Category: Print Edition

Rock solid
Despite mounting anti-tobacco pressures, the top cigarette brands are more valuable than ever.
By George Gay
At the International Food & Drink Event (held March 19–22 at the Excel center in London), Japan Tobacco International (JTI) hosted a stand dedicated to the future of brands, which was designed as a “wake-up call to global food and drinks companies that their brands are under increasing attack of excessive regulation.”
“JTI has been on the front line fighting bad regulation for several years, and as regulators look to hit food and drinks companies with the same punitive taxes, pictorial health warnings and even ‘plain’ packaging—a measure which bans any form of branding on packs—we have experience and expertise that we would like to share,” Jonathan Duce, head of external communications at JTI’s global headquarters in Geneva, was quoted as saying on JTI’s website.
The note went on to say that whether it was a bottle of wine, a chocolate bar or a fizzy drink, excessive regulation not only impacted large product manufacturers but also threatened small businesses, including design and packaging suppliers. Small shops—often central to communities—could be hit hard by ill-thought-through regulation such as plain packaging through struggles with implementation costs and logistical constraints, confused customers who couldn’t find their products, slower transaction times, product inventory issues, and impacted margins. The creative industry was indirectly under attack too, as branding bans would affect their other fast-moving consumer goods clients, while smaller boutique/craft businesses that were becoming increasingly popular would suffer disproportionately from the attack on their brands.
“Regulators are ‘copy and pasting’ tobacco-style regulations into other sectors without any thought as to whether they worked elsewhere,” said Duce. “Australia failed to speed up the already existing decline in smoking rates after banning branding on tobacco packs more than four years ago. In fact, the measure backfired and distorted the whole competitive landscape. It didn’t change whether people smoke—it changed what they smoke. Between two products, smokers now choose the cheapest. This includes illegal tobacco, which has increased by over 20 percent since the introduction of the policy.”
On JTI’s website www.thefutureofbrands.com, there is much information about some of the ways in which regulations that have been used against tobacco products are being applied to other types of products. Indeed, the website quotes Olivier De Schutter, former UN special rapporteur on the right to food, as saying, “Unhealthy diets are now a greater threat to global health than tobacco. Just as the world came together to regulate the risks of tobacco, a bold framework convention on adequate diets must now be agreed.”
The website lists a number of regulations already imposed or being brought in on nontobacco products, of which the following are some. Thailand has imposed pictorial health warnings on alcohol products, Indonesia is considering alcohol plain packaging, France and South Africa have placed restrictions on alcohol advertising and promotion respectively, and Australia has imposed a 70 percent tax on alcopops. A number of countries, including France, Belgium and the U.K., have adopted or proposed special taxes on soft drinks containing sugar, and Hungary has implemented a law imposing such taxes on foods such as prepackaged sweetened products with high sugar content and foods with high fat and salt content. Mexico has introduced advertising restrictions on sugary soft drinks, and Ireland has introduced advertising restrictions on fast food and foods with high sugar content. The Canadian province of Ontario has proposed pictorial health warnings on chips, pizzas, grape juice and chocolate milk, and Chile has imposed 20 percent health warnings on sugary drinks.
Prompting change?
This all sounds very worrying up to a point, but, given that some people champion these sorts of restrictions, it is as well to ask whether they are a good thing or a bad thing, and whether they are universally good or bad. And I guess these questions have to be asked from the point of view not only of the brand owners, their suppliers and retailers but also from that of consumers and society in general.
It could be argued that the pressure put on the tobacco industry over the years helped to prompt the invention of electronic vapor products, and most reasonable people would consider this to be no bad thing I think. So if pressure is brought to bear on these other industries and their products, could it be the case that the businesses that make up these other industries might start casting about for solutions to the health problems that their products help to create?
One thing seems certain: They won’t do so of their own volition. Otherwise they would have done so by now. This is not to say that they are unethical, though some might be; it is merely a question of competitiveness. It would be competitive suicide for one company to change the formula of its products to make them less risky if, in doing so, they were made less appealing to the consumer. Other companies would merely take advantage, and relying on consumer loyalty would be naive. Clearly it is the case that, like the tobacco industry, these other industries need to be the subject of regulation; the question concerns only what sorts of regulation.
But perhaps one of the most interesting questions concerns why JTI is taking the trouble to alert other industries to the dangers posed by excessive regulation. As far as I know, solidarity across industries has not been a feature of tobacco’s experience in the past, and, if a survey carried out earlier this year by the World Intellectual Property Review is anything to go by, things aren’t set to get better. The publication asked its readership whether the intellectual property (IP) sector was fighting a losing battle against standardized packaging. Ninety-three percent of replies answered yes, but the point was made by one reader that it was the tobacco sector rather than the IP sector that was losing. One reader was reported to have said that public health concerns did and should outweigh IP rights, while another apparently said that IP rights did not have greater force than legislation designed to protect public health.
All things considered, it seems to me that there is a certain logic in putting pressure on industries, businesses and their risky products, but I cannot say I’m in favor of the sorts of policies used against the tobacco industry. Increasing taxation, especially in the case of sugary drinks and fast food, would certainly be regressive—as it is in the case of tobacco—because these are the sorts of products mainly consumed by the financially worse-off within most societies. I have never been a fan of bans on advertising and promotion because I do not see these as having a great impact on volume sales, though they can cause existing consumers of a particular product to try a different brand.
As to graphic health warnings and standardized packaging, I have to ask whether the world needs further uglification. Imagine a world where graphic health warnings were applied to tobacco products; alcoholic drinksp; fatty, salty and sweet foods; and sugary drinks. A visit to the supermarket would be a nightmare. Or rather, it wouldn’t, would it? Because we would all gradually block out these images. But then again, what would a trip to the supermarket be like if all of these risky products were the subject of display bans? It would be a logistical impossibility. We would all have to shop online, which would at least have the advantage of disallowing people from squeezing the avocados and then putting them back. I take it that it is not possible to squeeze such items in a virtual way and cause actual bruising.
The way to handle these risky products, including tobacco, is for governments to provide the public with accurate information about their possible deleterious effects and to let people make their own choices. After all, as somebody pointed out long ago: There are no bad foods, just bad diets. In some countries, where illiteracy is widespread, some of that information might have to be delivered via illustrations, but, even so, it should not descend into propaganda.
As valuable as ever
On the other hand, another way to deal with the brand issue is to let governments regulate as they think fit because it won’t make any difference. In March, Brand Finance issued a press note titled “Tobacco Brand Values Hit New Highs in Spite of Regulation.” According to the note, more than 80 percent of tobacco brands are growing in value.
Brand Finance said that each year it values the brands of thousands of the world’s biggest companies. “Brands are first evaluated to determine their power/strength (based on factors such as marketing investment, familiarity, loyalty, staff satisfaction and corporate reputation) and given a corresponding letter grade up to AAA+,” it said. “Brand strength is used to determine what proportion of a business’s revenue is contributed by the brand, which is projected into perpetuity to determine the brand’s value.”
The company made the point that during the past 15 years, an accelerating tide of regulation had swept over the tobacco industry. There are now significant restrictions on when and where consumers can buy and use cigarettes in most markets of the Organisation for Economic Co-operation and Development and many in other markets too. “The advent of plain packaging is an even more fundamental threat, putting the very existence of tobacco firms’ brands at risk,” it said. “In its strictest form, it will prevent companies from differentiating themselves and from communicating quality and unique features to consumers. This could ultimately commodify the product, leading to a race to the bottom in terms of price and quality.”
But so far so good, I guess. Brand Finance went on to say that despite the apparently existential threat of this regulation, the world’s top tobacco firms were managing to increase the value of their brands. “Marlboro, the world’s most valuable tobacco brand, has achieved an all-time record brand value of $32.4 billion,” it said. “A decline in Western markets is being offset by growth in other parts of the world such as China, Indonesia and Africa where regulation remains weaker. Marlboro is also successfully extending its brand into new products. Many of the major tobacco brands were slow off the mark to embrace e-cigarettes; however, Marlboro’s iQOS system and HeatSticks are now proving hugely popular, demonstrating the brand’s power.”
Brand Finance’s CEO David Haigh said Marlboro’s success was by no means an isolated case, with the brand values of major names such as Pall Mall, L&M, Newport and Winston all growing this year and the likes of Parliament, Sampoerna and Chesterfield enjoying double-digit growth. “Despite the well-founded health concerns and mounting regulation, the value of these brands for their owners and investors remains robust,” he said. “The day when the value of tobacco brands goes up in smoke is a long way off.”
