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  • A Seismic Shock

    A Seismic Shock

    Photo: Taco Tuinstra

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

    By Stefanie Rossel

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

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

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

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

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

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

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

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

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

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

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

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

    How do you think the vapor sector will develop?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    An Ill Wind

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

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

    By Stefanie Rossel

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

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

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

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

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

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    A different animal

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

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

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

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

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

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    Impact on supplying industries

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

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

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

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

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

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

    Vaping in times of Covid-19

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

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

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

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

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

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

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

    Tobacco’s untapped potential

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

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

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

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

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

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

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

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

    Beyond Tobacco

    Photos: BAT

    British American Tobacco prepares for a radically different future.  

    By Stefanie Rossel

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

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

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

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

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

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

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

    Faster and more responsive

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

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

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    Consolidating brand properties

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

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

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

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

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    Jonathan Fell

    Pushing forward

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

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

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

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

    Dealing With Disruption

    Photo courtesy of the Avant Garde E Liquid vape bar

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

    By Kenneth Robeson

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

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

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

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

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

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

    Manufacturers

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

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

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

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

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    Retailers

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

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

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

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

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

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

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

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

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

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

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

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    Supply chain

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

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

    Ahead

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

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

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

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

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

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

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

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

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

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

     

  • Nipped in The Bud

    Nipped in The Bud

    Photo: Milkos | Dreamstime.com

    India’s ban on vaping comes with unintended consequences.

    By Stefanie Rossel

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

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

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

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

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

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

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    Lost opportunity

    Samrat Chowdhery

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

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

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

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

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

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

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

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    Into a black market

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

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

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

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

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

    Missing the target

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

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

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

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

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

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

    Double Whammy

    First, vapor companies selling in China lost the internet. Then the coronavirus closed their physical stores.

    By Mark Miao

    By Mark Miao

    In 2019, the Chinese tobacco industry recorded a mid-single-digit growth in current sales value terms and a slight decline in volume terms, largely thanks to new product development in the vapor market and consumers’ growing preference in premium and mid-priced cigarettes due to the increasing disposable income. As the largest category in tobacco, cigarettes achieved a value of CNY1.5 trillion ($211.71 billion) in 2019, a 3.1 percent growth rate in current sales value. However, sales volumes stagnated in 2019 at 2.3 trillion sticks. Under China’s longstanding state tobacco monopoly system, the China National Tobacco Corp. (CNTC) dominates the nation’s tobacco supply from manufacturing to retailing, leaving a tiny space for international brands (Table 1).

    Table 1:

    Company

    Volume exposure to China as share of total cigarette sales in 2019

    China National Tobacco Corp.

    98.47 percent

    Philip Morris International Inc.

    0.13 percent

    British American Tobacco PLC

    0.10 percent

    Japan Tobacco Inc.

    0.02 percent

    Slim cigarettes volume growth rate surpasses superslim in 2019

    In terms of cigarette sizes, slim cigarettes surpassed superslim cigarettes in 2019 in sales volume growth rate. As an innovation of cigarettes, the introduction of slim and superslim cigarettes has attracted the attention of consumers, some of whom are eager for an alternative to standard cigarettes. While there are technical challenges in maintaining aroma, comfort and satisfaction in superslim cigarettes, these can be addressed, and the potential consumer benefits of slim cigarettes quickly attracted the attention of local tobacco monopoly administrations. By the end of 2019, there were more than 80 premium slim cigarette brands on the market, which together account for 80 percent of the slim cigarette market, according to the State Tobacco Monopoly Administration (STMA).

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    Smoking control, production drop and declining smoking prevalence

    The decline of cigarette volumes in 2019 can be attributed to stricter enforcement of smoking restrictions in public areas, lower production and declining smoking prevalence. The first public smoking restrictions date from December 2013. The Communist Party of China Central Committee and the State Council have asked officials to take the lead in adhering to the smoking ban in public areas such as schools, hospitals and other venues. On Nov. 23, 2014, the Legislative Affairs Office of the State Council released a draft regulation crafted by the National Health and Family Planning Commission, which intended to ban smoking in all indoor public areas nationwide. This marked the first time that China formulated regulations to control public smoking comprehensively throughout the country. Since the draft regulation was released, at least 20 cities in China have passed regulations to control smoking in public areas.

    According to the National Bureau of Statistics, cigarette production in November 2019 was 12.4 percent lower than in November 2018. Production also fell in August, May and June. Cigarette sales are likely to drop further. Under the Healthy China 2030 Initiative that was implemented in 2016, China aims to lower the proportion of smokers above the age of 15 to 20 percent by 2030.

    Despite these developments, the sales value of cigarettes has not been severely impacted thanks largely to the tobacco industry’s significant tax contributions to the state’s revenue. Taxes paid by CNTC account for more than 6 percent of China’s fiscal revenue. In 2018, CNTC paid CNY1 trillion in taxes, and in 2019 the figure increased by 17.7 percent. Moreover, revenues from tobacco sales have become an important source of income for local governments, such as Yunnan Province, where the restriction of smoking has proved to be a tough task.

