consumption. Cigarette butts are the most littered plastic item on earth as many smokers don’t consider them to be litter. According to the Truth Initiative, butts have consistently made up 30 percent to 40 percent of all items collected in annual international coastal and urban cleanups since the 1980s.

    While most of a cigarette’s components quickly disintegrate when smoked or disposed of, the filter will stick around for some time. Around 98 percent of cigarette filters comprise cellulose acetate (CA), a polymer that is slow to degrade in the environment. It can take up to 14 years for a CA filter to degrade, depending on the conditions of the environment where it has been discarded.

    Tadas Lisauskas

    “Our estimation is that more than 4 trillion plastic butts are littered every year, and marine life researchers warn that there could be more plastic than fish in the ocean by 2050,” says Tadas Lisauskas, founder and CEO of California-based Greenbutts. “Urgent action is needed.”

    A material-science and impact-driven business, Greenbutts has made it its mission to eliminate CA cigarette litter. The company was founded in 2010 by Lisauskas and Xavier Van Osten, who were newcomers to the cigarette filter business at that time but were acutely aware of the need for a green alternative to the plastics-containing filters polluting the environment.

    They soon learned that creating a viable substitute was a science in itself. In addition to degrading quickly when discarded in the environment, a biodegradable filter or filter substrate must meet many requirements, such as adequate smoke chemistry and acceptable sensory performance. The filter must also be suitable for processing on high-speed filter assembly equipment and cigarette making machinery.

    To help tackle these challenges, Greenbutts hired a former executive of specialty filter manufacturer Filtrona as technical advisor and teamed up with experts from the U.K. Nonwovens Innovation and Research Institute to evaluate fibers with sufficient porosity and thickness.

    Greenbutts spent almost a decade designing and developing filters that provide comparable taste and filtration properties as current CA filters but will disperse in water within several minutes with agitation and begin to degrade in compost within several days.

    After years of R&D and testing with tobacco companies, the company came up with a patented substrate and filters made of all-natural, food-grade fibers, such as abaca fiber, cotton flock and industrial hemp as well as a starch-based binder, which were introduced to the market in the summer of 2019. The product is sold in bulk or as ready-made rods of filters and filter tips. The blend of materials allows for the same filter manufacturing rates as acetate filters, according to Greenbutts.

    Greenbutts’ patented substrate and filters are made with all-natural, food-grade fibers.
    Greenbutts’ patented substrate and filters are made with all-natural, food-grade fibers.

    Better Alternative

    Greenbutts is now ready to take its innovation to the next level. In November, the company introduced Greenbossing, a trademarked process developed with Boegli-Gravures. According to the companies, the innovation will revolutionize Greenbutts’ filter rod manufacturing. “We want to offer to the tobacco industry not just an alternative but the state-of-the-art solution,” explains Lisauskas. “We believe we are creating the next generation of biodegradable filters by introducing our patented Greenbossing technology. Boegli and Greenbutts are actively innovating together and leading a sustainability pathway and building the future today. The Greenbossing technology arrives at the perfect time to accelerate the transitioning from cellulose acetate, which is a single-use plastic (SUP), to Greenbutts’ fully biodegradable and water dispersible substrate. The innovation will enhance the existing filtration capabilities and sensorial experience and much more, setting the Greenbutts substrate far ahead of all competitors and establishing a new ‘gold standard’ for cigarette filters.”

    CA filters are still considered the gold standard in cigarette filtration. While it is still early days, Lisauskas believes they may very well lose that position to his Greenbossing products. “The initial analytical lab tests have shown promising results, and we will be able to share them in due time,” he says.

    Regulatory Pressure

    In recent years, awareness of the cigarette litter problem has increased. Several countries are considering legislation to reduce cigarette butt waste. In July 2021, the European Union enacted its Single-Use Plastics Directive (SUPD). While the SUPD does not oblige tobacco manufacturers to use plastics-free cigarette filters, it requires producers to fund consumer awareness campaigns, extended producer responsibility schemes and tobacco filter collection initiatives from December 2023.

