Category: Print Edition

  • The Virtue in Vice

    The Virtue in Vice

    Photo: kohanova1991

    Vice Ventures has carved out a niche investing in good companies in “bad” industries.

    By Stefanie Rossel

    For startups in the reduced-risk nicotine product business, raising money can be an almost insurmountable hurdle. In addition to the typical challenges faced by new enterprises, they must cope with unfavorable perceptions: Due to the tobacco industry’s controversial legacy, any company associated with the sector—however remotely—continues to carry a stigma in the eyes of many. For some venture capital funds, this makes investment in such companies a no-go. Many of them even have specific clauses prohibiting investments in “bad” businesses.

    Venture capitalist Catharine Dockery repeatedly ran into this issue when pitching her investments in the late 2010s. With the possibility of recession looming on the horizon, she was convinced that the best way to earn a return on capital was to invest in “vice” brands, with companies such as Altria Group and Diageo historically outperforming others in times of economic hardship. Yet many of the investment firms she applied to had provisions blocking such investments.

    Getting nowhere with established firms, Dockery in 2018 established Vice Ventures, a financial firm without inhibitions about investing in so-called sin industries. Remarkably, many of the fund managers who had rejected her strategies due to their employers’ restrictions ended up investing in Vice Ventures with their personal money, endorsing the validity of her approach.

    The venture capital firm started with a $25 million fund, raising money from family offices and high-profile investors like Marc Andreessen and Bradley Tusk. It was followed by a second fund of the same size last year. In 2020, Forbes recognized Dockery in its “30 Under 30” ranking, an index that recognizes notable young entrepreneurs in various industries.

    While Vice Ventures invests in companies catering to vices, such as alcohol, cannabis and nicotine, it takes a sober, analytical approach. By selecting good companies—those that have the power to grow explosively without hurting people—in a bad environment, Dockery says she is looking for “the virtue in the vice.”

    “We’re focused on finding responsible operators in categories where other funds often won’t get involved,” she explains. “We see nuance in this space in the sense relative to the typical fund view of entirely black or white by category.”

    Dockery is convinced that vice startups, and by extension vice investors, can generate returns while still being mindful of the social good. The reputational problems of the sector stem from the tobacco industry’s past behavior. The big tobacco firms, for example, spent years downplaying the risks of smoking. Even though many of them have changed their conduct, that legacy still taints the sector today. Dockery detects a double standard, though, noting that investors who object to tobacco may have no qualms about funding companies that have contributed to and covered up the impact of climate change, for example.

    “Our most important criterion for evaluation is legality and feasibility of the business plan.”

    Ethical Investments

    Dockery spent much time determining how morals would influence her strategy and then developed some rules to guide her decisions. Good investments, she argues, have founders and leaders who are ethical and honest. Good vice products, meanwhile, are created for, marketed to and consumed by consenting, responsible and understanding adults who have power over their decisions. According to Dockery, good vice companies care about their customers and have real-world expectations for their behavior while good vice products inform users how consumption may affect them.

    Evaluated against these criteria, investing in reduced-harm nicotine products, with cigarettes killing over 480,000 Americans each year, according to health groups, is a logical and ethical step. “There is significant research suggesting that having flavored recreational options available to adult smokers is a useful public health tool,” says Dockery. “Vice Ventures is quite active in investing in early-stage nicotine companies, including both recreational products that require premarket tobacco product application (PMTA) approval and nicotine-replacement therapy (NRT).”

    The first startup Vice Ventures financed in the nicotine sector was Lucy Goods, a Nevada-based manufacturer of recreational and NRT oral nicotine products. Lucy Gums, the company’s nonmedical flagship product, is advertised as an upgraded version of the classic nicotine gum, coming with “stronger flavors, better texture and packaging you don’t have to be a rocket scientist to open.”

    A behavioral study, published in Harm Reduction Journal in January, concluded that Lucy Gums helped prevent nicotine cravings among participants, did not appear to attract those who never used tobacco products and had low potential to promote nicotine relapse among former tobacco users. Results suggested minimal appeal to youth, and there was no evidence that Lucy Gum flavors appealed more to young adults than to older adults. “The fact that Lucy appeals to people who smoke, regardless of their intent to quit smoking, highlights the potential of Lucy to reach more adult tobacco users than medicinal NRT products and to facilitate their transition to less harmful alternatives,” said Lucy Goods’ co-founder and CEO, David Renteln. With a 0.3 percent reduction in population-level smoking rate projected for a 2.3 percent quitting rate, current smoking cessation methods show limited effectiveness.

    “While not a cessation product, Lucy is positioned in a crucial middle ground, targeting nicotine users who want to address the harms of consumption, consume nicotine in new and enjoyable ways, and potentially, in the future, work toward reducing consumption,” Dockery says. In May 2022, Lucy Goods submitted PMTAs for 42 nicotine products.

    Vice Ventures also led the financing of Qnovia’s Series A funding in 2022. The Richmond, Virginia-based startup raised $17 million, which it said it would use to move forward an investigational new drug submission to the U.S. Food and Drug Administration and begin human clinical trials for its NRT drug candidate.

    Qnovia has developed RespiRx, a handheld, pocket-size atomizer capable of producing vapor without heat, which the company hopes will become the first FDA-approved, prescription-only inhalable NRT solution (see “High-Tech Quitting,” Tobacco Reporter, March 2023). In late 2023, trial results showed that the drug delivery platform had an “exceptional” pharmacokinetic profile compared to existing NRTs.