I don’t think that this is at all surprising, partly because of the brand mergers that have been introduced. But in any case, when tobacco advertising restrictions and bans first came in, the theory was that the well-known and respected brands that were on a market before it went dark would continue to dominate that market after advertising was banned. A lot of people said that this dominance would last for 10 years, but I think that was an underestimate. And I think the same will apply in the case of standardized packaging. It is often said that standardized packaging is unbranded, but this is clearly not the case. The branding is limited, but, importantly, the brand name is still there. The consumer who turns up at her local tobacco retailer and cannot see the brand names of cigarettes because they are so small or because displays have been banned can, unless she has a lot of time on her hands, rely only on her memory, and her memory will be loaded with the biggest brand names. Where branding is severely limited, the products that are likely to suffer are the least-known brands. And new-brand launches become extremely difficult.
And I don’t get the argument that smokers will opt for the cheapest brands simply because of standardized packaging, unless the “quality” of the top brands hangs only on their packaging. Smokers and the consumers of other under-threat products might go for the cheapest brands, but this they will do rather as a result of having to survive in a broken economic system where shortsighted companies use redundancies as a profit tool or offer only insecure jobs that pay starvation wages. One of the biggest dangers to brand values has to come from the actions of companies in general and even from some of the owners of those brands, not from regulation.
June 1, 2017
The heat is on
As the success of iQOS continues, Philip Morris International gets ready to launch its other reduced-risk products.
By Stefanie Rossel
Jacek Olczak
Has Philip Morris International (PMI) found the magic bullet the tobacco industry has long been searching for? The company’s first-quarter results suggest it is well on its way toward the smoke-free future that has become PMI’s declared goal.
Amid lower-than-expected cigarette shipment volumes, the company’s heat-not-burn (HnB) platform iQOS remained the shining light. PMI sold 173.6 billion cigarettes in the first quarter of 2017, 11.5 percent fewer than in the previous year’s quarter. However, sales of iQOS consumables, (commercialized as Heets and HeatSticks) ballooned to 4.4 billion units from 453 million units.
PMI’s HnB device continues to show impressive growth. The product also fits nicely with PMI’s broader strategy of divesting low- to no-margin volumes in favor of the premium end of its portfolio, says Wells Fargo Securities analyst Bonnie Herzog.
Japan, where iQOS was tested in 2014 and rolled out nationwide in 2016, remains the largest market for the reduced-risk product (RRP). Today, its performance continues to be the prime driver of PMI’s results in this market, according to chief financial officer Jacek Olczak.
The national market share of iQOS increased by 5.4 points in the first quarter to 7.1 percent, driven mainly by Marlboro Heets, which also helped grow the entire Marlboro share, including combustible cigarettes, to 17.1 percent. The performance is even more remarkable when viewed against the backdrop of industry volumes declining by 7.4 percent in Japan.
IQOS is also doing well in its other launch markets. In the first quarter of 2017, it reached national market shares of 0.5 percent in Italy, 0.9 percent in Switzerland and 0.4 percent in Portugal. In Germany, where iQOS was introduced in Berlin, Frankfurt, Wiesbaden and Munich last summer, the product reached a combined share of 0.8 percent in the last week of March, Olczak said.
The product is currently available in key cities in 24 markets. The most recent launches took place in Lithuania, Colombia, South Africa, Poland, Serbia and France.
New territory
That PMI is entering unchartered territory became obvious in several launch markets. In New Zealand, one of the most heavily regulated markets for tobacco products, the health ministry declared iQOS consumables—but not the device—illegal because they supposedly violated a 1990 law prohibiting tobacco products intended for uses other than smoking.
Arguing that the law was not developed for heated tobacco and e-cigarettes, PMI has continued marketing iQOS to registered adult smokers through an “invitation-only” website. At press time, the health ministry said it was still investigating the matter.
Taxation has been an issue, too. Russia, where iQOS has been test-marketed since 2015, has created a new tax category for heated tobacco products. Heets are now subject to an excise of rub4,800 ($82.1) per kilogram, according to ECigIntelligence. The rate is expected to rise to rub4,992 in 2018 and rub5,192 in 2019.
In Israel, two lawsuits accompanied the launch of the product. In March, the country’s health ministry announced that iQOS would be exempt from tobacco regulation until the U.S. Food and Drug Administration (FDA) decided on the company’s modified-risk tobacco product (MRTP) application. Given that the FDA’s assessment could take until 2018 or even longer, this implied that iQOS and Heets would be exempt from tobacco excise taxes, could be sold in Israel without health warnings and could be used in public for a considerable time.
Alleging favoritism, Israel’s domestic cigarette maker, Dubek, filed a lawsuit. The second petition, presented by third parties, including two health groups, asked for iQOS and Heets to be recognized as tobacco products. In early April, the justice ministry decided that, in the absence of an FDA decision, iQOS should be sold as a tobacco product, subjecting it to all restrictions on tobacco marketing, advertising and public smoking.
Seeking FDA approval
By the year’s end, PMI aims for iQOS to be present in 30 to 35 markets. High on the list is the United States, where the company has submitted not only an MRTP application but also a premarket tobacco product application (PMTA), which would allow PMI to market iQOS independent of the MRTP process. If the FDA approves the PMTA, the product would be marketed by Altria, the parent company of Philip Morris (PM) USA. Herzog predicts that iQOS will be launched in the U.S. this year.
Due to tax hikes, bans on tobacco marketing and smoking in public places, as well as growing health awareness, smoking in the U.S. has been declining since the 1960s. In 2015, prevalence stood at 15.1 percent. The figure is expected to further decline by around 3 percent annually until 2040, according to data published by the Centers for Disease Control and Prevention.
PMI is the first company to seek FDA approval to market an HnB product as being less harmful than traditional cigarettes. If the claim is approved, it would be a game changer for Altria and PMI. Not only would PM USA obtain a substantial marketing advantage over other RRPs, including e-cigarettes, but such a decision would also facilitate entries into other markets. The assessment, however, will take time. At the time of this writing, it was still unclear whether the FDA would even accept PMI’s application of 2 million-plus pages. Several MRTP applications have been filed with the FDA, but the agency has yet to sanction a modified-risk tobacco product.
Increasing capacity
Herzog is optimistic about the potential of iQOS. “Based on current success, we expect PMI to achieve critical mass—i.e., a 2 to 3 percent smoker share—within 12 to 24 months of entry into any given market, in line with PMI’s expectations,” she commented in an investor’s note. IQOS, she added, was resonating strongly with adult consumers. “Smoker conversion rates are exceptional across markets at 70 to 80 percent, and adult smoker awareness is growing—it now stands at 70 percent in Japan compared to 90 percent awareness of conventional Marlboro cigarettes.”
Favorable taxation of the consumables is expected to further contribute to the success of the product. At present, tax rates on HeatSticks are between 20 to 30 percent lower than those on combustible cigarettes, says Christopher R. Growe, managing director at Stifel Food and Tobacco Equity Research. “We believe this could add significantly to profitability for PMI, as the product tends to sell at the same retail price as the combustible products. We believe this opportunity represents upside to the company’s estimate of $720 million to $1.2 billion in annual profits from RRPs.”
More than 2 million adult smokers worldwide have already switched from combustible cigarettes to iQOS, PMI’s chief executive officer Andre Calantzopoulos said at the company’s annual shareholder meeting on May 3. In March, the company announced that it would invest approximately €300 million ($323.72 million) to convert its Papastratos cigarette factory in Greece into a manufacturing facility for the tobacco sticks to be used with iQOS. Located near Athens and expected to be fully operational by January 2018, the factory is expected to produce 20 billion units annually. PMI aims for an annual capacity of 100 billion units by the end of 2018.
The company also has a HeatSticks factory in Bologna, Italy, and a small-scale development center in Neuchatel, Switzerland.
The addition of production capacity will reduce per-unit production coast, according Herzog. She expects iQOS to generate $500 million in operating profit in 2018, increasing to around $15.5 billion by 2025.
Progress at all levels
In the meantime, PMI’s other RRP platforms are making progress, as well. Platform 2, to be commercialized under the name Teeps, is also an HnB product. Unlike iQOS, which heats tobacco using an electronically controlled blade, it features a carbon heat source that, when ignited, transfers heat to a patented tobacco plug.
Teeps is said to be more similar to a combustible cigarette than iQOS, which may make it an even more attractive alternative for smokers. It will also come with Marlboro-branded consumables and is scheduled for city tests and a possible national launch this year, according to Herzog.
Platforms 3 and 4 contain nicotine but no tobacco. Branded “Steem,” Platform 3 generates a nicotine-containing vapor using nicotine salt. When a consumer draws on the mouthpiece, a chemical reaction between nicotine—a weak base—and a weak organic acid takes place to produce a vapor containing nicotine salt. PMI acquired the Steem technology in 2011 from Jed Rose, of Duke University, and other inventors. The company expects to test the product in 2017.