    Luis Sanchez

    “The question is not if the CA plastic filters will be banned; the question is when they will be banned,” says Luis Sanches, chief strategy officer at Greenbutts. “The CA butts are the No. 1 most littered single-used plastic item in the world, and there is no logical reason to stop them from being banned. Many other SUPs have already been banned, such as plastic straws, cutlery, plastic bags, plastic cups. And the banning of the CA plastic filters is simply a matter of time. The tobacco business is aware of this, and there is clear indication that they are fully committed to drive the change. We at Greenbutts believe that through awareness and education, the industry will eventually drive the change, the regulators will enforce the change, consumers will deliver the change. We at Greenbutts are facilitating this change to occur.”

    Despite the significant problem of cigarette litter, CA filters continue to dominate the market. Not only because CA has been a tried-and-tested, cost-effective material but also because there were no external incentives, such as stricter regulations, encouraging a rethink. In the U.S., the expensive regulatory approval process for new products actually presented a barrier to more environmentally friendly filters. In the first years since the launch, Greenbutts therefore marketed its product to hemp cigarette manufacturers and the marijuana industry.

    With agitation, Greenbutts’ filter will disperse in water within several minutes. In the environment, it will start degrading into compost within several days.
    With agitation, Greenbutts’ filter will disperse in water within several minutes. In the environment, it will start degrading into compost within several days.

    Into the Future

    The Greenbossing technology may help Greenbutts overcome the regulatory hurdle. “The FDA authorization is a lengthy and meticulous process,” says Lisauskas. “It requires a lot of data, patience and solid science. We have already started the process with the collaboration of world-class scientists and our legal team to embark on this challenging journey.”

    As rules for environmental protection tighten around the world, cigarette filter manufacturers and other industry players have stepped up their efforts to provide alternatives to CA-based filters. Most of these solutions, however, are made from paper, a substrate that presents challenges. For example, paper behaves differently than cellulose acetate so that it requires adjustments in the design of the filter and cigarette, and it often comes with a characteristic taste and smell.

    “The sensory performance, I would say, is the most challenging factor to overcome,” says Lisauskas. “The chemically and physically modified filaments of cellulose acetate associated with the plasticizer, triacetin, make the plastic filter a very well-designed filtration tool for several chemical compounds present in tobacco smoke.”

    The Greenbutts filter with the Greenbossing technology, by contrast, utilizes natural fibers, specifically selected for their sensorial neutrality, filtration capability and mechanical strength. This combination minimizes natural variability, enables airflow control and reduces paper filters’ cellulosic sensorial notes, according to Lisauskas.

    The company has recently experienced a clear and growing interest from EU-based tobacco companies in its product. “We can attest that other organizations, outside the EU, want to take the lead on the sustainability agenda by giving consumers what they are looking for: authentic products, no plastic, no chemicals, no additives, and all-natural alternatives,” says Lisauskas.

    Sanches hopes that because of the further benefits delivered by the Greenbossing process, the tobacco industry will adopt Greenbossing eventually as its new standard for both combustible and heated-tobacco products. “And it will open up further opportunities for other combustible products beyond tobacco,” he says.

    The company already has some experience with heated products. In August 2021, Greenbutts entered into an agreement with Poda Lifestyle and Wellness, which uses the biodegradable filters in its Beyond Burn Poda Pods.

    Greenbutts is currently evaluating heated-tobacco products, Lisauskas relates. “There is nothing that should impede the successful application to this sector,” he says. “The Greenbossing process should deliver the perfect match.”

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

    A Fresh Start

    Photos courtesy of Filtrona

    After a decade of operating under the Essentra umbrella, Filtrona is back as an independent company.

    By Stefanie Rossel

    For decades, it was a household name in the tobacco industry. Now it’s back: Filtrona. Having operated as Essentra Filter Holdings since 2013, the specialty filter manufacturer was sold to a private equity firm last year and is now in the process of rebranding.

    “The Filtrona name has a rich legacy of innovation supported by strong industry partnerships, so we felt it was only right to build on what our partners were already familiar with,” says Filtrona’s CEO, Robert Pye. “We have developed a new logo and branding program and will be rolling that out in the coming weeks to rejuvenate the brand and give it a modern look and feel.”