    Qnovia claims it has the potential to fill the void for more effective pharmacotherapies and NRTs, as traditional treatments fail to deliver nicotine rapidly, which is crucial when trying to alleviate withdrawal symptoms.

    Chicago-based Black Buffalo, another company partially funded by Vice Ventures, has created a moist smokeless tobacco alternative based on nicotine-infused edible leaves from the cabbage family. According to Black Buffalo, the leaves’ properties are similar to those of tobacco in terms of texture, aroma, color and flavor. While smokeless tobacco products, such as dip, snuff and chewing tobacco, remain popular in the U.S., with sales reaching $4.98 billion in 2022, according to the Federal Trade Commission, societal attitudes toward oral nicotine use have been shifting. Black Buffalo’s products are aimed at moist smokeless tobacco consumers migrating away from traditional tobacco products.

    Focus on Harm Reduction

    So what does it take for a nicotine startup to successfully pitch with Vice Ventures? “Our first, most important criterion for evaluation is legality and feasibility of the business plan,” says Dockery. “Nicotine companies often face exceptionally long regulatory timelines and complex regulations, so we need to feel confident that the management team can navigate that landscape.”

    While Vice Ventures tends to evaluate companies on an individual basis rather than a category basis, it is especially focused on the concept of harm. “There is a myriad of ways a product can cause harm to the consumer or society, regardless of the company involved,” says Dockery.

    There are also characteristics that exclude contenders. “We frequently receive pitches for products, especially in nicotine, that are planning to operate in ways that don’t meet our investment criteria,” says Dockery. For example, Vice Ventures is uninterested in the delta-8-tetrahydrocannabinol (THC) products that have rapidly gained popularity following the passage of the 2018 U.S. Farm Bill, which legalized industrial hemp with THC levels below 0.3 percent dry weight. The fact that delta-8 products exploit a regulatory loophole has prompted Vice Ventures to stay away from the sector.

    Due to the regulatory landscape, nicotine is a bit of specialty sector in Vice Ventures’ broad portfolio. According to Dockery, convincing investors depends to a large extent on the person. “We have a track record of approaching this field in a very responsible way, which helps a lot,” she says. “Professional investors often engage with our fund the most readily because they understand the opportunity we’re working to capitalize on. Many of our fund investors are passionate co-investors, so they are frequently involved alongside the fund in our investments.

    “Outside of Vice Ventures, co-investors largely depend on the sector we’re investing in. For some of our more regulatory-intensive categories like nicotine, we often see private and high-net-worth investors instead of funds involved in early stages of companies.”

    Over the next five years, Dockery plans to continue growing the fund’s scale and reach. With the $25 million fund closed last year, the company is looking to develop approximately 30 best-in-class early-stage domestic and international companies in various vice industries. “We’re already a well-known partner for early-stage capital in our verticals, and there is natural room to grow over time,” she says. “Venture capital represents one of the most niche areas of the investment market, and our position as an early-stage partner will set us up for unique long-term relationships with top startups.”

  • Russian Resolve

    Russian Resolve

    The Chestny ZNAK system tracks items from production to real-time sales. | Photo: CRPT

    A supplier of product labeling solutions claims its technology had helped shrink the Russian illicit cigarette market by a quarter.

    By Marissa Dean

    The black market and illicit trade are hot topics. Confronted with ever-rising taxes, consumers of tobacco products in many markets are increasingly tempted by more affordable black market offerings. Many places are adjusting and implementing technologies and processes to help curb black market trade. Russia is one of these areas, having recently been listed by the World Health Organization among the countries with policies providing the highest level of protection for its citizens from tobacco.

    During a side event at the third Meeting of the Parties (MOP3) to the Protocol to Eliminate Illicit Trade in Tobacco Products, officials gave a presentation on Russia’s Chestny ZNAK track-and-trace system. The event, which took place on Feb. 13 in Panama, was aimed at familiarizing the parties “with proven approaches to ensuring traceability of tobacco products in accordance with Article 8 of the protocol,” according to Revaz Yusupov, deputy general director for the Center for Research in Perspective Technologies (CRPT) in Moscow. “Special attention during the presentations was given to the impact of the system on reducing the illicit tobacco trade in Russia. Representatives from Nigeria, Brazil and Panama were present at the event, facilitating discussions on the potential implementation of the system in their respective countries.”

    Introduced by the CRPT in 2019, the Chestny ZNAK system tracks items from production to real-time sales. According to Yusupov, the system is the first of its kind globally. “The fundamental approach involves assigning a unique digital data matrix code to each product,” explained Yusupov. “This code undergoes scanning at every stage, spanning from production to sale. The entire product journey is traced through electronic document management and online cash registers, mandated by law across the country.”

    Products with the assigned digital codes are deemed legal, complying with all requisites and documentation. Attempting to illegally introduce goods into the Russian market without proper documentation and labeling is “impractical,” according to the CRPT, because of the success of the Chestny ZNAK system—the digital codes are safeguarded by cryptographic protection, which makes forgery impossible.

    The information about the products within the system is tamper-proof as well, according to the CRPT, and the system blocks the sale of expired goods or goods lacking proper documentation. Currently, 667,000 companies and individual entrepreneurs use the system, which boasts a processing capacity exceeding 350,000 operations per second (“surpassing that of Uber or Netflix,” said Yusupov) and a data volume of nearly 100 petabytes.