    Illicit manufacturing

    On Jan. 20, 2020, the STMA announced its progress in the crackdown on tobacco counterfeiting and smuggling. A total of 10,826 cases involving counterfeit cigarettes with value above CNY50,000 were investigated in 2019, which was an 18.97 percent increase in comparison with 2018. According to Euromonitor International, the volume of illicit trade decreased by 10.1 percent, to 87.5 billion sticks, in 2019. It is worth noting that the Chinese market for illicit cigarettes is significantly smaller than it was in 2014 (Table 2).

    Table 2: Illicit Trade Penetration in China

     

    Units

    2014

    2015

    2016

    2017

    2018

    2019

    China

    percent

    5.3

    5.0

    4.9

    4.6

    4.1

    3.7

    Although the anti-counterfeiting and anti-smuggling campaign has achieved significant results, the situation remains grim. Driven by the exorbitant profits, illicit trading of cigarettes is bound to exist for a long time. Increasingly illicit traders have moved their operations to Southeast Asia, only to smuggle their products back into China for distribution.

    The STMA, together with departments such as public security, customs and the coast guard, is determined to crack down on these illegal activities, especially in Guangdong Province and Guangxi Zhuang Autonomous Region, as these two provinces, bordering Southeast Asian countries such as Cambodia, Burma and Vietnam, have been hardest hit by counterfeiting and smuggling operations.

    The boom of non-cigalike closed systems driven by online availability comes to a halt

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    During an internal symposium in August 2018, Jianmin Zhang, director general of the STMA, urged the tobacco industry to strengthen its research into the transformation of traditional cigarettes and develop a new type of tobacco industry. Although still small, the new-type tobacco market is developing at an unprecedent pace, reaching a 101.6 percent growth rate in terms of current sales value in 2019 thanks to the vigorous growth of non-cigalike closed vapor systems.

    Starting in 2018 with only a few brands, the market has welcomed an increasing number of new products in 2019. Both local vapor manufacturers and original equipment manufacturers have set foot in the non-cigalike closed systems market. These non-cigalikes have been warmly welcomed by consumers, especially the young adults, thanks to their fashionable designs, convenience and affordable prices.

    Before the advent of the internet, the vapor market in China had kept a comparatively low profile. However, in June 2018, a CNY38 million injection of angel financing in the vapor firm Relx led to a boom of vapor startups.

    In January 2019, the launch of FLOW with the endorsement of a leading internet enterprise accelerated the growth of vapor industry. This growth continued even though the vapor products were named and shamed by China Central Television for their alleged health risks and lack of industrial regulations. A total of 35 vapor brands in China received financing in the first three quarters of 2019, and the total financing amount exceeded CNY1 billion.

    With the help of significant investments, non-cigalike closed systems have become widely known among consumers. However, the supervision of the vapor industry did not keep up with the rapid development of the market and led to some areas of concern, manifested, for example, by the question of whether nonsmoking younger consumers are being attracted to the category, as well as marketing issues such as irregular labelling of e-liquid. These phenomena accelerated the arrival of regulations.

    On Nov. 1, 2019, the STMA and the General Administration of Market Supervision and Administration issued Circular on the Further Protection of Minors from Electronic Cigarettes, which prohibited sales to minors, along with internet sales and advertisements of vapor products.

    The circular hit the hot vapor market like a bucket of cold water. Before its announcement, the sales of domestic vapor brands were carried out mostly through major online B2C channels such as Tmall and JD.com, which accounted for 80.7 percent of value share in the vapor market in 2019. The internet retailing ban put vapor and combustible tobacco products on the same level. The sales of vapor products have been transferred from internet retailing to other channels such as social media and offline vapor stores.

    The circular also severely impacted the sales of vapor products because of decreased accessibility. Contrary to offline buyers, online shoppers face no time and geographic restrictions to purchase vapor products; they can buy as long as they have access to the internet. This is an important benefit particularly for vapers in smaller cities where there are fewer vape stores.

    Besides, selling offline requires a large investment in the creation and operation of physical stores. In the short term, the high entry barrier will phase out small and uncompetitive brands, and intensify competition. In the long term, the market will concentrate as leading players with deeper pockets can open stores more rapidly than their smaller counterparts. Physical stores also provide existing and potential consumers a place to experience vapor products, which will probably contribute to the sales increases.

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    The potential of heated tobacco

    Rather than burning tobacco, heated tobacco products create an inhalable vapor. It is claimed that heated tobacco products offer a 90 percent to 95 percent reduction in harmful and potentially harmful substances and toxicity, thereby reducing risk while maintaining satisfaction. Currently, China prohibits the sales of heated tobacco products. However, in its July 2018 reform notice, the STMA urged departments and bureaus to deepen innovation and reform of new-type tobacco products and promote the development of customization, industrialization and branding of new-type tobacco products, as well as the corresponding policies and regulations.

    China Tobacco Sichuan Industry Corp. was the first Chinese provincial tobacco manufacturer to launch a heated tobacco product: Kung Fu-Kuan Narrow. The product debuted in South Korea in October 2017. Since then, other tobacco monopoly administrations and private companies have entered the heated tobacco market. Although current regulations reserve heated tobacco products for exports, they might still have domestic potential in the future.