    The company’s head office will remain in Singapore. Filtrona currently has more than 2,000 employees and is present in 120 markets. The company operates 11 manufacturing facilities across Europe, America and Asia. It also has three innovation centers, an accredited laboratory and a center of excellence focused on sustainability.

    According to Pye, 2022 was a “very solid year” for the business despite the challenges involved in completing the sale and unforeseen issues such as the war in Ukraine, which disrupted global supply chains. Pye says the company achieved outstanding double-digit growth last year. Under new leadership, the company’s focus remains on increasing its market share, particularly by expanding in China, Asia, the Middle East and Africa—where the tobacco industry continues to grow—while driving profitability and transforming its business through innovation.

    Robert Pye | Image courtesy of Filtrona

    “The Filtrona name has a rich legacy of innovation supported by strong industry partnerships, so we felt it was only right to build on what our partners were already familiar with.”

    Robert Pye, Filtrona CEO

    Chinese Venture

    In 2020, a filter joint venture (JV) was established with the State Tobacco Monopoly Administration in Xiamen, China, with China Tobacco Fujian Industrial Co. Its shareholders are Essentra (now Filtrona) and three Chinese tobacco companies in Shanghai, Guangxi and Hunan. The JV manufactures specialist filters at the new facility in Xiamen in Fujian province. It is also at this location that a China Development Center for the introduction of advanced filter solutions has just opened.

    China is one of the last growth markets for combustible cigarettes. “We are delighted with the progress made at the China JV despite seeing many challenges since we held the opening ceremony in January 2020,” says Pye. “The project has been a remarkable success with commercial operation starting in July 2021, with the China Development Center recently established at the end of 2022. The partnership continues to grow capacity and capability and has already created a promising pipeline of innovative projects serving the Chinese market. We look forward to further growth as we introduce our proprietary filter technology to the market.”

    While the tobacco industry is in the midst of an unprecedented transformation with sales of combustible cigarettes stagnating and those of next-generation products rising, Pye sees significant opportunities in the sector. “It is a trillion-dollar* market globally, and we have large market penetration,” he says. “Whilst the total market volume for combustibles is declining, the demand for filter solutions that offer differentiation remains robust. The use of more complex filter specifications continues to grow proportionately in several important markets. Filtrona is also active in the heated-tobacco segment with design, testing and manufacturing of filter solutions. In addition, Filtrona is leading the way forward with sustainable filter solutions, which is becoming increasingly relevant across the tobacco market.”

    Filtrona benefits from being the only global, independent partner capable of designing, testing and manufacturing innovative filter solutions, Pye points out, with Filtrona’s laboratory being one of the few globally accredited independent scientific services for tobacco filtration.

    “In the past, we had a pivotal role in the setup of standards for combustibles through our accredited laboratory,” he notes. “Today, we are assuming a significant role in the setup of global standards for next-generation products (NGPs), including e-cigarettes and heated-tobacco products.”

    Filtrona benefits from being the only global, independent partner capable of designing, testing and manufacturing innovative filter solutions.

    Partner in Transition

    Aware that the tobacco industry is changing, Filtrona’s vision is to support its partners in their transition by continuing to deliver quality and innovation. As an example, Pye mentions the research and development Filtrona has conducted for its ECO range of sustainable solutions, which are plastic-free and biodegradable. The ECO range includes sustainable solutions for tear tapes used in packaging. The recently launched Rippatape Halo is a paper-based tape for the e-commerce packaging market. “Brands are seeking plastic-free solutions, and Filtrona is delivering on all fronts,” says Pye.

    The company appears to be well placed to meet growing demand for plastic-free, biodegradable filters driven by legislation such as the European Union’s Single-Use Plastics Directive (SUPD). While cigarette butts have been exempted from the SUPD for the time being, a provisional agreement in the legislative process encourages the development of sustainable alternatives to tobacco product filters containing plastic through the introduction of extended producer responsibility (EPR), an application of the polluter-pays principle. EU member states have until Dec. 5, 2023, to set up EPR schemes for tobacco filters that contain plastic.

    Research conducted by Filtrona reveals that in 75 percent of countries, smokers are more eager to positively impact the environment than the general population. According to Pye, “This gives us significant opportunity to innovate and meet these evolving consumer needs.” Pye adds that Filtrona is investing significantly in paper-based filters with improved sensory performance, specifically taste.