    The Chestny ZNAK system isn’t specifically for tobacco products, though it has been successful in curbing the illicit tobacco market. The system can be used across goods, and it has been implemented in 16 categories of goods, including dairy products, water, clothing, footwear, perfumes, tobacco, medicines, beer and low-alcohol beverages, biologically active additives, antiseptics, medical products, soft drinks and juices, wheelchairs and children’s water, according to the CRPT. When asked about how the system works across goods, Yusupov stated that “The implementation process kicks off with pilot tests for each product category. While participation is not mandatory, it is in the business’ interest as it provides an opportunity to prepare equipment and practice with free Data Matrix codes. Workgroups are formed, comprising representatives from both the business sector and the system operator. Collaboratively, they develop a labeling concept that aligns with the unique requirements of each area within the circulation of goods.”

    And the system has been quite successful, according to its manufacturer. “Before the introduction of labeling,” said Yusupov, “the illegal tobacco market in Russia consistently grew, surpassing 15.6 percent by 2019. Following the implementation of labeling, it decreased by a quarter, with 18 productions legalized and 45 illegal ones shut down. Authorities claim that the combined impact of cracking down on illegal trade resulted in RUB245 billion ($2.7 billion) in increased tax revenues.”

    By the end of 2025, it’s estimated that the overall economic impact will reach RUB1.6 trillion ($17.6 billion).

    In addition to the Chestny ZNAK system, Russia has also enacted a law to systematize control over the circulation of tobacco raw materials and equipment through the licensing institute along with the establishment of an authorized government body for supervision. This government body has instituted a system for registration of equipment. Requirements have also been introduced for tracking the volume of production and circulation of tobacco products and raw materials and for the seizure and destruction of illegal tobacco products and the associated manufacturing equipment, and customs and border authorities have been granted additional powers in regard to illicit trade. Administrative and criminal liability are enforced for a broad range of violations related to mandatory product labeling requirements, including smuggling, production, introduction into circulation and transportation of unmarked goods. There are also quantitative restrictions on the movement of individuals within the territory of the Russian Federation with unmarked tobacco and nicotine-containing products. All of these reforms in combination with the Chestny ZNAK system have led to Russia’s success in curbing illicit trade, according to the CRPT.

  • Thriving Against the Odds

    Thriving Against the Odds

    Image: K

    Pondering the industry’s remarkable longevity as Tobacco Reporter celebrates its 150th anniversary.

    By George Gay

    Longevity is good, right? Most people probably want to live longer, or, out of fear, postpone death—at least until tomorrow. And, until quite recently, average life expectancy had been generally increasing and allowing most of us to outlive previous predictions. For instance, if I had lived to the average age predicted for people born in the year that I was born, I would have been dead about a dozen years ago. But, based on current predictions, I still have until the end of June this year—according to my calculations, June 29, to be precise.

    This makes me wonder what tobacco control people might mean when they declare that a smoker died “prematurely.” What standard are they comparing the smoker’s lifespan against? We aren’t born stamped with sell-by dates.

    I started to wonder about such matters when, in this, the 150th year of Tobacco Reporter, I was asked to write about longevity as it relates to the tobacco industry, and it occurred to me that there must be some relationship between the longevity of people, companies and industries, though I imagine that relationship is complex and becoming more so given the march of robotics, artificial intelligence and environmental breakdown. The pharmaceutical industry, for instance, is a product of people while the increasing longevity of those people is largely down to the drugs and other medical interventions developed by the industry, whose longevity, therefore, seems to be assured.

    A Hardy Lot

    But the longevity of the tobacco industry raises different issues because it is said to be “killing” the smokers who are its main customers, so the question arises as to why the industry has managed to survive and even thrive, especially during the past six decades or so when the risks of smoking have become widely known and the industry has had ranged against it governments, a huge tobacco control industry and much of the media.

    But let’s start with another, related question. Why have smokers continued with their habit in the face of massive disincentives? After all, the consumption of cigarettes has generally been described during the past six decades as everything from risky to deadly. Such consumption is said to constitute an addiction and to cause poverty and multiple diseases that “kill” about half or two-thirds of cigarette smokers, along with nonsmokers, a toll amounting to about 1 million lives a year and predicted to reach 1 billion during this century. It is said to be the major cause of “premature” and even “preventable” deaths worldwide and to cost societies much more than it contributes, both financially and emotionally. Carelessly discarded cigarettes and butts are blamed for fires and significant environmental damage while tobacco products have been degraded through regulation, and smoke is said to discolor and make everything it touches smelly. Smoking, and therefore smokers, have been “denormalized,” and, to cap it all, cigarettes are said by some to have no inherent value.

    And yet 1 billion smokers continue to smoke, and nonsmokers continue to take up smoking. Why? Is an eighth of the world’s population insane? Are these people recklessly obstinate, or do they not believe, or choose not to believe, the above? I don’t think so. I think the cause can be traced to tobacco control and the strategies that it has used, which have included the dissemination of misleading and ill-thought-out propaganda that has engendered in smokers a healthy skepticism. I don’t want to go through all of the questionable issues raised in the paragraph above, but it is worth pointing out that a lot of smokers would be rightly insulted by the claims that their smoking caused them to be poor and that cigarettes have no inherent value. In many cases, their impoverishment was caused by the life chances, or lack of them, they were handed at birth, and so cigarettes provide one of few pleasures available to them.