PMI’s Platform 4 is called Mesh. It is a closed-system e-cigarette that features a new heating technology. Instead of using a wick and coil, as is common in most e-cigarettes, the Mesh atomizer has an embedded stainless steel mesh with more than 1,300 tiny holes in its cartridge. According to PMI, this increases the surface area in contact with the e-liquid and allows the e-liquid to be heated more precisely.
Mesh cartridges are manufactured, assembled, pre-filled and pre-sealed in a fully automated, Good Manufacturing Practices-compliant process in Europe, thus meeting strict regulatory requirements and addressing concerns of vapers regarding product quality, safety, consistency and origin. Mesh has been developed by Nicocigs, a U.K. vaping company that PMI acquired in 2014. The product is currently being tested in Birmingham, U.K.
Reflecting on the company’s progress toward a smoke-free future, 2016 was a pivotal year, according to Calantzopoulos. To date, PMI has hired more than 400 scientists and invested more than $3 billion in the research and development of RRPs.
The company has published the results of its scientific assessments of iQOS in more than 200 peer-reviewed publications and is talking with regulators around the world to make a case for its heat-not-burn technology.
To support its efforts, PMI has also increased transparency. In April, the company presented its Intervals website, an inhalation-toxicology repository for RRPs. The proof-of-concept data-sharing initiative hosts comprehensive, annotated data sets generated by PMI as part of its development and assessment of reduced-risk products.
June 1, 2017
Rolling with the punches
Developing customized, flexible and efficient solutions, machinery makers are meeting the challenges of an industry in transition.
By Stefanie Rossel
The pace of change in the tobacco industry has accelerated significantly in recent years. The decrease of global cigarette sales volumes continued in 2016, amounting to an estimated 3 percent; in China, sales volume reportedly even shrank by 8 percent. New regulations, such as the revised EU Tobacco Products Directive, which was implemented in May 2016, are forcing tobacco companies to focus on compliance.
This year started with British American Tobacco’s takeover of Reynolds American Inc., another mega-merger that is likely to lead to further rationalization of production sites and perhaps further concentration among the tobacco giants. As demand for combustible cigarettes declines worldwide, cigarette alternatives continue to show impressive growth rates.
Ian TIndall
In response, cigarette manufacturers have started repurposing their factories. In March, Philip Morris International (PMI) announced a €300 million investment ($319.59 million) to convert its Papastratos factory in Greece from a cigarette-making facility into an iQOS “tobacco sticks” plant.
Unsurprisingly, investments in traditional tobacco making and packing equipment have been lower in the past few years. “We are all certainly operating in a very challenging environment,” says Ian Tindall, innovation and marketing director at Molins. He remains optimistic, however. “Despite the consolidation of the industry that we all hear about, there are still many independent players who continue to invest, albeit in a more modest scale than some of the big multinationals. They see the value of working with established and reputable suppliers, and so there is some space to operate.”
And even beyond smaller tobacco companies, the machinery sector still offers considerable opportunity; it just takes the right strategy to seize them.
Molins, for example, identified the need for a full end-to-end offering for the mid-speed market where reliability, robustness and quick brand changes are key. “We have introduced the Alto and Octave making machines to compliment the Forte filter maker, and then introduced the Optima hinge-lid packing machine to give true make-pack capability from a single supplier,” says Tindall.
New business models
At the same time, Molins reorganized its business into a “one-stop shop.” “We have amalgamated Langen Group, Molins Tobacco Machinery, Molins Technologies and Cerulean into a single company: Molins,” says Tindall. “This has immediately added to our offering comprehensive testing capabilities that can be delivered to our customers through the Cerulean brand. We can now deliver a total make-pack-test line and even a whole laboratory for regulatory testing if needed. This merging of companies has also given the customer access to a greater number of field engineers and, when considering special projects, a larger number of scientists and development engineers. We believe by offering more support to our customers we can allow them to concentrate on what they do best, and this brings success for both us and them.”
TMQS of Germany has also gone through a transformation. Starting out as a supplier of spare parts in 2001, the company today describes itself as a solutions provider.
“While we are not focusing on providing new machinery as our main field of business, the important point for us is to deliver whatever is required in terms of improvements, leading to a better machinery usage, improved embedding of machinery into their new surroundings, modernized and enhanced data collection, and usage of systems and anything else providing benefit for a factory in its specific situation,” says TMQS sales manager Norbert Schulz-Nemak.
“All this needs to happen with a very high value-for-money ratio, and it must be done with an open-minded approach. Barely any project is like the other, which is due to the specifics of every machine and the required outcome.”
While acknowledging the challenging business environment, Schulz-Nemak believes it also provides opportunities. For example, equipment suppliers can participate in the consolidation process by developing solutions for new production processes or simply by helping factories save money.
“This can range from small solutions like an improved version of a ledger drive for cigarette and filter making via very tailored processes of sub-assembly repair or maintenance with optimal content for the exact requirements or an active diameter control for cigarette and filter makers up to high-tech solutions for very specific products in diverse markets,” he says.
Opportunities prevail
The equipment market is saturated due to the consolidation among the cigarette companies and the subsequent shifting of manufacturing capacities into fewer factories producing larger volumes. However, such developments may also mean good business for machinery suppliers. “These additional manufacturing capacities usually go along with the need for a bigger variety in brands for the receiving factories as long as local brands are shifted to different factories. This could also mean that new machinery is required as space is limited but capacities are to be increased. And even if no new machinery is required, specific standardizations or modernizations may need to be projected in order to bring all machinery to the factory standard,” says Schulz-Nemak.
Even as cigarette volumes continue to decline, the variety of brands is increasing as consumers demand more individualized products. For cigarette manufacturers, this means shorter production runs and more frequent brand changes. “As multinationals continue to develop new variations of existing brands and try to develop new brands, we are also seeing a resurgence in format change parts for the MK9 Classic and orders for new machines,” confirms Tindall. “This mid-speed machine is known as the ‘workhorse of the industry,’ and over the years has shown to be perfect for any cigarette variant.”
He says that these changing consumer requirements might spawn a new type of “boutique” cigarette producer targeting very specific markets. “To us, this niche is one we have targeted and fulfill well.”
Joining forces
Tobacco machinery suppliers have also embraced digitization, automation and interconnectivity. Molins’ latest equipment is capable of communicating with other parts of the production line, including makers, packers and testing equipment. It is ready to take advantage of developments such as data mining and metrics.
According to Schulz-Nemak, most of TMQS’ solutions are able to share data with the next-level management information system (MIS). “This enables our customers to embed these units into their own MIS and its data to be used for process evaluations or as one basis for higher-level systems.”
These days, tobacco machinery suppliers often cooperate with IT companies.
Working with a partner, Molins can deliver plant-wide quality-assurance data systems, such as Nexus, which has been deployed successfully. “This adds value to the manufacturing chain by ensuring that products are being made to the appropriate quality specifications and that the product is adequately verified,” explains Tindall.
TMQS works with Shenzhen Hualong Xunda Information Technology Co. “They develop complete solutions for whole factories that enable a full reporting and a management of the manufacturing processes on the click of a button,” says Schulz-Nemak. “Everything can be connected—from sensors within the machines providing status messages about the condition of functional groups via information on parts usage on each machine to develop a preventive warning system about potential upcoming breaks based on real usage data via material usage, real-time visualization of all machines in a virtual factory to a full management information system informing about all key parameters of the manufacturing process, ranging from primary to secondary operations and further,” he says.
Staying flexible
In times of industry transition, flexibility is key. “Our firm belief is that, by changing with the industry we can be better placed to meet the demands of consumers and regulators,” says Tindall. “This requires Molins to be an agile partner in changing to meet market demands, and this is reflected in the products we have been bringing to market.”
Schulz-Nemak notes that a concentration of production capacities is usually accompanied by the target of cost reduction, while the quality of the manufactured goods is expected to remain at least at the same level. “TMQS is set up to deliver exactly this, he says. The company, he says, offers direct cost savings, cost savings through standardization and cost savings through technical solutions that, among other benefits, reduce downtime.
This approach, says Schulz-Nemak, allows TMQS to look toward the future with confidence. “The requirements will keep changing,” he predicts. “We are ready for this ongoing challenge.”

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

May 1, 2017
Chasing clouds
The future of China’s underdeveloped vapor market hinges on regulation, innovation and consumer education.
By Stefanie Rossel
Despite its status as the birthplace of the modern e-cigarette and the largest producer of related hardware, China’s domestic vapor market remains tiny. In 2015, e-cigarettes generated sales of only $448 million, according to Jackie Zhuang, a Chinese vapor industry consultant. By comparison, the country’s eight leading cigarette brands alone accounted for $125 billion, according to Research and Markets.
Approximately 90 percent of the world’s vaping equipment, as well as accessories and a major part of e-liquids, are manufactured in China, but almost all of it is destined for export. Domestic product awareness remains low; even in major cities such as Beijing and Shanghai, vaping is uncommon.