    For veterans of the tobacco industry, paper-based filters are a familiar concept; they were standard until the 1950s before the first commercial cellulose acetate filters arrived on the market. “Interestingly, current ECO ranges are loosely based on the first paper filters to arrive on the market, so our long heritage in paper-based filters is highly relevant to the challenge of finding sustainable solutions for today’s market,” says Pye.

    “Whilst the total market volume for combustibles is declining, the demand for filter solutions that offer differentiation remains robust.”

    Robert Pye, Filtrona CEO

    Opportunities Ahead

    Going forward, Pye expects Filtrona to increasingly focus on consumer customization and modularity. “Capsule flavors are likely to be high on the design agenda, allowing the user to pick type and flavor as well as choosing when to crush the capsule. Japan and South Korea are well-established low-tar markets, with a significant slim/super-slim segment. We see this trend growing in other parts of Asia.

    According to Pye, increasing sales of tobacco-heating devices and other NGPs underscore an appetite for innovation that should benefit the company. Filtrona offers a dedicated range of filters for heated-tobacco products.

    “Keeping a close eye on new products launching into the market, we see a fresh wave of innovation in areas such as organic, additive-free and sustainable tobaccos. This further underlines and substantiates the relevancy of our ECO range of filters,” says Pye.

    Filtrona, he says, is looking forward to supporting its customers to transform and grow. “It’s an exciting time for the industry, and we’re proud to play our part,” Pye says.

    *$935 billion, according to Euromonitor

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

    Conquering the World

    On Jan. 30, KT&G CEO Baek Bok-in and PMI’s Jacek Olczak signed an agreement to intensify their companies’ cooperation in smoke-free products. Photo: KT&G

    KT&G is making steady progress toward its ambition to become a “global top-tier” tobacco company.

    By Stefanie Rossel

    Things are going well for KT&G: In its ambition to become a global top-tier tobacco company, South Korea’s leading cigarette manufacturer reports steady progress, having broken sales records every year for the past five years.

    During an investor day on Jan. 26, 2023, CEO Baek Bok-in presented the company’s vision for 2027 and outlined growth strategies that focus on three core business areas: heated-tobacco products (HTPs), health functional food (HFF) and overseas business. Three days later, the company secured a long-term supply and distribution contract with Philip Morris International to commercialize KT&G’s Lil HTP outside of South Korea.

    KT&G, which increased its sales from KRW5.23 trillion ($4.26 billion) in 2021 to KRW5.9 trillion in 2022, aims to generate KRW10.2 trillion in annual sales by 2027. More than half of the company’s sales are supposed to come from overseas by then, Baek said during the investor conference. In 2022, overseas sales accounted for around 33 percent of KT&G’s annual sales.

    To achieve its goal, KT&G announced an investment of KRW4 trillion over the next five years. The company plans to establish a “virtuous cycle” by investing the earnings from its cigarette and other core businesses into new businesses.

    Focus on Heated-Tobacco Products

    KT&G CEO Baek Bok-in during the company’s recent investor day.

    A top priority in KT&G’s strategy is the global expansion of its HTP segment. Of the company’s overall sales in the nicotine category, around 76 percent are currently generated by the cigarette division and 24 percent by the HTP business.

    “Our revenue target for the HTP business by 2027 is KRW2.08 trillion, which is 138 percent growth compared to 2022’s estimated KRW0.87 trillion,” says KT&G Senior Executive Vice President Bang Kyung-man. “To reach the target, we will increase investments in R&D capabilities and production capacities to respond to the worldwide growing demand for HTPs.”

    As Bang pointed out during the investor day, KT&G is considering Kazakhstan and eastern Europe as possible locations for a new factory. To raise the necessary capital, KT&G may sell some of its current financial assets, Bang said.

    In its domestic market, KT&G dominated the category, with a share of 48.5 percent in the third quarter of 2022, according to The Korea Herald. South Korea’s highly competitive HTP category has been growing at a remarkable speed. In 2022, manufacturers sold 538.6 million packs of consumables, up 21.3 percent over the same period of the previous year, according to the ministry of strategy and finance.