    Covid-19 likely to dampen consumption

    The Chinese tobacco industry reached CNY1.7 trillion in 2019 with a steady growth momentum over the past three years. However, the industry is currently going through a rough period given its reliance on offline channels. The closure of shops and restaurants in response to the coronavirus has not only reduced shopping but also decreased smoking opportunities, especially in smaller cities that were not enforcing smoking bans. In China, cigarettes have traditionally played an important role in social gatherings, which were largely banned in early 2020.

    The slow return to normal, along with the stagnation of logistics, will undoubtedly decrease supply in the first quarter of 2020. In the meantime, the epidemic will also slow the physical store expansion of vapor players, which will further affect sales of vapor products in 2020. Due to the deceasing accessibility of tobacco products, smoking prevalence might decline and lead to a tobacco products consumption decrease in the short term. However, in the longer term, the industry will likely remain resilient in China due to the addictiveness of cigarettes and the strength of consumer behavior.

    Mark Miao is associate analyst at Euromonitor International.
  • A Pointless Exercise

    A Pointless Exercise

    The EU’s upcoming ban on menthol cigarettes serves no purpose.

    By George Gay

    According to Hannah Devlin, science correspondent of The Guardian, astronomers are to sweep the entire sky for signs of extraterrestrial life for the first time, using 28 giant radio telescopes in an unprecedented hunt for alien civilizations (Feb. 15, 2020, page 3). Toward the end of her piece, Devlin quotes the theoretical physicist Stephen Hawking as having warned against attempting alien contact, suggesting the outcome for humans would not necessarily be good. But she quotes, too, Andrew Siemion, the director of the Berkeley Seti center, as saying that he thought such contact should be attempted, and adding that, “I think without a doubt, we would.”

    I think both comments are right up to a point. It is unarguable that the outcome of such contact would not necessarily be good for humans, but history has taught us that, whatever the risk, scientists somewhere would not hold back from making the attempt. Scientific knowledge is no bar to stupidity.

    I cannot think in terms of light years, so I find it impossible to imagine making contact with life forms in other galaxies. But I do find it instructive, often in what turns out to be a cautionary way, to consider what extraterrestrials might make of us earthlings if, because of their super-advanced technology, they could view us in real time through a telescope. What might they say to one another, I wonder? “Hey, come and look at these jerks! Their environment is going down the toilet, and what are they doing? They’re worrying about menthol cigarettes! These are supposed to be intelligent beings! Let’s not go there.”

    I think that the EU is a great experiment in international cooperation, and I am sad—and if I were younger I would be angry—that the U.K. is leaving it, but ridiculous legislation such as its ban on the production and sale of menthol cigarettes sometimes makes it difficult for people such as me to defend the institution against its detractors. In the great scheme of things, what is the point of banning menthol cigarettes?

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    Background

    Well, before I attempt to answer that question, a couple of notes about what the ban entails and how it came about. The production and sale of menthol cigarettes and cigarettes with capsule-containing filters are to be banned within the EU from May 20, 2020, as is the sale of roll-your-own (RYO) tobaccos sold with mentholated filter tips and/or papers. However, RYO tobacco and “accessories,” such as mentholated filter tips and papers, may all be sold separately.

    This regulation has been a long time coming. Its origins go back to a December 2012 proposal by the European Commission to update the EU’s Tobacco Products Directive (TPD) and, a year later, to the EU Parliament’s support for stiffening the rules against tobacco and related products, and, de facto, against committed tobacco users. Early in 2014, the TPD2 was approved by the Parliament and adopted by the EU Council; and it entered into force in May of that year. Aspects of TPD2 were challenged, but it was declared valid by the European Court of Justice in May 2016. Most of the provisions of TPD2, including a ban on the sale of cigarettes with characterizing flavors except menthol, came into effect in May 2017, following a year’s sell-through period. There is no sell-through period in respect of menthol cigarettes.

    Now, let’s return to the question above: what is the point of the ban? Well, according to some commentators, it is aimed at reducing smoking; but this must be hokum. Trying to reduce smoking by banning the sale of menthol cigarettes is like trying to reduce alcohol consumption by banning the sale of wine with characterizing flavors other than grape—such as peach wine.

    Meanwhile, the EU put forward as part of its justification for the ban what the U.S. Food and Drug Administration (FDA) had concluded in 2013: that menthol cigarettes pose a public health risk above that seen with nonmenthol cigarettes. It also quoted the FDA as saying that menthol use is likely associated with increased smoking initiation by youth and young adults; that menthol in cigarettes is likely associated with greater addiction; and that menthol smokers are less likely to successfully quit smoking than their nonmenthol-smoking counterparts.

    Of course, the EU did not point out that the FDA was so concerned about menthol cigarettes in 2013 that it did nothing about them.