    And on that subject, it would be wrong to ignore the importance of the illegal trade in cigarettes in helping to keep smoking rates up in difficult times—in allowing smokers to continue with their habit when they cannot afford licit products. Governments, tobacco control and tobacco manufacturers have aligned to rail against this business, but once again, they have put forward some of the most crass and unconvincing arguments, blaming smokers but not those who impose taxes and price increases.

    Of course, tobacco control would claim that smoking continues because of nicotine addiction, though this cannot be a factor in nonsmokers taking up smoking. And it certainly cannot be the only reason because if it were, a type of automatic, generational stop-smoking system would kick in. In fact, I don’t believe that addiction is a very important factor, or at least it needn’t be. But, for whatever reasons, tobacco control has been at pains to medicalize smoking—to claim that smokers cannot quit without interventions by the medical profession working with the pharmaceutical industry or, more lately, with tobacco harm reduction advocates.

    And here we get a glimpse of why the tobacco industry—and many of the tobacco companies of which the industry is composed—has been so resilient in recent times: flexibility. With the launch of reduced-risk products, the aims of the industry in regard to cigarettes are in line with those of tobacco control, and even surpass them, I suspect, since it has a future beyond cigarettes whereas tobacco control has not. In other words, the tobacco industry has been subsumed, though not welcomed, into what has become the colossal tobacco control industry while still selling tobacco, mostly cigarettes. Some might call this sleight of hand rather than flexibility, but it has worked and does work.

    An Irrational World

    This is all well and good, but it doesn’t explain how the tobacco industry managed to survive and even prosper during the 50 years or so between the time when the risks of tobacco consumption loudly entered the public discourse and the time when the industry started out in the lower risk business. How can one explain why, when governments came to believe that huge numbers of lives and dollars were being lost to smoking, no serious, long-term attempt was ever made anywhere in the world to ban cigarette smoking?

    There is at least one powerful, specific reason for this, but firstly I think I should mention what I think is the most powerful general reason: the fact that we do not live in a rational world, something that gets forgotten and leads to much unnecessary anguish and disappointment. Remember, within the world of tobacco control, for instance, 5 percent equals no percent. And looking further afield, most of the damaging complaints leveled at the tobacco industry can also be leveled at other industries, including but not restricted to the alcohol, arms and automobile industries, and no serious, long-term efforts have ever been made to stop the sale of arms and automobiles nor the sale of alcohol in most of the world. I guess that if you are a glass-half-full sort of person, you might argue that there is a certain consistency to our irrationality, and perhaps that brings you comfort. Where this consistency breaks down, however, is in respect of the reactions to the damage caused by these products, which in the case of alcohol, arms and automobiles is largely to adopt a head-in-the-sand approach while in the case of tobacco, it is to heap opprobrium on smokers, tobacco companies and the industry.

    Why this discrimination? I’m running out of space here, so I shall have to answer that question briefly and perhaps without as much rigor as I would like to employ. The reason, in my view, is that many of those who govern us like to be driven around in big, polluting vehicles and are not adverse to touching the buttons in their arm rests to order the slaughter of innocent people, their own citizens and others, with technically advanced weaponry, but they are morally opposed to tobacco smoking. I should mention by way of explanation, perhaps, that they also like to drink.

    The Benefit of Bulk

    Beyond irrationality, the major reason why the tobacco industry was able to thrive was down to its size, the foundations of which were built up before the risks of smoking were widely known. Right from the start, it was able to acquire its raw materials at favorable rates while being able to increase the prices of the products made from that tobacco. It could afford the best scientists and lobbyists to support its causes, it could afford the best lawyers to defend it when needed and, anyway, the cost of any fines that were imposed could be passed onto smokers. Extraordinarily, even when the tobacco manufacturers went from denial to admitting that their products caused harm, there was little change.

    Crucially, its size meant that for a long time, the industry was able to argue that even if its products were harming smokers, it was providing work across the world, from the tobacco fields to the boardrooms. Millions were employed growing, selling, processing, transporting and manufacturing tobacco. And many others were employed in the businesses that fed into these activities, and others still in the wholesale, retail and advertising sectors.

    And even when the employment argument started to unwind in the face of such developments as wholesale company consolidations, globalization, the introduction of new technologies into tobacco fields and factories, and the ending of tobacco advertising and promotions, little changed because governments were hooked on tobacco taxes, and it was a lot easier and less costly not to rock the boat—to collect those taxes from two or three big, efficient manufacturers than from multiple small-sized and medium-sized players. It was another case where the manufacturers were able to align themselves with those who supposedly opposed them. It wasn’t and isn’t a loving relationship, more a marriage of convenience, but it worked and is still working.

    Enduring Legacy

    One other factor that should be mentioned here is tradition, which must exist in some sort of relationship to longevity and which has bound smokers together in a sense of camaraderie, whether, as 60 years ago, in majority groupings at social events or more lately as minorities huddled together outside pubs. The cigarette was able to lay claim to being a traditional product also because, with the advent of ever more advanced machinery, it became, leaving aside its risky aspect, an almost perfect product, one that was refined but remained largely the same for decades. You could argue, and certainly I would, that cigarettes started to lose the respectability that tradition bestows when regulations were introduced to degrade these products and their packaging and when consolidated manufacturers, chasing profits and presumably in thrall to the idea that cigarettes had become simply nicotine-delivery systems, reduced the range of products on offer, especially in respect of taste.