Until 2013, there was virtually no domestic market for vapor products, explains Zhuang. “In 2013, the Chinese sales volume for e-cigarettes surpassed $14 million for the first time, and it was all through online sales.” Since then, however, the sector has shown impressive growth, with online sales climbing to $81 million in 2014 and $266 million in 2016.
Jackie Zhuang
Over the next five to 10 years, analysts expect that the market compound growth rate will exceed 30 percent. Due to China’s sheer size, the market for vapor devices holds enormous potential. A study on e-cigarette regulation in China, published in December 2016, calculates that for every 1 percent rate substitution of e-cigarettes for combustible cigarettes, the Chinese e-cigarette market will increase by almost $5 billion.
Zhuang estimates that there are currently between 1 million and 1.5 million Chinese vapers, most of them men. Only 2.4 percent of Chinese adult females are smokers, and an unknown percentage of females vape. “Half of the online buyers are interested in box mods, the other half in cigalikes. Among offline retail buyers, 99 percent purchase box mods and mechanical mods.”
Across all distribution channels, nominal e-cigarette sales in China totaled $448 million in 2016, according to Zhuang. Online sales accounted for 57 percent of that figure. “Most of the vape products in China are sold via Taobao/Tmall and jd.com, with Taobao officially accounting for a gross merchandise volume of $231 million,” says Zhuang. “However, it is common knowledge that a major percentage of this volume is generated by faking sales records.”
Retail outlets accounted for 37 percent of sales in 2016. “The number of shops had doubled comparing to 2015, but I estimate that at least 10 percent of the shops went out of business in January 2017 before Chinese New Year, after some investigations by several third-tier smaller cities in China, but surely also more new shops opened during that period,” says Zhuang.
The other traditional retail outlets contributed $29 million. “These channels include tobacco shops, gas stations, pharmacies, convenience stores and the other sales channels, such as corporate gift set packages,” says Zhuang. “All attempts of entries into the convenient store channel in China have failed, as cigalikes did not move in China.”
Apart from e-cigarettes, almost no other cigarette alternatives are consumed in China. “The sale of nicotine-replacement therapy products is negligible, accounting for less than $1 million per year,” says Zhuang. “Snus and other smokeless products do not exist. There are herbal cigarettes, but it’s a very small market.”
Attempts at tobacco control
The future of vapor in China will depend on consumer education and regulation, according to Zhuang.
In 2015, the Chinese government began to strengthen tobacco control measures. Its efforts included a tax increase on wholesale cigarettes from 5 to 11 percent in early 2015. In December 2016, China unveiled draft legislation to ban smoking in public places nationwide by the end of 2017. Zhuang says the ban has already been enacted in Beijing, Shanghai and Shenzhen. “The law enforcement in the first-tier cities is actually unexpectedly good,” he says.
Brad Abrams
Nationwide, however, attempts to ban smoking have mostly failed due to a lack of enforcement as well as China’s tobacco culture. Smoking is deeply rooted in Chinese society, particularly among older people. About 68 percent of men and 3.2 percent of women are smokers, according to China Briefing, a business intelligence company. For men, the pressure to smoke is high. In social and business settings, cigarettes are used to establish trust and form relationships. “With the rapidly changing demographics in China, young people are more aware of the negative health consequences of smoking and are either not smoking or looking for safer alternatives,” notes Brad Abrams, president of Vogue Trading International, who until recently worked for a China-based investment holding company.
Also frustrating smoking restriction efforts is the fact that China’s tobacco industry is state-owned. The China National Tobacco Corp. (CNTC) owns about 900 cigarette brands; tobacco generates an estimated 7 to 10 percent of China’s government revenue.
“Unlike in the West, where there is a natural tension between the government, who regulates, and the industry, which makes shareholder profits, in China the government and the industry are the same entity,” reflects Abrams. “The senior managers of [the State Tobacco Monopoly Administration]/CNTC are also high-ranking party members, a dual role. Taken together, in China there is a very strong motivation to protect the status quo in the tobacco economy. This includes fiscal income to the government, personal and institutional power of the top officials, and full employment in the countryside.”
As Chinese cigarette sales volumes have flattened, the industry has been adjusting its prices and product mix to protect revenues.
“Personally, I believe that e-cigarettes and vaping in China suffer from the same general lack of satisfaction compared to traditional cigarettes to most smokers in the West,” says Abrams. “That, coupled with the strong smoking culture and tradition in China, leads to a general lack of strong interest.”
Despite China’s massive e-cigarette hardware industry, vaping domestically has been taken up by only a select few.
Turning up the heat
Contrary to state-run combustible cigarette industry, the Chinese vapor sector is dominated by privately held manufacturers. The potential of next-generation products in China, however, has not been ignored by the monopoly. In 2015, it created the Shanghai Research Institute of New Types of Tobacco Products to help develop the new product category.
According to Euromonitor International, the State Tobacco Monopoly Administration (STMA) started researching and developing an e-cigarette product in 2013. One year later, CNTC’s provincial subsidiary in Hubei brought its first vapor products to market in Wuhan.
Blue & White and Ruisheng, two companies with ties to China’s tobacco industry, launched cigalikes, according to Zhuang. But all CNTC attempts to launch e-cigarettes have since stopped. “There is not any commercialization yet from China Tobacco,” he says. Zhuang believes that heat-not-burn products are a better fit for the Chinese tobacco monopoly than are e-cigarettes. “E-cigarettes will exist but they don’t bring value to the CNTC as far as tax intake is concerned,” he explains.
Abrams agrees. “The CNTC companies are well-aware of all of the nicotine alternatives available around the world,” he says. “I have made presentations to CNTC R&D groups describing the noncigarette alternatives, as well as new nicotine-delivery devices—as have many other westeners. Personally, I believe that the new technologies coming out of Philip Morris International [PMI] and to some extent British American Tobacco [BAT] are more interesting to the CNTC companies, as they may provide smokers with a more traditional nicotine-delivery experience, plus hold the potential to be taxed at a rate equivalent to or higher than current products—thus protecting their present revenues and power.”
Whatever the outcome of the STMA’s efforts, it will be interesting to see the implications for unaffiliated e-cigarette companies. Several international tobacco companies have shown interest in China’s e-cigarette market. In January 2017, Imperial Brands announced the establishment of a joint venture with the CNTC. Unlike joint ventures established by competitors, Hong Kong-based Global Horizon Ventures does not focus exclusively on conventional tobacco products. The partners are considering next-generation product launches “in due course.” Analysts speculate this could include Imperial’s Blu e-cigarette, which holds strong positions in both the U.S. and the U.K.
Abrams is less optimistic. “The tobacco industry in China is extremely complex, even more than in the West, with many factors influencing any potential change,” he says. “To date, STMA/CNTC has been focused on maintaining the status quo. It is a particularly difficult market to penetrate or change. As an example, look at the PMI/CNTC and BAT/CNTC joint ventures that have been in existence for many years with current relatively low market shares. Granted there are many other strategic benefits they have enjoyed, but STMA/CNTC continue to closely control their domestic market.”
Uncertain future
The future of next-generation products in China depends on several factors. The participation of the CNTC is critical, as is regulation of e-cigarettes. As of May 2016, no government agency in China had taken responsibility for regulating e-cigarettes. In the absence of regulations that treat e-cigarettes as either medical devices, pharmaceutical products or tobacco products, they are considered consumer products.
Other issues that will affect the future of the Chinese vapor sector include the price difference between combustible cigarettes and e-cigarettes, which is still significant, as well as the lack of quality control standards. Taxation will also play a role. Zhuang expects this process to take another three to five years. Product innovation will be key, according to Zhuang. “There is no perfect item for the Chinese market yet,” he says. “Chinese consumers are waiting for better vape products and better vape education.”

April 1, 2017
Aprecia esto
Habanos SA celebrates the Cuban cigar with a splendid party.
By Timothy S. Donahue
Hector Luis Prieto
It isn’t easy. Sitting in the back corner of a tobacco field, Hector Luis Prieto told Tobacco Reporter that being a famous grower in Cuba has only made his job more complicated. It was easier when nobody knew his name. He wants to spend his time at his farm, with his family. That’s nearly impossible now that busloads of “turistas” visit his plantation almost daily.
“The crop is my life. It’s my family’s life. It’s everything to us. Tobacco is how we survive,” says Prieto. “I rarely leave; it’s my home.” Prieto is young (45), in farmer’s years. He wakes up every morning at 4 a.m. to inspect the fields. Every morning. Every leaf. Nothing is left unseen. No plant goes untouched. His dedication is impossible to overlook.