    To stay ahead of its rivals, KT&G has invested heavily in R&D over the past years.

    Last November, the company introduced two new Lil models, Lil Aible and Lil Aible Premium, which deploy artificial intelligence to optimize the heating temperature, calculate the number of available puffs and measure the battery percentage. The premium version comes with an additional OLED touchscreen and a mobile app that among other things allows the user to receive calls and messages on his or her device. Shortly after the launch, PMI started selling its latest HTP model, IQOS Iluma, in South Korea.

    Fruitful Cooperation

    Outside South Korea, KT&G and PMI have successfully partnered for the past three years. In January 2020, they entered into an agreement that gives PMI exclusive access to KT&G’s smoke-free brands and innovation pipeline and provides KT&G with access to PMI’s global commercial infrastructure and experience in commercializing smoke-free products. As a result of the collaboration, Lil is currently present in 31 countries in Central America, Europe and Central Asia, with both market share and profitability continuing to grow significantly, according to Baek.

    On Jan. 30, 2023, PMI and KT&G turned their agreement into a 15-year contract. To respond to evolving market conditions, the agreement calls for frequent performance evaluations. Both companies expect their commitments to increase over the duration of the agreement, starting with a commitment for the first three-year period equivalent to 16 billion consumables.

    KT&G expects its HTP overseas sales and consumables volume to grow 20.6 percent and at a 24 compound annual growth rate for the next 15 years through the collaboration with PMI. Based on that assumption, JP Morgan anticipates KT&G’s combined domestic and overseas HTP sales to reach KRW5.8 trillion, which is almost equivalent of the current consolidated annual sales of KT&G group. Hanwha Investment & Securities, meanwhile expected the cumulative revenue from the 15 year contract to be KRW31.5 trillion.

    While stepping up its efforts in next-generation products, KT&G will continue to focus on the conventional cigarette business. “For our overseas cigarette business, we aim to reach KRW3.8 trillion by 2027, which is 44 percent growth compared to 2022’s estimated KRW2.7 trillion,” said Bang. “We will increase the number of overseas subsidiaries and further implement the direct business model in the overseas market.”

    KT&G currently has four tobacco manufacturing plants, one each in South Korea, Russia, Turkiye and Indonesia, with a combined annual production capacity of 13.6 billion cigarettes of overseas facilities, excluding Korea.

    Exploring a Growth Market

    For the HFF business, which is part of KT&G’s Korea Ginseng Corp. (KGC) subsidiary, the company has set a revenue target of KRW2.1 trillion for 2027, an increase of more than 58 percent over 2022. “We plan to support our subsidiary to expand its presence in the overseas market, especially the U.S. and China, by leveraging its strong competitiveness in the domestic market,” said Bang.

    KGC aims to become a global nutrition solutions provider. HFFs are a growing market worldwide. Spherical Insights & Consulting values the global market for functional foods and drinks at $189.5 billion in 2021 and expects it to increase to $285.3 billion by 2030. Consumer demand for products with enhanced nutritional profiles, the consultancy said, has been spurred by changing lifestyles and rising affluence. In 2020, North America dominated the global functional food market owing to the prevalence of chronic diseases and increasing consumer knowledge of the benefits of functional foods.

    In South Korea, sales of HFFs generated KRW3.1 trillion in 2020, according to the Ministry of Food and Drug Safety’s Food and Drug Statistical Yearbook for 2021. In addition, the country exported health functional food worth KRW226 billion. KGC is estimated to generate annual revenue of KRW1.4 trillion in 2022.

    KT&G remains committed to KGC despite calls by Flashlight Capital Partners to spin off the subsidiary. The Singaporean activist fund noted that while many overseas funds are interested in the company’s ginseng business, they are currently unable to invest in it because of their environmental, social and corporate governance principles against tobacco.

    In its annual meeting, however, KT&G said there was no plan to divest of its ginseng unit. “We will not decide on spinning off our ginseng business at this point,” Bang told Tobacco Reporter, adding that it is unclear whether the spinoff will enhance shareholder value in the long-term perspective.

    Bang also disagreed with suggestions that KGC is undervalued, pointing out that research analysts are applying higher EV/EBITA multiples to KGC than they are to its peers. “Also, KGC has been benefiting from synergies with KT&G Corp. as it has been leveraging KT&G’s overseas business network and infrastructure,” Bang said.