    Reading the above, I was amused by the way the FDA, this self-styled bastion of rigorous science, apparently throws the word “likely” about as if it were confetti at a wedding. And I found myself not convinced by what seemed to me to be some muddled thinking. If the FDA thinks it’s necessary to say that it’s possible “to successfully [my emphasis] quit smoking,” rather than “to quit smoking,” I take it that it believes also that it is possible to unsuccessfully quit smoking. But whereas you might make an unsuccessful attempt to quit smoking, you cannot unsuccessfully quit smoking—not in this galaxy.

    I have trouble also with the concept of “greater addiction.” The word “addiction” has become so malleable in the minds of a lot of people that it is now like mental chewing gum. No more than I can imagine a million light years, can I imagine how degrees of addiction would be measured in a scientifically rigorous manner.

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    Other risks

    The EU aligns with the FDA also on smoking initiation among young people. One of the EU’s original justifications for the ban cited scientific studies that have shown that flavors such as menthol facilitate inhalation and may play a role in smoking initiation. I would have thought scientific studies that purport to show that something may be the case should be binned, but, having said that, I am ready to believe that it is possible that menthol does aid smoking uptake by the young. However, there are laws to prevent the sale of all types of cigarettes to these people, and it seems unbalanced to spoil the enjoyment only of adult smokers of menthol cigarettes because the authorities in the EU’s member states are failing to enforce laws that apply to all cigarettes, especially given the fragility of the scientific studies referred to above.

    After all, the EU seems not to take issue with another product that has been linked with cancer and that young people consume—the younger ones at the behest of adults. In fact, according to the headline above another story that appeared in the same newspaper as Devlin’s report, the EU has been under attack for spending more than €200 million ($225.78 million) on the promotion of meat. As writer Daniel Boffey points out in his piece, “Scientists have provided evidence of a link between cancer and diets involving pork, beef and lamb products.”

    And how those extraterrestrials must be laughing. Boffey points out too that the livestock sector is responsible for about 14.5 percent of human-derived greenhouse gas emissions. How can it be in the interests of young people for the EU to spend millions of euro promoting something that is linked with cancer and that is helping to flush the environment down the toilet? It is young people, not older adults, who are going to have to settle, at best, for a life squatting on the toilet’s event horizon.

    But it isn’t really about the young, is it? How can we have the temerity to maintain, against all the evidence, that we want to protect young people? And I’m not talking only of governments here, I’m calling out ordinary people. One example. In my country, the U.K., voters have recently given a huge parliamentary majority to a party that, during the past 10 years, has overseen a big increase in child poverty and that will almost certainly cause more such poverty during the next five years—a party led by a person who many commentators say is unable or unwilling to account for how many children he has. Elsewhere, the abuse of children in the U.K. is accepted to the point that those in authority often look the other way, and it is even “celebrated” in one of our poetic forms, the limerick. I don’t know what became of the young chaplain from Kings, but some of the leaders of his church sit, by right, in our second chamber, the House of Lords; I presume, to provide us with spiritual guidance. This is way beyond irony.

    I would not argue that the EU should concentrate on nothing but the environment. But it should certainly take off the table any nonessentials and put all available hands to the environment pump. The climate crisis is not a future event. It is already upon us.

    By comparison, the menthol-cigarette ban is pure faff. I presume that it has been devised by people who haven’t moved against gooseberry and elderflower wine because most of them consume alcohol. They want to put a stop to a pleasure that they cannot understand. You can see this in the rules about roll-your-own tobacco. Allowing the sale of menthol papers and tips as separate items but not in conjunction with tobacco seems to be aimed at inconveniencing smokers. The EU’s bureaucrats should be put to work on critical projects. Announcing the European Green Deal is all well and good but, from what I read, making it work is going to be a huge challenge. The carbon scammers will already be jostling for position.

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    Accommodation

    Inevitably, products have been appearing on the market aimed at helping menthol-cigarette smokers through the difficult time being ushered in by the May 20 ban. One, a menthol-infusion card that smokers can slip into a pack of regular cigarettes or fine-cut, is particularly clever, mimicking as it does the RYO accessory exemption, and thereby presumably staying well within the spirit and the letter of the law. Ironically, menthol smokers might end up preferring this system because they can tailor their preferred menthol level by adjusting the length of time they leave the cards in the pack. And of course, menthol smokers can help themselves after May 20 by putting regular cigarettes, together with some menthol crystals bought from their local pharmacies, into a sealed jar and leaving them there for a time based on their preferred menthol strength.

    Despite the fact that I see the menthol cigarette ban as being unnecessary and unfair, discriminating against and collectively punishing a minority group of smokers, you have to accept that what is done is done and try to make the most of it. I suppose you have to hope that those menthol-cigarette smokers in the EU who do not want to take advantage of the new DIY methods react by quitting or switching to menthol vaping.

    But it’s those extraterrestrials who will have the last laugh. They will hardly be able to contain themselves as more EU energy is expended on TPD3 while the environment tips over the event horizon to the strains of “Goodnight Irene.”

    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.
  • Reducing the Footprint

    Reducing the Footprint

    Paula Birch of Parkside Flexibles reflects on ways to minimize the environmental impact of tobacco packaging.