Prieto has to check his plants daily during the growing season, which can begin as early as late October and end sometime in February. He rises so early because he knows the tourists will be arriving soon, and once the busses start unloading, he won’t have time to manage his fields properly. Everybody wants to get their picture taken and possibly score a cigar rolled by Prieto himself. That’s a rarity nowadays; Hector only rolls for special friends. Handing me a fresh cigar, he said “aprecia esto”—appreciate this. He doesn’t plan on rolling many more. We were already smoking a cigar rolled by his friend, so this special one got put safely into a pocket.
It wasn’t always like this. Before 2008, the year Prieto won the Habanos Man of the Year award in the production category, his farm wasn’t on the list of stops for the tour buses full of tobacco travelers. Now, Prieto’s a legend. He is the youngest man ever to win the prestigious award. That is some pretty high praise, as Prieto’s operation is in the western Cuban province of Pinar del Rio in the town of San Juan y Martinez, an insanely bumpy two-hour drive from the capital city of Havana. My companion’s face hilariously smashed against the car roof numerous times as he tried to sleep on the trip there. Prieto won the award for having a higher yield of fine wrapper tobacco than any of his neighbors in the Vuelta Abajo region, home to perhaps some of the finest tobacco farms in the world.
Prieto isn’t alone in his love of tobacco. It’s a passion for these island people. Cuba has long been known for its exceptional cigars. Celebrating that tradition, Habanos SA, part of the state-run tobacco monopoly, has hosted the Festival del Habano for 19 years in a row now. The gathering is billed as the world’s top event for premium cigars. It is as advertised, too. It’s an intense week completely devoted to the knowledge and enjoyment of Habanos (Havana cigars) and the latest developments in the field. There is no tobacco event quite like it anywhere else in the world.
Opening doors
This year’s event, held from Feb. 27 to March 3, centered on the H. Upmann, Montecristo and Quai D’Orsay brands, all of which received some major additions to their portfolios during the festival. More than 2,000 participants from 50 countries attended the revelries, as well as 180 journalists and 70 companies from 11 countries. The event’s traditional trade fair includes numerous manufacturers and suppliers in the tobacco world, artisans, collectors, and suppliers of smoking accessories and luxury goods. The seminars are lumped in with the trade fair, which is held in the massive Palacio de Convenciones in Havana.
The event began with the traditional press conference held inside Havana’s International Conference Center, where Habanos SA company executives answered questions and provided an overview of the company’s sales figures for the previous year. Nothing is ever easy in Cuba, however. Oddly, event workers would often only open one side of a double-doored entranceway, making getting into or out of the different breakout sessions a complicated mess. To be fair, they were trying to check badges as well. Life also happens on Cuban time here, meaning everything starts an hour or two late. You learn to accept these things.
Starting off, Enrique Babot Espinosa, Habanos’ chief of market operations, told attendees that the company “reaped” $445 million worth of revenues in 2016, with 450 million units sold, accounting for 70 percent of the global market, excluding the U.S. Then, Habanos co-presidents Inocente Nunez and Luis Sanchez-Harguindey answered questions from the crowd.
When asked about the loosening of trade restrictions by the U.S., Sanchez-Harguindey said the steps are a move in the right direction. “We will be able to bring our culture, our product, closer to the U.S. customer. Our product is highly demanded and appreciated around the world … these are exactly the same expectations that we have for the U.S.,” he said through an interpreter. “These measures must be put into context, as there are conditions such as the number of cigars that can be imported in the U.S. The main difference, as compared to previous measures, is the limit of 100 units. This is as opposed to the previous measure of $100. The impact over the past 2 1/2 months [since the change] has not been significant.”
The best-selling vitola (format) worldwide has been Robusto. The Cohiba Robusto is the leading seller, followed by Partagas and Romeo y Julieta. In descending order, the largest markets for Cuban cigars are Spain, France, China, Germany, Cuba and Switzerland. Together, these six countries account for 50 percent of Habanos sales. “Increased tourism [13 percent growth from 2015 to 2016, totaling more than 4 million visitors a year] has appreciated the growth of sales in the Cuban market,” said Sanchez-Harguindey. Overall, Habanos claims to be experiencing a 5 percent yearly growth, while the industry overall grows at 0.5 percent. “A heads-up for 2017, we are aware of challenges, and we continue to remain consistent in our pursuit to launch new products,” said Sanchez-Harguindey. “We are consistent in our mission towards innovation and quality.”

Handmade Habanos
Habanos SA was founded in 1994 to commercialize all the brands of Habanos and tobacco leaf worldwide. As an arm of the Cuban state tobacco company, Cubatabaco, Habanos controls the promotion, distribution and export of Cuban cigars and cigarettes. The company operates in more than 150 countries around the world. The term “Habanos” has been used since the late 19th century to identify the “puro” Cuban cigar. After more than 200 years, Habanos are the only cigars that continue to be made totally by hand with long filler, according to Habanos.
Visiting a Cuban cigar factory is a unique experience. The smell is unmistakably tobacco, with a sweet honey and crisp cedar scent. Real Fabrica de Tobaccos La Corona is one of the more modern factories in Cuba. Although rich with tradition, the factory has changed locations several times throughout its history. Formerly known as “La Casa de Hierro,” La Corona is also the home to the Romeo y Julieta brand.
The cigar factory is a living entity, and its rolling room is its central nervous system. Here, the dedicated hands of expert “torcedores”—cigar rollers—are hard at work. It’s crowded, and everyone has something to do. Only security guards and tour groups are standing around. Visitor Mark Ryan, of U.S.-based Daughters & Ryan, said he was in awe of the speed and quality of the Cuban craftsmanship. “Wow,” he exclaimed. “They are really good.”
Festivalgoers were also able to visit the historic Fabrica de Tabacos Torcido H. Upmann, one of the most renowned cigar factories in the world. This is where the first vitolas for H. Upmann were created, according to Habanos. This year, the factory began production of the first H. Upmann Gran Reserva Cosecha 2011, in its iconic Sir Winston vitola. It’s the first Gran Reserva presented by the H. Upmann brand since its founding over 170 years ago, according to Habanos.
This factory is special. Herman Upmann was a former banker who was the first to ship cigars in cedar boxes, according to our tour guide. When you enter, the rollers are smacking their chavetas (a crescent blade specifically designed for use in making cigars) on their rolling tables as a loud welcoming gesture. There are 695 workers in the H. Upmann rolling room alone. They produce up to 30,000 cigars a day. Music plays loudly, and everyone seems to be having fun producing product. Several rollers are simultaneously smoking cigars.
It’s old, the factory, and it has several floors that housed rollers, quality control, aging and packaging in different areas as you climb the black wrought-iron stairs. All the H. Upmann brand’s vitolas are produced at this factory, including the Linea Magnum with Magnum 46, Magnum 50 and the recently launched Magnum 54. Rollers here are also responsible for producing prestigious vitolas for the Montecristo brand, including the most premium line offered by Montecristo, the new Linea 1935.
Trading places
While the trade show accompanying the festival offers its own excitement with beautiful women and well-dressed men showcasing uniquely Cuban humidors, antiques and other cultural items, the real draw is the seminars. Visitors can experience the International Habanosommelier Contest (think wine sommelier for cigars), as well as attend a master class on rolling cigars. There are also numerous lectures, and pairings of exclusive rums and brandies with cigars.
The rolling class is one of the most popular seminars. The class was led by master roller Arnaldo Ovalles, who had some help from rollers from Cohiba’s famed El Laguito factory who strolled the floor. Attendees were taught how to roll a Corona Gorda vitola, which is the third most popular Cuban vitola, behind only the Mareva and Robusto sizes, according to Ovalles. Each participant is given all of the ingredients they need to roll said cigar: a cutting board, a chaveta, glue and tobacco for the filler, binder, and wrapper. Visitor George Cassels-Smith, CEO of U.S.-based Tobacco Technologies Inc., rolled one of the better cigars. “It’s not bad,” he said of his slightly crooked smoke with a satisfied grin.
There was also a session on the history of the Quai D’Orsay cigar, “The Quai D’Orsay Brand—Then and Now.” Leading the lecture were journalist Yves Belaubre; Antoine Bathie of Seita, the former French distributor of Cuban cigars; Jose Maria Lopez Inchaurbe, strategic marketing director of Habanos SA; and Carlos Ferran, international marketing supervisor of Habanos.
In 1973, the Quai D’Orsay cigar was born out of the lack of a quality French-only cigar and the strong bond between the French and Cuban people. It was the first regional division of Habanos SA (then Cubatabaco). There are different stories as to what the Quai D’Orsay name refers to. One is that it refers simply to the famous Paris avenue of the same name; another suggests it refers to the French foreign ministry located on it. Both are true, according to Bathie, whose father was instrumental in the development of the Quai D’Orsay brand. “My father thought this would be a good name for a cigar to be presented at events like state dinners,” said Bathie.