    Of course, it is true to say that tobacco had never aspired to the sorts of appellation and vintage certifications that wine boasts, and now it would not be allowed to, but for a long while, there was a hint of such quality assurances in phrases such as: “It’s the tobacco that counts.” So it is unsurprising that, arguably, until the arrival of unconscionable levels of taxes, generic products and the oddly named “value” cigarettes, brand loyalty among cigarette smokers must have been just about the highest of any consumer group. Indeed, in another example of how governments have helped tobacco manufacturers, or at least individual manufacturers, a type of brand loyalty has presumably picked up again in recent years in those countries where retailers are required to keep cigarettes under lock and key.

    Additionally, cigarettes scored heavily in the sorts of ritualistic activities that surround much tradition. In fact, even now, the industry is at pains to try to keep some of the ritualistic traditions alive in lower risk products. It is interesting, too, that despite the “denormalization” of smoking, officially, tobacco remains a solid part of the fabric of society. In a recent story on consumer price indices, a writer noted, with some surprise, that the U.K. Office of National Statistics still tracked, among other things, four different packs of cigarettes and rolling tobacco—along with e-cigarettes.

    But enough of all this backwards looking stuff. What about the future? Well, I guess that tobacco control will continue with its often ludicrous strategies because of its failure to understand smokers, and governments will continue to rip off smokers because they can while they both take their time coming round to the view that abstinence doesn’t work and tobacco harm reduction does. Meanwhile, tobacco manufacturers will likely retain their alignments, all the while motoring on, at first being driven by hybrid tobacco and nicotine businesses before moving on to cleaner, nicotine fuels alone.

    Or will they? The premature death of tobacco and, especially, cigarettes has been predicted for as long as I can remember, and they ain’t dead yet. Indeed, perhaps this is one area where talk of a preventable death is not so dumb. Perhaps tobacco products have a lot of life left in them, especially since, as seems increasingly likely, populations become more stressed as the world is plunged into forever wars and environmental catastrophe by those morally opposed to smoking.

  • Mapping Milestones

    Mapping Milestones

    Photo: Imperial Brands

    Three years into its five-year strategy, Imperial Brands reports progress on multiple fronts.

    By George Gay

    The U.K. government looks set to ban outright the sale of disposable vapes largely on the grounds that these products, which can be bought with a relatively modest outlay, are said to appeal to those under the age of 18. Currently, arguments are raging around this issue, but no matter on what side of the fence you sit, it cannot be denied that there is something less than coherent about the reasoning behind the proposed ban because it is already illegal in the U.K. to sell vapes to those under 18. The legal position in respect of disposable vapes and the underaged will not change because of the ban, though it will in respect of the rest of the population, so the argument that the proposal is aimed at protecting the underaged does not stand up to scrutiny.

    It is odd, too, that another, more reasoned argument against disposable vapes—that their disposal, whether careless or authorized, is too environmentally damaging—seems to be of only secondary concern to the government. But it is of concern, and some industry players are taking steps to address at least some of the issues raised.

    In its 2023 annual report, Imperial Brands said that it had launched its Blu Bar disposable vape brand in 11 European markets, so I took the opportunity of asking it for its views on these products. “We have long called for action to prevent the deliberate marketing of vaping products to young people,” Imperial said in an emailed reply. “It is important, however, that new restrictions do not compromise the ability of vaping products to transition adult smokers away from combustible cigarettes.

    “Disposable vapes are currently used by more than half of adult vapers in the U.K., and a ban threatens to undermine the country’s significant progress to reduce smoking. There’s also a risk it will fuel the illegal trade of unregulated products, already a sizeable problem for enforcement authorities.

    “We recognize the sustainability challenges associated with disposable products. We have been working hard to address this in our portfolio and have just launched a new version of Blu Bar (Blu Bar 1000) in the U.K. (other European markets to follow) with a removable battery.”

    The use of a removable battery is presumably an important step in disposable vape design because it makes the dismantling of used products in qualified waste disposal facilities safer and more efficient, and therefore more likely to happen. It doesn’t, I guess, address the important question of the number of batteries being used and disposed of across the country, but then this can be partially addressed by increasing the number of puffs that products deliver. In any case, apparently, at Imperial, this is not the end of the story. “Expect to see more innovation—all built on our consumer insights—from us later this year,” Imperial added.

    The reference to consumer insights harks back three years to the launch of Imperial’s five-year strategy to transform itself into what it describes as a consumer-led challenger business. As part of this strategy, it set up in 2021 a Global Consumer Office, and it now has two Sense Hubs at which it interacts with consumers to understand their expectations. “We are placing the consumer at the center of our decision-making by building our capabilities in consumer insights, portfolio and brand management, innovation, and through our portfolio of next-generation products (NGPs),” Imperial said.

    This is all well and good, but I had to admit that I was less than certain what was meant by a “challenger business” and what you had to do to qualify as such a business. “We are the smallest of the global businesses in our industry, and that means to succeed over the long term, we need to be a strong challenger,” Imperial said. “Being a challenger is about having the best understanding of our consumers and their choices. It is about having simple and efficient operations that enable us to be agile. It’s about building a culture where our people can perform their best work.

    “To give an example: We have had a disciplined, challenger approach to NGP market entry. We have launched products only in markets where the category (vaping, heated tobacco and/or modern oral) is a big proportion of overall nicotine consumption—and where we have strong existing routes to market.”

    The reference to a disciplined approach to NGP is not just managerial speak. In fact, as part of its five-year strategy, Imperial put in place the means not only to revive its combustible business but to reboot its NGP business completely. In its 2023 report, it describes how, during fiscal years 2021 and 2022, it first refocused the business by withdrawing from several markets, such as the heated-tobacco market in Japan, which it decided did not fit its challenger criteria. Presumably, withdrawing from Japan’s heated-tobacco market must have taken considerable thought and discipline.