    By George Gay
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    Most of us rarely see and rarely come into direct contact with some of the materials and activities that are causing the degradation of our environment, such as certain insecticides and manufacturing processes. But packaging is in our faces the whole time, so it attracts a level of public criticism that is perhaps out of proportion to that aimed elsewhere. Tobacco Reporter spoke with Paula Birch, global sales director, Parkside Flexibles, about this and other issues.

    Tobacco Reporter: How would you describe the current state of the general environment—not concerned only with the tobacco industry or packaging? Is it, in your view, in robust health, in need of some TLC, worrisome, approaching a crisis, past repair…?

    Paula Birch: Since the airing of the BBC Blue Planet II series, consumer awareness of the environment and the role humans have in destroying what is a very sensitive and balanced ecosystem has escalated. The situation in our view is worrisome, and some key actions by consumers and governments alike need to be taken around the world to avoid moving into a crisis situation in the next few years.

    Do you think the tobacco industry’s packaging plays a significantly negative role in the environment?

    Consumer concern about the environment has clearly thrown the spotlight onto the packaging sector. However, our view at Parkside is that this has been unnecessary and out of proportion to the issue. First and foremost, packaging protects and preserves goods along the supply chain, minimizing waste and the loss of valuable resources. It has an environmentally positive role in its fundamental functionality. However, not all packaging is created equal, and the industry can certainly be held to account in the design of packs that are overengineered, or “overpackaged,” using unnecessary materials in their primary design.

    Today, packaging, and primarily single-use plastic packaging, is blamed for a lot of environmental damage. However, the main issue in reality is the consumerist society that we now live in creating demand for convenient and disposable goods, as well as poor human behavior in littering, which creates pollution and marine litter.

    Packaging in the first place should be designed with minimum material use—assuring the product is not damaged or does not suffer in transit in terms of shelf life—and with due consideration given to its disposal route. Packaging should always be lightweight and made from renewable or recyclable polymers, and be fully recyclable at the end of its life, or compostable if not. This way we drive circularity in use and avoid the use of fossil fuels, which is clearly undesirable.

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    Are the companies you deal with, whether suppliers or customers, becoming more conscious of the need to protect the environment? Are they willing to pay the price of protecting the environment—assuming there is a price to pay in the short term?

    Suppliers and customers are clearly addressing their corporate social responsibility and environmental objectives driven by the media, which is filled every day with consumer demands and environmental or climate change concerns. However, it is clear that, due to the higher costs associated with small-scale production, innovative new materials are often significantly more expensive than are incumbent materials and frequently have compromised performance attributes in contrast with those of the industry incumbents. We therefore do not see widescale adoption in the tobacco sector of these newer materials but do see a desire for the recyclability of current polymers, which we strive to provide.

    The tobacco industry’s approach to packaging and the environment seems to have been fairly good, but would it be fair to say that it could do a lot better?

    Yes, that’s fair, and the tobacco industry is not alone. All brands across FMCG [fast-moving consumer goods] see opportunities to change, but it comes at either a cost or pack performance penalty. The reason why many packaging formats and plastics in particular have become ubiquitous is because of their high-level functional attributes. They have simple structures that, for instance, make them lightweight but at the same time render them robust, puncture resistant, transparent and effective barriers to moisture and aroma. This is hard to replicate with mono-polymer structures suitable for recycling, for example. Innovation will continue and new breakthroughs will clearly be made in time, but if it were easy to switch, we have no doubt brands across the board would have done so already.

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    Perhaps it is the case that, even if the industry did do a lot better, that would not make a huge difference in the grand scheme of things—in the face of the problems we must confront. Is that fair, or is it too defeatist?

    Clearly the planet is facing a significant challenge in dealing with climate change and we all have to do our bit to drive change. It is true that packaging seems to have become a target for consumer focus due to media attention and that since there are perhaps far more polluting industries—for example, transport and logistics—the focus is out of balance. However, the packaging industry does recognize it must use lightweight, recyclable, renewable and bio-based materials, and ensure that packaging is absolutely optimized throughout the supply chain, in order to regain consumer trust and deliver incremental changes as part of a societal shift.

    What changes can the tobacco industry make to its packaging and packaging activities—from raw materials to retail—to reduce its negative impact on the environment?

    The key, as outlined above, is minimizing resource use in the first place. Designing with the minimum amount of material and then seeking options that either incorporate renewable or recyclable materials in the design. From there it’s about ensuring that the disposal route is also optimized—the pack should be recyclable or compostable.

    What changes is Parkside making to its tobacco-industry business to reduce its impact on the environment?

    Parkside Flexibles is a global leader in the production of home and industrial compostable packaging films as an alternative solution to non-recyclable flexible packaging solutions that currently go to landfill. Flexible packaging has been difficult to recycle due to its inherent design utilizing multiple polymers either co-extruded or laminated to create the multifunctional performance requirements it delivers, such as barriers to gases, light, aroma, etc.

    Flexible packaging is a fantastic packaging solution in that it is lightweight and therefore extremely efficient from a supply chain and carbon footprint perspective. However, many brands and consumers are seeking circularity in packaging design and it struggles to close this loop. Parkside has therefore invested over eight years in the research and development of compostable laminate solutions that have equivalent barrier, graphic and packing performance to common flexible packaging substrates and has successfully delivered fully accredited solutions for home and industrial composting scenarios. These solutions are perfectly suited to tobacco applications, and we are working with a number of brands that are interested in the compostable packaging format.