An interesting addition to this year’s lecture series was named “The Art of Combination (the wrapper, the binder and the filler),” which was all about how the three parts of a cigar meld together to form the final product. Industry experts explained how a problem with one part can affect the entire smoking experience. Everyone was given one of four different cigars, each of which had something intentionally wrong with it, whether a twisted bunch, a draw that was too loose, poor construction issues or too much of one type of tobacco. Each person was then asked to smoke their sample and report back on what they thought was wrong with the cigar. The experts then explained what was wrong with the individual cigars and how they should have been constructed.
Cuban nights
The Habano Festival includes several interesting evening gatherings. With the exception of Monday’s opening evening event, which was waylaid by weather, Cuba put on quite the show. Free cigars, rum and the island’s stimulating nightlife come alive for the privileged attendees who managed to secure invitations. The closing gala event is hottest ticket in town, however. It’s hard to imagine something as spectacular outside of Las Vegas.
The El Laguito reception hall served as host to dinner on Wednesday night. It was dedicated to Quai D’Orsay. Guests experienced the brand’s three vitolas—Coronas Claro and the new No. 50 and No. 54—as well as a vitola from its historical portfolio, Quai D’Orsay Imperiales. Only 2,000 were made exclusively for this dinner. The event featured various musical performances, all choreographed by Cuba’s maestro Santiago Alfonso’s company.
The gala dinner paid tribute to the Montecristo brand and was held Friday evening at the Pabexpo center in the Miramar neighborhood in Havana. As part of the festivities, Habanos gave out samples of, among other cigars, the new Montecristo Linea 1935 in three different vitolas: Legend, Dumas and Maltes. This year’s celebration included performances by a number of different artists, including Haila, David Torrens, Diana Fuentes and A Otro Tiempo, as well as the Ballet de Lizt Alfonso, which celebrated its 25th anniversary last year.
Then there was violinist Ara Malikian and his ensemble. It was one of the most spectacular shows of the event. Malikian and his instrument danced across the stage with great enthusiasm and energetic force. Many of these artists left the stage and circled among guests. After dinner and the shows came to an end, Habanos handed out awards in three different categories: business, communication and production. Cuban grower Josefa Acosta Ramos took the top spot in the production category, while Edward Sahakian, a U.K.-based tobacconist, won in the business category. Gordon Mott, senior contributing editor for Cigar Aficionado, prevailed in the communication category. Chile’s Puro Tabaco, with its representative Felipe Rojas, was unanimously voted the winner of the 16th edition of the International Habanosommelier Contest. Judges said it was the closest competition yet. “It’s an honor like no other,” Rojas said.
Finally, the gala dinner and overall festival closed in a major way—with the famed humidor auction. This year’s auction got heated early as two bidders fought fiercely for the Cohiba humidor, for which Canadian bidder Leander Da Silva raised his numbered paddle with the highest winning bid of the night, €380,000 ($406,000). A few humidors exceeded the €250,000 mark, and by the end of the auction, seven one-of-a-kind humidors sold for more than $1.3 million. The money will be donated to the Cuban public health system.
As the event officially ended, we said our goodbyes to the festival’s talented media team, headed by Habanos’ director of marketing operations, Daymi Difurniao, which organized the event. We passed through the large Pabexpo doors one last time, walking back into the humid Cuban air. Hundreds of taxi drivers stood like paparazzi waiting to ferry exhausted attendees home. Luckily, we already had a driver waiting for us who wisely parked a few blocks away so we didn’t have to sit through the chaotic traffic in front of the convention center. The Habano Festival was an amazing experience. There is just something rare and special about Cuba. Much like its cigars, its people are vibrant, beautiful and genuine. Next year, the world’s finest cigar show should be even better.
Latest releases from Habanos SA, Cuba’s cigar monopoly
There were several new cigars announced during the 19th Habano Festival. The first Gran Reserva from the H. Upmann brand in the Sir Winston (47 x 178 mm) vitola (format), was one of the most promising releases. This is one of the brand’s most special cigars; it has additional aging of its leaves and is only in limited production.
Also exciting was the launch of Linea 1935 under the Montecristo brand. Three new vitolas are incorporated into the brand’s regular portfolio; these will become the most premium Habanos offered by Montecristo. Two of the three vitolas are unprecedented in the Habanos portfolio: Maltes (53 x 153 mm) and Dumas (49 x 130 mm), while Leyenda (55 x 165 mm) takes the form of the special limited-edition Montecristo 80 Aniversario, launched in 2015 to commemorate the brand’s 80th anniversary.
Typically a strictly French offering, the Quai D’Orsay brand is reinventing itself. It is doing so by launching a new design and presenting two new vitolas, with international distribution in the major markets of Habanos SA. The Quai D’Orsay No. 50 (50 x 110 mm) and Quai D’Orsay No. 54 (54 x 135 mm) vitolas come in both in 10- and 25-unit presentations. These will be added to the Coronas Claro (42 x 142 mm) vitola to create an attractive brand portfolio that will be available worldwide in 2017 through the Habanos international distribution network.
Habanos also released the new Romeo y Julieta Petit Royales (47 x 95 mm), a totally new vitola that is incorporated into the brand’s regular portfolio. With a heavy ring gauge and short length, this is a Habano in line with the current trend in formats increasingly demanded by enthusiasts around the world, according to Habanos SA.
There were also three limited editions announced during the festival: Cohiba Talisman (54 x 154 mm), Partagas Serie No. 1 (52 ring gauge x 138 mm) and Punch Regios de Punch (48 x 120 mm). – TSD

April 1, 2017
Smell a rat
The creation of “expert panels” to detect characterizing flavors hints at the folly of the tobacco ingredients discussion.
By George Gay
I’m fascinated by the idea of having regulations that provide for a panel of people to decide whether a tobacco product has or hasn’t a characterizing flavor other than tobacco—a judgment that will mean in the case of the former that the product in its current format is banned, while in the case of the latter the product may remain on the market.
The setting up of such a panel is provided for within the EU’s revised Tobacco Products Directive that came into force last year, though it is not clear to me when the panel might be ready to start work. Presumably, however, it won’t be anytime soon because, I assume, protocols will need to be put in place, a lexicon will have to be agreed, reference products will have to be identified, and panelists will have to be trained in the various products to be tested.
One of the fascinating aspects of this exercise for a person such as me, whose olfactory system cannot tell red wine from white wine in a blind tasting, is its apparent subjectivity. Of course, the European Commission says that the method to be used will be robust. It says that the panel, comprising experts in sensory analysis, chemical analysis and statistics, will be backed by a technical group that will carry out sensory assessments based on a comparison of the scent properties of the test product with those of a reference product. In addition, where necessary, chemical assessments will be made, in part because a flavoring is taken to mean an additive that imparts scent and/or flavor.
And the commission assures us that sensory, including scent, analysis is an established scientific discipline that applies principles of experimental design and statistical analysis to assess and describe perceptions of the human senses, including smell, to evaluate consumer products. It has been found to be a suitable method for producing valid, robust, reliable and reproducible results when assessing whether a tobacco product has a characterizing flavor, the commission says.
This sounds all well and good, but, if as I understand it, a characterizing flavor is defined as a clearly noticeable smell or taste other than one of tobacco, the question arises as to what is the need for all of these experts and the chemical analysis. If it’s clearly noticeable, any person off the street—with the possible exception of me—could handle the job.
It must surely be the case, given the presence of the experts, that while some products will have a smell clearly different from tobacco and some will smell only of tobacco, some products will be marginal in their smell, and it is these that raise the interesting questions. If it takes a panel of experts backed by technicians, chemical analysis and statistical modeling to determine whether product A has a scent beyond tobacco, what is the point in the exercise? I mean, if the different-from-tobacco scent is so difficult to pin down that it requires a trip to the laboratory, product A is hardly likely to create a stampede of smokers and nonsmokers at retail outlets. And it is largely the attractiveness of product A, especially in the case of young people, that the EU is hoping to eliminate.
Of course, it might be argued that the chemical analysis is needed because the commission’s purpose is also to guard against additives that increase the addictiveness or toxicity of the product. But is this possible? Is it meaningful? What level of addictive or toxic agents would have to be discovered so that it could be said with confidence that the product under test was more addictive and/or more toxic than was the reference product? After all, we are often told that the cigarette, in whatever form, is more addictive than heroin is, and that it is the only licit consumer product that kills when used as it is meant to be used.
If characterizing flavors are the concern that critics make them out to be, it shouldn’t take an expert panel to detect them.