    Having refocused, it then began a test-and-learn process introducing new products in pilot markets, closely studying reaction from consumers and customers, before scaling up.

    Which brings us to the 2023 financial year. “For our potentially reduced-harm business, this has been an important year, with product innovation and targeted market launches translating into accelerated revenue growth,” Imperial says in its report. “Following the introduction of new propositions in vape, heated tobacco and oral nicotine, we now have credible offerings in all three major categories. And consumers can now buy our NGP in more than 20 European markets as well as the United States.

    “This operational acceleration has translated into revenue growth of 26.4 percent globally, and 40.4 percent in Europe, where we have been focusing our investment.”

    Not everything has gone to plan, however. The U.S. Food and Drug Administration on Feb. 5 issued marketing denial orders to Imperial subsidiary Fontem U.S. for four Blu disposable and one Myblu brand of e-cigarettes, which means that these products may not be marketed or distributed in the U.S. While this and a previous failed attempt to get Imperial Brands through the FDA’s premarket tobacco product application (PMTA) process has been costly and is no doubt frustrating, it is not altogether surprising. The Fontem application joins those of many other companies that have come to grief against the gates of the FDA. “After reviewing the company’s PMTAs, FDA determined that the applications lacked sufficient evidence to demonstrate that permitting marketing of the products would be appropriate for the protection of the public health, which is the standard legally required by the 2009 Family Smoking Prevention and Tobacco Control Act,” the agency said in announcing its decision. It might have added, “No pasaran!”

    The list of Imperial’s main NGP markets seems to support the company’s claim to have launched products only in markets where vaping, heated tobacco and/or modern oral is a big proportion of overall nicotine consumption and where it already had strong existing routes to market. Its main vapor product markets are, in alphabetical order, Belgium, the Canaries, the Czech Republic, France, Germany, Greece, Ireland, Italy, Portugal, Spain, the U.K. and the U.S. In heated tobacco, they are Bulgaria, the Czech Republic, Greece, Hungary, Italy, Poland and Portugal. And in modern oral, they are Austria, Denmark, Estonia, Iceland, Norway and Sweden.

    Of course, while these lists look reasonably impressive following a major reboot, on the global stage, Imperial is smaller than its three main rivals, so it has developed a partnership approach to innovation. “This is exemplified by our three new innovation centers,” Imperial says in its report. “Our Sense Hubs in Liverpool and Hamburg bring together our own development teams with third-party partners and our consumers. Our Shenzhen site enables us to get closer to our supply chain partners.

    “Our new way of working has halved the time from initial concept to market launch and increased our capacity to work simultaneously on multiple projects. This is particularly important because of the need for us to take a multi-category approach, reflecting the way different markets are evolving different NGP preferences because of local culture and regulatory environments.”

    Although much progress has been made, these are early days yet in respect of the NGP side of the business, as Imperial readily admits. For instance, while its 2023 report included tobacco (cigarettes, RYO, cigars and snus) volumes, it gives no NGP volumes. When asked about this, Imperial said that NGP volumes had not been large enough to justify reporting. “But as the success of the reboot grows, this is something we’re keeping under review,” it said. “We do report on NGP revenue by region.”

    Fair enough. One thing that did seem odd to me, admittedly not someone trained in management of any kind, was that in its 2023 report, Imperial announced a £1.1 billion ($1.39 billion) share buyback scheme for 2024, up from a £1 billion scheme in 2023. Why, I wanted to know, was the money not invested in the business—perhaps in the company’s nascent NGP products?

    The answer was that Imperial was already delivering on its four priorities for the use of capital, namely: invest behind new strategy to support sustainable growth; maintain a strong and efficient balance sheet; a progressive dividend policy growing annually, taking into account underlying business performance; and surplus capital returns to shareholders.

    “We remain fully committed to investing in the business,” the company wrote. “It is the priority for capital, and we have been stepping up investment in NGP rollouts. But our NGP plan is targeted behind specific markets and products based on the market data and consumer insight.”

  • Confidence and Confidentiality

    Confidence and Confidentiality

    Willie McKinney (Photos courtesy of McKinney Specialty Labs)

    McKinney Specialty Labs has the expertise to generate trustworthy data and the discretion to share it only with authorized users.

    By Taco Tuinstra

    If you want to quickly grasp the difference between vaping and smoking, peek into the e-cigarette testing laboratory at McKinney Specialty Labs in Richmond, Virginia, USA. Then compare it to the smoking lab a few steps down the hall. The first room looks bright and crisp, almost like a hospital operating theater, while the second room has tubes exhausting cigarette smoke out of the lab, bringing to mind the scene from a sci-fi thriller.

    If you want to obtain a more profound understanding of the complex aerosols generated by vapes and combustible cigarettes, however, you will have to analyze them scientifically—and this is what McKinney Specialty Labs excels at. Among other services, the lab offers physical testing, which includes characterizing the particle size distribution and output of aerosols; microbiological testing; toxicology testing and regulatory compliance assistance. It also tests the ignition propensity of combustible products.

    To carry out such tests, the 57,000-square-foot facility is equipped with some of the industry’s most sophisticated instrumentation, including machinery that less apportioned laboratories might only dream of. Jake Hilldrup, technical director of chemistry, points out some highlights. McKinney Specialty Labs is the proud owner of a Virtrocell model 48 v2.0, for example—an instrument that exposes cells directly to aerosols. By skipping intermediate steps such as capturing the aerosol before adding it to cells, the Vitrocell mimics the conditions under which products are consumed better than conventional equipment.