    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.
  • Easier Said Than Done

    Easier Said Than Done

    Photo: Justin Greenaway

    Recycling e-cigarettes remains a  challenge

    By Stefanie Rossel

    While vapor products are considered to be less hazardous to users’ health than combustible cigarettes, the impact of their waste products on the environment may become just as harmful. Currently, cigarette butts are the most littered items in the world. Since the 1980s, they have consistently made up 30 percent to 40 percent of all items collected in annual international coastal and urban cleanups, amounting to an estimated 4.5 trillion cigarettes annually being discarded worldwide, according to the Truth Initiative, a U.S. not-for-profit tobacco control organization. Thrown into the environment, they leach nicotine and heavy metals while their cellulose acetate filters take up to 10 years to degrade (also see “Minimizing impact,” Tobacco Reporter, April 2019).

    Due to their complex construction, e-cigarettes entail additional perils for the environment. When littered, broken vape products can ooze dangerous metals and battery electrolytes, not to mention nicotine liquid, which is toxic. The remaining plastic parts of the device take an estimated 450 years to decompose—If they disintegrate at all. Studies have shown that they break into micro particles by atmospheric conditions over time. The individual components of e-cigarettes belong in different waste categories, which can make proper disposal challenging.

    In the U.S., the world’s largest vape market with a value of $6.4 billion in 2019, according to Statista, the legal situation for the appropriate disposal of vaping devices is complex and inconsistent. Most devices sold don’t include instructions on how to dispose of them correctly.

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    Heterogeneous rules

    In the wake of vaping’s growing popularity among teenagers, littering of used e-cigarettes has become a serious problem for U.S. high schools. As students are prohibited from smoking or vaping on school grounds, they tend to do so in surrounding areas, often throwing away their discarded vape pens and cartridges as carelessly as they would cigarette butts. Schools collect the used items, which makes them “generators” of waste under the U.S. Resource Conservation and Recovery Act (RCRA).

    To aid the schools in their thankless new responsibility, the Public Health Law Center (PHLC), a tobacco-control organization, in December 2019 published a guideline on how to properly dispose of e-cigarette waste. As generators, the RCRA requires schools and other institutions such as airports and courts to comply with special handling requirements, which, among other things, include that they notify their hazardous waste regulatory entity and fill out a special form to obtain a U.S. Environmental Protection Agency (EPA) identification number.

    They are also required to inspect the hazardous waste on a weekly basis to make sure that there is no leakage. Nicotine, be it in the shape of a liquid or salt, is a listed hazardous waste under the RCRA. The law requires generators to ship the waste storage containers, which are not permitted to remain on site for more than 90 days, to a properly permitted hazardous waste treatment, storage or disposal facility. “While recycling the e-cigarettes would make them no longer subject to RCRA hazardous waste requirements, the problem is that, to date, no network of legitimate recycling facilities that recycle nicotine for later reuse appear to exist,” the PHLC states in its publication. “The additional burden on public institutions can be overwhelming.”

    By collecting e-cigarette waste, institutions also become generators of lithium-ion batteries as they are found in rechargeable e-cigarettes. Despite their risk of fire or explosions, the batteries are not required to be stored and disposed of in the same strict manner as nicotine waste. The RCRA treats them as “universal waste,” but at the state level, hazardous waste regulatory agencies have developed different standards on how to treat them.

    If used or disposed of outside one’s residence and/or accumulated by a public entity such as a school or a business, federal law uniformly treats vapor products as hazardous waste. Should students dispose of their used items at home, however, the situation is different: Under federal law, vapor devices are consumer products designed for use at a consumer’s residence in their residence and can therefore be discarded by them as nonhazardous waste. Instead, they qualify as “hazardous household waste,” which again is subject to state regulation.

    To facilitate matters for their customers, several U.S. vapor companies have introduced voluntary take back programs, although some later discontinued these initiatives. Juul, which leads the U.S. vapor market with a share of around 75 percent and, according to the U.S. Centers for Disease Control (CDC), sold 16.2 million devices in 2017 alone, currently has no such program. “We are committed to developing effective, innovative and sustainable solutions,” the company told Tobacco Reporter. “We look forward to launching further takeback and recycling pilot programs in the future. In the meantime, we suggest consumers recycle their Juul devices with other electronic waste which contain lithium-ion polymer rechargeable batteries. Juul pods are not intended to be refilled and we ask consumers to not litter.”

    Minimizing landfill

    Regulation is clearer in the world’s second-largest vape market, the United Kingdom, where e-cigarette sales accounted for $3.2 billion in 2019, according to Statista. Despite the country’s departure from the European Union (EU) in January, it remains for the time being subject to EU laws, such as the Waste Electrical and Electronic Equipment (WEEE) regulations, which entered into force in 2014. The law aims to reduce the amount of electrical and electronic equipment ending up in landfills as hazardous materials can contaminate water and pollute soil, and the amount of landfill space in Europe is limited.