More bureaucrats and consultants
OK, you could argue that this doesn’t really matter because it’s jolly interesting to have a bunch of experts sitting around sniffing and analyzing tobacco products, but it does matter. Many people living in the EU have been suffering from the effects of austerity, a system of transferring what little money the financially poor have been left with following the negligent and criminal activities of some banks to the better off, and many of these impoverished people are smokers. As I understand it, EU member states and the commission will be allowed to charge manufacturers and importers of tobacco products for assessing whether a tobacco product has a characterizing flavor, whether prohibited additives or flavorings are used, and whether a tobacco product contains additives in quantities that increase to a significant and measurable degree the toxic or addictive effect of the tobacco product concerned. But while they might charge the manufacturers and importers, the bill for these activities is going to land in the laps of smokers, and this is unfair.
This panel is like tracking and tracing in that it takes a sledgehammer to crack a nut. It is about well-off people in suits attending meetings where the coffee and biscuits are paid for by various overt and covert imposts brought down on impoverished smokers and where the discussions are all about “helping” smokers. But smokers cannot afford this sort of help. They cannot support further layers of bureaucrats, consultants and hangers-on. Surely, the EU, having convinced itself of the need for tracking and tracing, cannot be unaware that many smokers are addicted to a product they no longer can afford.
But hey, that’s their problem, right? Tobacco and tobacco consumers have been denormalized, so they cannot expect to be treated fairly, or in the same way as other products and consumers are treated. Other consumer products launched into a market system are judged by consumers so that those products that pass that judgment remain on the market while those that don’t wither and die. But, in the case of tobacco in the EU, the judgment is being passed over to people who are probably not consumers of that product and, as far as I am aware, will not test it as a normal consumer would use it. And their judgment is not about ensuring that the most attractive products remain on the market but about ensuring that some of those products are removed from the market.
The reason for turning the world on its head in this way, I guess, is that the consumption of tobacco is said to be highly risky, which it is in relation to some products, though not all. Alcohol, which is linked with at least six types of cancer and which is far riskier than is tobacco at a societal level (in terms of contributing to violence and road accidents), has no such panel sitting in judgment of it. Perhaps this is because it is accepted that, after an hour or two of work, the panel members would no longer be able to function properly, and might be tweeting inappropriately, making unwelcome sexual advances to fellow panel members and fighting in an unseemly manner.
Menthol
Of course, the tobacco smelling panel won’t have to sit in judgment of menthol because the EU has decided already that this flavoring should be banned as of 2020. This is interesting because it raises the question of prohibition. A lot of people claim that tobacco prohibition can’t be brought in because alcohol prohibition didn’t work in the U.S. But I have argued in the past that this is a false comparison. Drinkable alcohol can be produced at home and can be drunk in the evenings out of sight of prying eyes. Producing a smokable tobacco and smoking it without detection is virtually impossible.
But prohibiting only menthol cigarettes is another matter. How can this be policed when smoking most other products is still permitted? Will we have to set up a new smelling enforcement agency? For sure there will be ways of getting around the menthol ban. Some smokers will make use of the black market, while for others the commission has kindly hinted at what they might do by including in the ban the addition of flavors in cigarette components and packaging. After a little experimentation, any smoker will be able to leave her tobacco-only cigarettes overnight in a jar with some readily available menthol crystals so as to enjoy menthol cigarettes the next day. And I suppose that if our smoker had a cold, or wanted to make believe that she was smoking menthol cigarettes in the tropics, she could add some menthol crystals to a bowl of hot water, stick her head under a towel over the bowl and smoke away on her regular cigarettes. Virtual reality without having to buy a fancy gadget that makes you look like a standard lamp.
Of course, it is not only the consumer who will suffer from these flavor bans. If, as seems likely, the bans on traditional-cigarette additives in the EU start to apply downward pressure on licit cigarette sales, licit flavor companies will suffer too. And while there is always the hope that the traditional-cigarette business lost by flavor companies will be made up, or partially made up, in supplying flavors for new nicotine-delivery products, there are clouds on the horizon here too.
The EU has not clamped down on flavored electronic cigarettes, but, in the U.S., the future for nearly all electronic cigarettes looks nonexistent under the Food and Drug Administration’s deeming regulations. And whereas moves are being made to try to take the sting out of the worst excesses of the deeming regulations as they apply to electronic cigarettes, wipeout could be replaced by death by a thousand cuts. The New Jersey Assembly health committee recently passed and sent to the Assembly appropriations committee a bill that would ban the sale and distribution of electronic nicotine-delivery devices that have characterizing flavors other than tobacco, menthol and clove. And it would be surprising if other jurisdictions didn’t follow suit—not because it is a good idea but because governments are given to bouts of collective hysteria.
Why menthol and clove, you ask? Well, there’s a logic at work there, but it has nothing to do with the health of the consumer.
The writer would like to thank Roger N. Penn, who has worked in the tobacco flavoring industry for more than 30 years, for his kind help in preparing this story.
April 1, 2017
Gauging the future
NDC Technologies is energized by the challenge of new tobacco products.
By George Gay
As combustible tobacco cigarettes start to make way for less risky products that require new or modified manufacturing materials, it would seem reasonable to assume that some of the traditional suppliers to the tobacco manufacturing industry must be wondering what tomorrow holds for them. But last month, when Tobacco Reporter caught up with the global marketing director of NDC Technologies, Ian Benson, he appeared primed for a demanding but interesting future for his company’s on-line measuring instrumentation. The traditional tobacco industry is still a strong and important part of NDC’s business, he said, and while the consumption of combustible products is declining slightly, it isn’t going to disappear in a hurry. The industry is still innovating, and it has a huge installed base of on-line infrared gauges that will need to be replaced at some time in the future.
At the same time, the reduced-risk products that are on the market and that are coming onto the market provide further opportunities. The manufacture of some of these products, including heat-not-burn devices, is interesting for NDC, Benson said, because the measurement requirements it generates go beyond the on-line moisture and total-volatiles measurements for which NDC’s instrumentation is best-known within the tobacco industry, and it draws on the capabilities of the group’s other three businesses, such as those to do with the measurement of thickness, mass per unit area, line speed and length. These are capabilities that NDC has in its portfolio and that it could use to help manufacturers that wanted to move in new directions. “I think we’re going to see more demanding and interesting measurement requirements from the industry in the future,” Benson said.
The fact that the traditional tobacco industry still has considerable mileage in it was illustrated in February when NDC received from China orders for infrared gauges worth about $1 million. This was business won following on-site performance tests against competitive instrumentation, Benson said, and it indicated that NDC was still attracting significant business based on the requirements of the combustible-products manufacturing industry.
The end of last year saw NDC score a considerable success, too, in another on-site trial, this time at the premises of a major Western tobacco manufacturer that NDC had not supplied previously. On this occasion, its TM710eV total-volatiles, infrared-filter gauge, which was launched at the beginning of last year, was chosen in preference to a diode-array full-spectrum infrared gauge and another filter-based gauge in a direct competitive trial in which the suppliers were not allowed into the factory to tweak their instruments.
The full gamut
Ian Benson
The difference between using a full-spectrum gauge and a filter gauge can be confusing to those not familiar with such technology, in part because both systems examine the full spectrum of infrared radiation at some point in the development process. In the case of the former, the full-spectrum gauge is mounted on-line, and the huge amount of raw data collected is subjected to a complex mathematical data reduction technique that identifies the infrared regions or wavelengths that correspond to the principle variance in respect of, say, total volatiles within the tobacco being measured—those parts of the spectrum that must be “observed” to measure the total volatiles.
In the case of NDC’s filter gauge, samples of the tobacco to be measured on-line are firstly run through full-spectrum infrared spectrometers in the company’s laboratory to identify the fingerprint of the total volatiles in the spectrum—to identify what are the regions or wavelengths of the infrared spectrum that correspond to changes taking place in the total-volatiles content of the tobacco. That fingerprint will be found in only four to six discrete regions, and those are translated into optical filters that are included in the on-line gauge.
“We are used to supplying production people who want a solution, so we’ve done that mathematical processing of the full-spectrum information in our laboratory and put the dedicated solution into our analyzer,” said Benson. “We are using the same modeling techniques as the full-spectrum—diode array—people, but we choose to give the customers a solution that is more process-suitable.
“What I mean by that is that tobacco manufacturers want fast measurements and they want measurements that are not affected by lighting, by ambient humidity and by changes in temperatures in the factory, and using our technology with filters, that can be achieved. NDC has been on-line since day one, which was back in 1970.”
For Benson, on-line is the key word. The problem with some full-spectrum systems was that they required the manufacturer to have a PC in the factory. “This is not really a practical solution,” he said. “You can go into factories where people have been using our instruments for 10 to 15 years and they still look in great condition; they have handled the environment. But I don’t think you can say that about a PC.”
NDC developed its TM710eV total-volatiles gauge in cooperation with major tobacco manufacturers, said Benson, and, since its launch, the uptake of it had been strong. Several international players were using it, obtaining good results and seeing the advantage of measuring total volatiles instead of just moisture.