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

    Doing the Math

    Photo: Fran_kie

    The numbers presented on illicit trade (and many other topics) should not always be taken at face value.

    By George Gay

    Shortly before I was asked to write this story on the illegal trade in cigarettes, the U.K.’s prime minister, Rishi Sunak, came up with a plan aimed, I assume, at helping to ameliorate the damage done to the country by his and previous conservative governments since 2010. His idea was that all pupils should be made to study mathematics until the age of 18, an aim that included some obvious pitfalls. For instance, given the plan was put in place, increasing numbers of people would come into contact with imaginary numbers, and even numbers that are difficult to imagine, such as 0.0005, which is about the percentage of the population who voted for Sunak to become prime minister.

    Even if, like me, you’re not a mathematician, it’s worth keeping your eye on figures that are presented to you. And in this regard, I was intrigued by a press note announcing the publication of a paper by Researchers at the International Tobacco Control Policy Evaluation Project, the University of Waterloo, Canada, who were said to have “evaluated the impact of federal and provincial menthol cigarette bans in Canada by surveying smokers of menthol and nonmenthol cigarettes before and after Canada’s menthol ban.” The research study was said to have found that “banning menthol cigarettes does not lead more smokers to purchase menthols from illicit sources, contradicting claims made by the tobacco industry that the proposed ban of menthol cigarettes in the U.S. by the Food and Drug Administration will lead to a significant increase in illicit cigarettes.”

    However, even a person with a limited understanding of mathematics would have to wonder whether the study’s findings support this statement, even leaving aside the seemingly important issue that Canada isn’t the U.S. It seems to me that it is a bit of a leap to make the above claim when the number of menthol cigarette smokers who took part in the study seems to have been only 138 (the study included, too, 1,098 smokers of nonmenthol cigarettes, who were used, at least in part, as a “control group”).

    As I read things,* menthol cigarette smokers were surveyed in 2016, before the nationwide ban** was brought in, and again in 2018, after the ban was introduced. Of the 138 menthol cigarette smokers who were surveyed in 2018, only 36 reported smoking menthol cigarettes after the ban while brand checks indicated that only 17 were actually smoking menthol cigarettes at that time and that the most recent cigarette purchases of only 13 of those 17 had comprised menthol cigarettes. Again, as I read things, only nine of the 17 bought their menthol cigarettes from outlets on First Nations reserves, but, despite these tiny figures, the researchers present their results to the first decimal place and are happy to conclude that “After Canada’s menthol ban, there was no increase in illicit purchasing of menthol or nonmenthol cigarettes from First Nations reserves.”

    The press note seems to push that conclusion further. Its heading, “Study refutes industry claims that ban on menthol cigarettes leads to increased use of illegal smokes,” is not confined to First Nations reserves outlets but presumably encompasses the other outlets covered: convenience stores, the internet, supermarkets and bars/pubs.

    This is important, I think. You can imagine somebody in the future quoting the report by saying that 51.2 percent of sales of illicit menthol cigarettes in Canada post the menthol cigarette ban were made on First Nation reserves. That sounds impressive, of course, unless you know that the 51.2 percent figure is based on little more than a handful of purchases.

    What is the justification for trying to “save” menthol cigarette smokers, but not other smokers, from the consequences of their own actions?

    An Alternative Destination

    Having said that, my main gripe with the study was that it was superfluous, and yet the authors called in at least two places for further research into this matter. Why is money spent on such studies when the world is in desperate need of funding for basic science?

    I was never sold on the idea that a ban on menthol cigarettes would necessarily and greatly increase the sale of illicit products in the place where the ban was imposed. And I certainly wasn’t sold on the idea that you need to carry out studies to get to the bottom of this question, though I understand that they are needed to keep going the huge economic benefits to be enjoyed by the increasingly large, multi-faceted industry dedicated to making the lives of smokers more miserable.