    Hilldrup then gestures to a collection of red devices with spikes. “The spike is a probe for electrostatic precipitation from metals,” he explains. The machine generates an electrostatic field that causes all the aerosol particles to stick to the sides of a quartz tube, allowing researchers to collect them without a pad. This is important, says Hilldrup, because many pads arrive from the supplier with background levels of metals, making it difficult to get a good baseline. “The probes ensure cleaner collection and better reproducibility,” he says. “They are very state-of-the-art tools for metal collection that other labs are not using yet.”

    In yet another room, the company has set up a dissolution apparatus to analyze the performance of nicotine pouches, which have been taking the U.S. tobacco market by storm recently. The machines run artificial saliva through the system to stimulate nicotine release. Among other insights, they will reveal how the nicotine is released within a given time frame. “Hopefully, it’s not coming out all within the first five minutes,” says Hilldrup.

    In addition to brand-name equipment from recognized international suppliers, McKinney Specialty Labs also features one-of-a-kind, in-house designed equipment, including a “Tripple Puff” collection system that allows researchers to test multiple electronic nicotine-delivery devices (ENDS) simultaneously. Developed by a lab technician who is a trained engineer, the Tripple Puff is “a nice timesaver,” according to Hilldrup.

    Having the right equipment is key to providing clients with timely and accurate data, but according to one of the company owners, Willie McKinney, it is not the gleaming machinery park that sets McKinney Specialty Labs apart. “It’s the highly skilled employees who make the difference,” he says. After all, anybody can purchase instrumentation, but not everybody can operate it properly. “You need experts to make sure the equipment is validated and operating the way it should, so the client can trust the results—and, importantly, the regulator can trust the results,” says McKinney.

    According to him, the U.S. Food and Drug Administration and its international counterparts are confident that McKinney Specialty Labs will generate data the right way. Such trust, he says, is crucial, and not every laboratory succeeds in earning it, as evidenced by a recent FDA notice advising manufacturers to be cautious with data generated by some labs. Some third-party test labs may be generating unreliable data, the agency warned. At McKinney Specialty Labs, clients need not worry about such issues, McKinney insists.

    Strong Credentials

    A certified minority-owned business, McKinney Specialty Labs officially launched at the start of this year, but the facility has been around for much longer, as part of a large organization offering analytical solutions for environmental projects. At one point, for various reasons, that company decided to discontinue operating the specialty lab and put the facility and its assets up for sale.

    McKinney was immediately interested. “The facility had a great reputation, with impressive scientists. So, when the opportunity arose to acquire it, I just had to look into it,” he says. One factor driving McKinney’s enthusiasm was the fact that he had worked with the laboratory for many years as a client and was intimately familiar with its staff and their professionalism. A board-certified toxicologist, McKinney boasts a distinguished career in the tobacco industry. Educated at the University of North Carolina School of Public Health and the New York University Center for Environmental Medicine, he is a leading expert on lung inhalation and aerosol physics.

    During his 20 years at Philip Morris, and later Altria, much of McKinney’s focus was on tobacco harm reduction. Among other projects, he worked on Accord, one of the first systems to heat rather than burn tobacco. Accord was a product before its time, but the research and development invested into Accord ultimately laid the groundwork for one of the most successful smoking technology innovations in recent history—the IQOS platform.

    McKinney then worked for Juul Labs, which he describes as an extraordinarily creative and energetic business. In addition to these corporate engagements, McKinney served as an industry representative on the FDA Center for Tobacco Control’s Tobacco Product Scientific Advisory Committee, gaining valuable insights into the agency’s thinking and establishing rapport with key agency officials.

    Leveraging Experience

    As the FDA sought to bring order to the burgeoning ENDS market, McKinney decided to leverage his experience in the private sector and with regulators. The first electronic nicotine products that smokers actually liked and started switching to were developed by startups. These small companies lacked the internal scientists, toxicologists and experts who could help them navigate the regulatory environment.

    So, in 2020, McKinney created McKinney Regulatory Science Advisors (McKinney RSA). The business comprises a consortium of individuals with rich experience in tobacco or a deep background in a relevant scientific field. “For example, one advisor is a former reviewer at the FDA,” says McKinney. “We also have a Harvard-trained behavioral scientist [who is also a frequent editorial contributor to Tobacco Reporter]—so we can help clients take their products all the way from concept to market.”

    According to McKinney, the services of McKinney Specialty Labs nicely complement those of the consultancy. “We can not only help clients design their studies but also execute them; we can guide them through the entire process,” he says. “For clients who choose to leverage those synergies, it’s a one-stop shop.”

    McKinney stresses that clients need not be concerned about the confidentiality of their data when the consultancy and lab work together. “Many labs generate data for multiple competitors and manage to maintain confidentiality,” he says. “McKinney RSA has served competitors while maintaining confidentiality, and so has this lab under its previous ownership. We have robust systems in place to maintain confidentiality. Plus, the only time the consulting firm is involved is when the client wants its services; the synergies are only leveraged at the client’s request.”