And it is not only cigarette manufacturers that are taking to the new gauge. A major manufacturer of oral tobacco products has also taken the TM710eV on board. Oral-product tobaccos have higher moisture levels than those of cigarette tobaccos, and the company had previously not been successful in finding an instrument to make the measurements it required. “But we have managed to make very successful measurements,” said Benson. “We have a good reputation for measuring total volatiles in these generally higher-moisture oral products.”
Again, the language, this time used in respect of moisture and total volatiles, can be confusing. Total volatiles take in anything that dries off in laboratory oven tests, which are performed in a factory to provide highly accurate reference data. The tobacco sample is weighed, heated to 100 degrees Celsius for three or 16 hours, depending on the preferred method, and then weighed again. Whatever has been driven off might be called moisture, but the correct term is total volatiles or oven volatiles. A large part of the total volatiles comprises moisture, but another part comprises humectants, casings, flavors, sugars, etc.
Well-positioned
And new-type products introduce other components into the equation. “The thing that has been interesting for us has been the development of heat-not-burn products, which we have been involved in,” said Benson. “We have data that proves we can measure moisture, nicotine, sugars and glycerol, the key components that need to be measured in respect of heat-not-burn tobaccos.”
And while a heat-not-burn tobacco factory might not require the number of gauges found in sophisticated traditional-cigarette plants, it requires a range of different measurements. “That plays well into NDC’s wide range of capabilities,” said Benson. “For instance, we are heavily into the packaging industry; so we have instrumentation to measure mass per unit area and geometric thickness, or caliper, as we would call it—all on-line. We are able to do a range of different measurements for that application; so if the industry continues to go that way, NDC is well-placed to offer the additional measurements that companies are going to need to control the processes involved.”
Not all the measurements that NDC can make have tobacco industry applications at present, but they are there if needed in the future. For instance, NDC has been involved in measuring the thickness and coating weight of the active ingredients of transdermal patches used as nicotine-replacement therapies. And, through its cable and tube business, the company can measure the length of materials and the speed at which they are moving if they are being produced in a web-based process. This is a noncontact method called laser Doppler velocimetry.
Apart from its tobacco, food and bulk business, and its cable and tube business, NDC has, as is mentioned above, a business serving the packaging industry in the fields of extrusion and converting processes and a business serving the metals industry measuring the thickness and flatness of steel or aluminum coils and strips.

April 1, 2017
Future dividend
The focus on harm reduction makes tobacco companies even more attractive investments.
By Stefanie Rossel
While social responsibility is a fairly recent concept in business, awareness of responsible corporate behavior has risen rapidly. Companies have widely accepted the idea. According an EY study, sustainability reporting has become “business as usual.” More than 80 percent of Fortune 500 companies address sustainability on their websites.
Today, sustainability strategies are driven by business objectives, rather than ethical ones. Company leaders believe sustainability adds value to their organizations and helps them identify and mitigate risks.
Sustainable investing has been booming in the past few years. In its most recent report, the Forum for Sustainable and Responsible Investment valued the 2016 U.S. market for sustainable, responsible and impact investing at $8.72 trillion, or one-fifth of all investments under professional management—a 33 percent increase since 2014.
“It is very important for investors that tobacco companies have a corporate social responsibility strategy in place,” says a senior consumer analyst with a London-based investment bank. “Clients are more interested than ever in environmental, social and governance [ESG] topics. If we can point to such an effort, there’s a lot of approval and interest from customers.”
While there is no single, agreed definition of what makes an investment “sustainable,” there are funds that explicitly exclude tobacco from their portfolios, treating it as a tainted sector, similar to firearms, alcohol, fast food or gambling.
But this could be about to change. According to a Wall Street Journal report, the increasing amount and availability of data on ESG factors means that investors can judge companies individually, rather than having to eliminate whole sectors based on their members’ shared characteristics.
Erik Bloomquist
Aware of their reputation, the major international tobacco companies have long implemented responsible business strategies. “Once you have ‘got over’ the actual product, you will find that tobacco companies are very sustainable with regard to their business model and economics in general,” the analyst says. “Moreover, they have strong cash flows, are well run and feature strong brands. They are also mindful of externalities and thinking about the future. What’s more is that the tobacco industry has successfully gone through some kind of existential threat which other industries such as sugar, for example, may still experience. Hence, the image of the tobacco industry with investors is actually quite good.”
As tobacco companies seek to reduce the health impact of smoking, the tobacco “taint” may lessen. Philip Morris International (PMI) has bet the company’s future on smoke-free products that present lower risks than cigarettes. British American Tobacco (BAT) has invested more than $1 billion in its next-generation product business. In February 2013, it became the first tobacco company to publish a dedicated harm-reduction report; in 2017 it released its third report of this kind, describing the company’s reduced-risk product portfolio, the current state of harm-reduction science and its plans for the future.
“The development and adoption of reduced-risk products as key parts of PMI and BAT’s portfolios are tectonic shifts in how the firms see their business developing in the future,” says tobacco analyst Erik Bloomquist. “This change in products over time will do a great deal to enhance the image of tobacco firms and, more importantly, their actual sustainability over many years.”
Adding value
BAT has been a pioneer in publicizing its good corporate citizenship efforts. “We have been producing sustainability reports for over 15 years,” says Jennie Galbraith, head of sustainability and reputation management at BAT. “This is a clear demonstration of our commitment to transparency and maintaining an ongoing dialogue with external stakeholders.”
The company conducted its first detailed materiality assessment 10 years ago. “This assessment was instrumental in sharpening our agenda and taking us from a broad approach that included numerous socially responsible and philanthropic projects to focusing on the core issues of harm reduction, sustainable agriculture and farmer livelihoods, and corporate behavior, as well as embedding the principle of shared value across our day-to-day business practices,” says Galbraith. “There is an added reputational benefit to doing this, but for us it’s all about building a strong business for the future. Over the years we’ve seen firsthand how considering sustainability and shared value can enhance our approach.”
Jennie Galbraith
There are various frameworks to evaluate the sustainability performance of a company. The most widely cited and followed among them is the Global Reporting Initiative and the Dow Jones Sustainability Index (DJSI). The latter ranking is based on research by Swiss investment group RobecoSAM and concentrates on best-in-class companies across all industries. It provides an integrated assessment of economic, environmental and social criteria with a strong focus on long-term shareholder value. There are global, regional and country DJSI benchmarks. Following RobecoSAM’s yearly rating, best-performing companies are included in the indices, whereas those that don’t meet the thresholds are removed.
Interestingly, while companies on their websites boast about their rankings in the DJSI, the importance of such indices to investors appears to be overrated “We do not follow these indices, so it is hard for us to opine, but generally they are little followed by investors,” says the senior consumer analyst. “Or investors may look at them, but only as a first resource—i.e., a kind of minimum standard before doing further work along their own criteria. So if companies are removed, it should have little impact.”
The only tobacco company to feature in the DJSI European Index, BAT has been listed for 15 consecutive years. “This means that BAT scored in the top 20 percent of over 600 European companies assessed, maintaining the same overall score as last year (83 percent) and scoring better than the industry average in 16 out of 17 sections of the assessment,” says Galbraith. “Our associate company Reynolds American replaced us in the World Index with a 4 percent higher score than us due to the weighting of certain categories where our global footprint raised challenges for our scoring versus that of Reynolds.”
According to Galbraith, the company’s high scores across so many categories reflect the quality of management across all key areas of the business and its comprehensive and globally consistent focus on sustainability issues.
Human rights
Nevertheless, good corporate governance remains an ongoing exercise. BAT recently increased its focus on one of the biggest challenges for the tobacco industry, human rights in supply chains.
“Our global agricultural supply chain is a vital part of our business, and we’ve long been aware of the importance of protecting human rights in this area,” explains Galbraith. “As a company, we take this very seriously, and addressing human rights risks is a core element of our new sustainable agriculture and farmer livelihoods program. From an industrywide perspective, the new Sustainable Tobacco Programme builds on our long-standing Social Responsibility in Tobacco Production program and is bringing together best practice to strengthen standards for suppliers across the tobacco leaf supply chain. This is an excellent example of collaboration and shows how different parties can come together to make a difference for the common good.”
In addition to its work with leaf suppliers, BAT has also been making strides across its wider supply chain. “For example, in 2016, we rolled out our new Supplier Code of Conduct, which sets out the minimum standards we expect all our suppliers to adhere to, including specific human rights criteria,” says Galbraith. “We’ve also been working over the last year to strengthen due diligence and introduce human rights risk assessment for all 70,000-plus suppliers outside of our agricultural supply chain. We welcome the U.N. Guiding Principles on Business and Human Rights, and legislation such as the U.K. Modern Slavery Act, as they provide a much clearer road map for companies to follow.”
April 1, 2017