    So the following is my contribution—an open-access, no-cost method of getting to the bottom of the menthol cigarette question. Wait until you are alone, sit down in a not-too-comfortable chair, switch off all electronic distractions, refrain from drinking alcohol and allow yourself the luxury of thinking; and, after a time, it will probably become clear that, assuming those selling menthol cigarettes post a ban will set their prices competitively, three major factors will interact to determine the level of sales of illicit menthol cigarettes in the place where such products are banned. Those are: the appeal of the products in the place where the ban is imposed, the efficiency of the authorities charged with preventing the manufacture and distribution of illicit products in that place and the ease with which the borders of the place can be sealed against the products.

    It is not difficult to figure out which countries would find it relatively easy to enforce bans on menthol cigarettes successfully and which would find it more challenging. And, as to the appeal of the products, it only needs to be remembered that the prohibition is not on cigarettes but on menthol. Importantly, the prohibition is not on nicotine, the thing that we are told keeps people coming back for cigarettes, but on a flavor that is preferred by a minority of smokers; so, without moving from my chair, I came to the belief that normally law-abiding, former menthol cigarette smokers were more likely to switch to nonmenthol brands than to go looking for illicit menthol cigarettes. And, in one sense, the research backs this up when it reports that of the 36 people who claimed to be smoking menthol cigarettes after the ban, 19 of them were mistaken. Of course, since the advent of the motor car and the tendency to speed has made most adults fairly flexible when it comes to obeying certain laws, and since it is possible that illicit menthol cigarettes might be offered to them in venues where alcoholic drink is being consumed and, therefore, decision-making flawed, a certain level of illegal trade has to be expected.

    But the fear of increasing the illegal trade is probably the least of any number of issues that are raised by bans on menthol cigarettes. One ethical consideration concerns discrimination. What is the justification for discriminating against menthol cigarette smokers? Or, looked at another way, what is the justification for discriminating against the smokers of nonmenthol cigarettes? What is the justification for trying to “save” menthol cigarette smokers, but not other smokers, from the consequences of their own actions?

    Rising Poverty

    But that’s enough from Canada. Let’s alight briefly in France where, in January, there was a report of a raid on an illicit tobacco factory that resulted in the seizure of more than 100 tons of tobacco-related products said to be worth €17 million ($18.7 million).

    Sitting in my chair, I wondered what I was supposed to make of this story. I guess it was meant to come across as a success in which the coordinated powers of national and international law and order foiled the activities of criminals. But I couldn’t help thinking that it described a failure since the main aim of law enforcement should be prevention rather than the clumsier activities associated with detection and prosecution. And there was a rather unpleasant aspect to the story, which described how the French police had arrested nine suspects, “most of them Moldovan nationals.” Unsurprisingly but unfortunately, we shall probably never know what brought these people to feel that their best hope was to live and work in a factory far from their home and constantly with the fear of detection.

    Could it be that they were financially impoverished? In a report in The Guardian on Jan. 23, wealth correspondent Rupert Neate quoted Nobel Prize-winning economist Joseph Stiglitz as saying that, in the period defined by the Covid pandemic and its aftermath, many people found life very difficult. And he added that, during the same period, it was shocking how many people and rich corporations made off like bandits. Those bandits, of course, will not be brought to justice.

    The question arises as to why it is seen as perfectly legitimate to create within the EU a fertile environment for the illegal trade in cigarettes by applying unfair levels of taxes while mandating that licit cigarettes should be as unpleasant as possible and then spend precious resources on hunting down those who try to get around such obstacles. With the advent of next-generation products (NGPs), the time is overdue for new thinking. Reduce taxes on cigarettes, remove the laws that require licit cigarettes to be unappealing, heavily promote alternative, low-risk tobacco and nicotine products, and the laws of competition will dissolve the problem of the illegal trade in cigarettes. 

    Of course, NGPs are not immune from being traded illegally, and I was intrigued by a recent press note from the U.K.’s Chartered Trading Standards Institute entitled “Illicit vapes top list of high street threats, say Trading Standards experts.” The note made some good points, but I was pulled up short by one comment. “It’s important we support retailers to ensure that products [vapes] are sold responsibly …. If we don’t, there’s a risk that products could be banned or overregulated, leaving smokers without the option of a product that carries a fraction of the risks of smoking and is an extremely effective aid to quitting.”