    The WEEE directive sets recycling and recovery targets and requires manufacturers and retailers to assist in the collection of WEEE for recovery and recycling. Manufacturers pay an annual fee for the safe collection and recycling of electrical waste products. End-users are obliged to dispose of such products not as part of regular household waste, but by dropping them at a dedicated e-waste reception location. This can also be a retailer of electrical or electronic products as long as their shop has a certain size, or the manufacturer. To indicate that a product is required to be discarded under WEEE rules, it is marked with the image of a crossed-out wheelie bin. In 2019, a German court prohibited Juul from selling in Germany because its products lacked this symbol.

    Every year, U.K. households and businesses discard an estimated 2 million tons of WEEE items ranging from washing machines to automatic money dispensers, according to the U.K. Health and Safety Executive. At present, vapor products account for only a small share of one of WEEE’s 10 broad subcategories. Listed among small household appliances, they are not even separately mentioned.

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    Up in smoke

    Despite differing regulations, vapor product waste is submitted to similar treatments in the U.S. and the EU. “Most vape product waste, inclusive of the batteries, goes through high-temperature incineration (HTI), which means it is incinerated at 1,000+ degrees Celsius,” explains Rob Smith, owner and operator of RS Recycling Ltd, a U.K.-based company that offers destruction and brand protection services for the secure disposal of commercially sensitive, difficult, dangerous or classified waste streams. “The heat will destroy the item completely and largely reduce waste volume. There is very little residue—typically 10 [percent] to 20 percent of the inbound waste volume is outbound as an inert ash.”

    In 2017, Smith was engaged by Valpak, a leading U.K. environmental compliance scheme that manages the recycling obligations of more than 5,000 U.K. businesses, to research ways of recycling vapor products. The results were sobering, Smith explains. “Recycling an e-cigarette is possible, but it’s very, very expensive. It’s a very small and tricky waste stream. If restricted to a single country, there’s a disproportionate relation of cost and R&D efforts to recycle these products.”

    One reason for this is the vast variety of vapor products. In 2017, the CDC counted 565 different types of e-cigarette devices in the U.S. market, 184 of which were disposable or single-use products. While the trend has since shifted toward reusable systems, market research companies nevertheless expect disposable products to remain on the market. It was these “cigalikes” that Smith studied. “The batteries are incredibly difficult to remove from the device, and they are all made differently,” he says.

    “The way they are manufactured is that the battery is tightly packed in the stem, which requires a lot of force to remove. The majority of devices are manufactured in China using lithium-ion polymer batteries, which are soft and easily damaged—around 1 [percent] to 1.3 percent of the batteries failed during removal with the possibility of catching fire if not properly dealt with by the recycler. The majority of fires in WEEE treatment facilities are thought to be caused by batteries being crushed, split or otherwise broken, or by arching and igniting surrounding combustible WEEE material,” says Smith.

    Battery recycling is all about recovering the rare and valuable metals used for their production, most notably lithium and cobalt. The batteries used in vaping devices, however, are only about one-sixth the size of batteries installed in smart phones, so the commercial viability of recycling them needs to be considered.

    Sweeep Kuusakosk is working on a large-scale recycling process for nicotine pods.

    A costly process

    Justin Greenaway

    Recycling a single-use e-cigarette, Smith points out, is about 20 times more expensive than burning it. “The question is whether manufacturers are willing to bear the cost,” says Smith. “There are no mechanical means currently available to take the battery out of the stem; hence a lot of costly manual labor is involved. The disposal of the nicotine liquid is also relatively expensive. Besides, there are toxic issues around that. Typically, WEEE treatment facilities are not used to dealing with hazardous toxic liquid—they have expertise in treating refrigerating gases or mercury dusts and residues, but the toxic liquids in e-cigarette cartridges present a different type of hazard and risk. Even touching the liquid with exposed skin is quite harmful.”

    Reusable closed and open systems are much easier to recycle, Smith says, because they have replaceable battery packs. “Batteries tend to be stacked or are built-in in large blocks in these devices. The devices will be broken up by the conventional WEEE process, where a chain mill is used. The machine can smash the vape product so that the battery comes out and the tank can be detached from it, which makes recycling easier.” He adds that the volume of vapor products that need to be recycled is still relatively small, which hampers development of respective recovery processes. “When there are large volumes of a certain waste, it’s more likely that recycling processes are designed for them.”

    Sweeep Kuusakoski, a leading WEEE processing facility in the south of England, is currently working on a large-scale recycling process for nicotine pods. The firm is a forerunner in this field, according to the company’s commercial manager, Justin Greenaway. “Working with e-cigarette responsibilities, we understand that the marketplace needs a recycling solution,” he explains. “We have already perfected the removal of batteries, using chain mills and a manual process for the disassembly of devices. Now we design a process for the cartridges to remove nicotine residue, wash out the remainders and recycle the pods.”

    The retrieved nicotine fluid will be incinerated. The company had previously developed a similar system for toner cartridges, according to Greenaway. “Nevertheless, it’s a challenging task for us,” he says. “We are still experimenting, but we plan to have the process ready in three months’ time.”