    At this point, I had to retire to my chair. What was this person saying? That he believes the U.K. government is so muddled in its thinking that it might ban vapes, a product that, in his own words, carries “a fraction of the risks of smoking” and comprises “an extremely effective aid to quitting [smoking],” if those products are sold to children? At the same time, he seemed to be implying that the government would not ban combustible cigarettes, the consumption of which is hugely riskier than is the consumption of vapes, and which are also sold to children.

    But perhaps he’s right to be concerned. You have to wonder whether the U.K. government isn’t a little hazy on questions of risk. Last year, while he was chancellor, Sunak was forced to pay a fine for breaking Covid-19 lockdown rules. And he started this year by having to pay a fine for traveling in a vehicle while not wearing a seatbelt.

    *Not being a mathematician nor a scientist, I had some difficulty following the figures, in no small part because percentages did not correspond with reported sample sizes, possibly because of the tiny sample sizes involved.

    **The report and the press note use, sometimes in the same sentence, both the words “ban” and “bans,” the latter to refer sometimes to provincial bans. I have used only “ban,” reflecting the fact that the menthol cigarette ban now applies nationwide, but I should point out that whereas the provinces introduced menthol cigarette bans between 2015 and 2018, the two surveys took place in 2016 and 2018.

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

    Questioning the Numbers

    Image: megaflopp | Adobe Stock

    Changes in the U.S. Tobacco Tax and Trade Bureau’s reports have made its data less useful.

    By Marissa Dean

    Each month, the U.S. Alcohol and Tobacco Tax and Trade Bureau (TTB) publishes excise tax statistical reports for tobacco products. In November 2022, the TTB announced that it would be changing the way in which it releases and reports this data—changes that significantly affect the quality of the data for its previous users.

    The reporting changes are attributed to the decrease in market players; the TTB stated that with so few remaining players, the data, as it had been published, made it easy to identify specific companies and their production and sales levels. This made for an unfair market, with some manufacturers privy to information that may affect product pricing and create unfair marketing practices.

    While at face value, the changes may not seem relevant, especially to those not adept at interpreting tax data, they are actually quite substantial. The TTB’s changes have led to shifts in the categories listed (categories now consist of cigarettes and a smaller number of other tobacco products) and the aggregation of tax-exempt data from all product categories; additionally, some months are missing data points. Tobacco products that are greatly affected include large cigars, little cigars, chewing tobacco, pipe tobacco and roll-your-own tobacco. As vapor products are not subject to a federal excise tax, the TTB does not, and did not previously, release any data regarding electronic cigarettes, e-liquid or other novel tobacco products.

    The trade association TMA uses the TTB’s tobacco tax data to create reports dissecting the information to discuss the U.S. tobacco product markets and trends. With the TTB’s changes, this information is now less useful than before. Overall, cigarette data hasn’t changed significantly outside of the lack of specific tax-exempt information; however, the other tobacco products are lacking much information that was previously available, making it impossible to get a complete picture of the market.

    When the TTB implemented its changes, it implemented them retroactively, meaning all of its previous excise tax statistical reports were removed from its website. The TTB also does not plan on notating which figures have been changed in revised reports to accommodate the new aggregation system, according to a source familiar with the matter.

    This poses a problem for TTB data users. Now, there are likely to be more discrepancies in data because one source may be using the “new” data while another may be using the previously published data. There are likely to be more gaps in information as well because many categories are missing information due to the aggregation—data comparisons are more difficult to obtain if missing data points become more common. Sources are less likely to be able to effectively discuss market outlooks and comparisons as well due to the gaps in data and the fact that categories have been combined. At best, they would be estimations and educated guesses based on historical data and trends.

    The aggregated information now provided by the TTB is useful in small part to give a snapshot of the market, but with gaps in data and large category aggregation, there is no way to dissect the market and understand possible trends in any comprehensive manner. Unless more players enter the game, it is unlikely that the TTB will revert to the way in which it originally reported the statistical data, creating a roadblock for those trying to discern potential market changes.

    Marissa Dean joined Tobacco Reporter in the summer of 2018 as a copy editor.Since that time, she has taken on additional responsibilities, including feature writing.Her skills span the publishing industry from layout and design to copy editing to content creation.