    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.
  • Custom-Made

    Custom-Made

    Lukowa Tobacco has specialized in shisha tobacco from Poland.

    By Stefanie Rossel

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    Originally a centuries-old habit in the Middle East, smoking hookah, also known as a water pipe or shisha, has become a global trend in recent years. While still a niche product compared to combustible cigarettes, it has been growing continuously. According to a 2019 research report, smoking hookah is expected to show an annual compound growth rate of 18 percent over the next five years, reaching a market value of $1.89 billion by 2024, up from $730 million in 2019.

    The tobacco type required for use in water pipes is flue-cured Virginia (FCV) as that cultivated in the southeast of Poland. The leaf comes with a characteristic bright yellow color and a soft tissue. With a value of 0.8 percent to 1.5 percent, the variety is extremely low in nicotine. As manual harvesting prevails, FCV leaf remains largely free from damage associated with mechanical harvesting.

    FCV has a sugar content ranging from 25 percent to 30 percent. The sugar caramelizes during smoking, so it doesn’t hurt the throat, and smoking is “soft.” The sugar also works well as a carrier for molasses and flavors. Moreover, high sugar content ensures a nice puff. In contrast to other tobaccos, the leaf’s “blond” color persists if primary processing and threshing are done properly—even after it has been mixed with honey and flavors, a fact that is of particular importance to shisha smokers.

    Miroslaw Pekala

    Family-owned Lukowa Tobacco has specialized in providing high-quality shisha tobacco, selling only smaller quantities of tobacco for cigarette production. “Actually, we are quite a young company,” says Miroslaw Pekala, Lukowa Tobacco’s CEO. “We started our business in 2013 with only leaf purchasing and trading, but we quickly decided to develop our business and invest in our own factory. In 2015, we launched our primary, and from the very beginning, we started to produce and sell tobacco for shisha.”

    Located in the city of Lukowa in the Bilgorajski district, the company is situated at the heart of Poland’s tobacco country. With 5,000 hectares, the region is the main and largest tobacco growing area in Poland where in total 8,000 hectares are cultivated. Local farmers have longstanding expertise in growing the tobacco types used for water pipe smoking, and they have also established the necessary infrastructure, such as drying barns, to cater to increasing demand.

    “We are happy and lucky to have tobacco in Poland, which is excellent for the shisha industry,” Pekala points out. “As we all know, the cigarette market for factories like ours is going down, but the shisha market is developing from year to year.”

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    Here to stay

    The Polish leaf market was quite different when Lukowa Tobacco entered it. When accessing the European Union (EU) in 2004, the country was cultivating 33,000 tons of tobacco annually. As in the rest of the common market, the Polish tobacco farmers’ community has been shrinking since. Today, it produces around 22,000 tons of tobacco per year.

    By 2015, the number of Polish tobacco companies had risen to more than 300. That year, the Polish government revised existing legislation and introduced new regulations. While some of the novel rules were enacted to make the country’s legislation compliant with EU requirements, others were domestic laws seeking to rationalize its tobacco industry.

    One requirement in particular became a hurdle to many: In order obtain a tobacco trading license, leaf dealing companies have to pay an annual guarantee to the customs office depending on their purchased tobacco volumes. For every 1,000 tons of tobacco traded per year, leaf merchants must pay pln1 million ($257,000)—a significant sum in a business characterized by small margins. As a result, many smaller companies closed or relocated to neighboring countries where legislation was less restrictive. Only 15 legally authorized leaf traders remain on the Polish market, among them the big international players—and Lukowa Tobacco. “We think all new regulation is very useful for serious companies who want to run the tobacco business legally,” Pekala comments.

    The company stands out by being one of only two leaf merchants in Poland that runs its own processing line; a third one has rented a processing facility. Lukowa Tobacco processes most of the tobacco for its own purposes. Third-party services account for only 10 percent of the company’s turnover.

    With its processed shisha tobacco, the company competes on a global level. “90 percent of our volumes are sold abroad,” explains Pekala. “The tobacco world is small; clients usually know the main primary processing factories from different countries and are well orientated with their offers.”

    He adds that high-quality production is a prerequisite to remain competitive in the company’s specialized niche. “Shisha clients to whom we mainly sell are very sensitive with regard to the quality, color and stem content. We must keep high standards of production and quality control. We also put a lot of efforts into cooperation with farmers and the agronomy in order to ensure high-quality leaf produced by farmers.” 

    In the production of hookah tobacco, Poland directly competes with France and Germany, which both have similarly favorable climates for the cultivation of Virginia leaf. Pekala says that his company also uses German and French seeds. “The tobacco is basically the same from those countries. Of course, it may vary because of the impact of weather conditions during the cultivation season. For sure, the advantage [of Polish shisha tobacco] is price because our farmers get lower prices for tobacco [compared] to France or Germany. It has the main impact on the final price and competition. However, Polish tobacco is not [as] well recognized all over the world like German or French [tobacco]. We still have a lot to do with the marketing of Polish tobacco. This is the mission of our company.”