    So far, clients appear to be comfortable entrusting their analytical work to McKinney Specialty Labs. “We are kept in business by a combination of regulation and R&D,” says McKinney. Cigarette and cigar testing is in steady demand due to regulatory requirements. On top of that, McKinney Specialty Labs has seen an uptick in interest for services related to ENDS and modern oral products. Interestingly, demand comes not only from the independent companies that drove the ENDS revolution but also from the established tobacco companies. Even though the big companies have the resources to do their own testing, they also outsource some of that work, as a spot-check on their own methods, for example.

    Building on a Solid Foundation

    While it’s still early days for McKinney Specialty Labs, the company says it is well on its way to realizing its initial goals. Because the facility had a great reputation already, McKinney’s first priority was to retain the talent. “We wanted to make sure that it would be a smooth transition for the employees, so the workforce was an important consideration during the negotiations: What were their needs? Could we match existing benefits?” says McKinney. The firm’s focus paid off, with nearly 100 percent of the workforce opting to continue with the new organization, according to McKinney. Other changes were on the administrative side. Because the lab previously was part of a larger organization, McKinney had to recreate some infrastructure, such as payroll systems.

    Now the company is doing a “deep dive” into how it can be more efficient. “Having been a lab client, I know what it’s like from the clients’ perspective; I know the challenges and opportunities that exist within the lab, so that’s a benefit,” says McKinney.

    Of course, even the best equipment, the most qualified scientists and the greatest levels of efficiency cannot guarantee success. The regulatory environment for nicotine products, says McKinney, has been “fluid” to say the least, making it extremely challenging for manufacturers to bring new products to market. “However, we pay very close attention to regulatory decisions and, importantly, why decisions are made. Then we leverage that information to decrease the probability of failure.”

    Looking forward, McKinney Specialty Labs plans to keep pushing the envelope. “Tobacco is a very specific industry, but the testing of complex aerosols has other applications as well,” says McKinney. “Cannabis, for example, is an interesting market. It is not clearly regulated, and knowledge is lacking. We see that as an opportunity to raise awareness of our capabilities. The nicotine experience rolls right over. Cannabis oils are thicker than what we are used to, but we have the expertise to figure it out. We can start developing and validating methods so that when federal regulations come into place, we should be ready to go.”

    Regardless of the services that the laboratory may add to its portfolio in the future, McKinney intends to offer his clients the same levels of confidence and confidentiality that his clients in the nicotine industry have become accustomed to. For each sector, he says, the company’s objective will be the same: “Our goal is to be a client-focused organization and deliver a quality product in a timely manner.”

  • Breaking Through Barriers

    Breaking Through Barriers

    Photos: Timothy Donahue

    Cuba’s cigar industry is on the road to recovery after several challenging years.

    By Timothy S. Donahue

    The Cuban cigar industry made huge profits last year, but it wasn’t because it produced more cigars. While the impacts of the pandemic, the weather and the scarcity of almost everything are overwhelming, the Cuban people and its tobacco industry are finding ways to endure. The cigar industry mirrors the country as a story of overcoming adversity and sowing the seeds of a hopeful new beginning.

    When Hurricane Ian’s winds began to howl in September 2022, they caused significant damage in the Pinar del Rio region, Cuba’s most prominent tobacco-producing province. The storm eviscerated crops and flattened 90 percent of the tobacco curing barns and other farming infrastructure needed to grow tobacco. The destruction came on the heels of the Covid-19 pandemic, which had already brought the worst economic suffering Cuba had seen in decades.

    Recovery has been slow, but Cuba has endured. While this year’s tobacco crop is the worst in the written history of the island’s tobacco crops, Cuba’s newspaper, Granma, reported earlier this year that 4,776 barns have been rebuilt, and another 620 are being completed. Luis Sanchez-Harguindey, co-president of Habanos, the state-run global distributor of Cuban cigars, said during a press conference at the 24th annual Festival del Habano that Cuban growers had also focused resources on their most efficient, volume-producing farms.

    “This growth factor has also been due to the enhancement of all the supply chains and the great effort done by Tabacuba, the producers, the tobacco growers, who, after the pandemic and the hurricane, have been increasing production,” he said. “We have a better group of products [we now can produce]. And these products that we offer, of course, do not satisfy the demand for the products yet.” He explained that the combination of increased demand and lower supply has been one reason for this year’s record growth.

    As the 2023–2024 growing season closed, a representative of Grupo Empresarial Tabacuba—the state-run company charged with managing the production of Cuban tobacco and cigars—told Tobacco Reporter that only two-thirds of the pre-hurricane tobacco hectarage was used for tobacco cultivation this season. Tabacuba said it reduced its targeted goals for the 2023–2024 harvest from the planned 12,905 hectares to 10,200; however, the amount of land used to grow tobacco is expected to return to pre-hurricane levels for the 2024–2025 season.

    “Today, we have a great [percentage] of this infrastructure operating at 100 percent. This has been possible because we quickly had all the necessary resources to build a workforce, a specialized labor force that can rebuild everything that had been destroyed,” Sanchez-Harguindey said. “There are still some minimally damaged areas. It is mainly issues related to construction [acquiring supplies]. Tabacuba has a policy to concentrate production with tobacco growers that traditionally produce higher yields and better quality. This has been possible during the year 2023. The impact, the result of all this work, is unprecedented growth in revenues over 2022.”

    Getting a Boost

    Sanchez-Harguindey said that while the farms produced less tobacco in 2023, Habanos achieved a major increase in the value of its cigars due to a new pricing structure and successful promotions of exclusive brands such as Trinidad and Cohiba. “We’ve been able to compensate for that reduction in volume with value,” he said.

    Habanos earned revenues of $721 million in 2023, up 31 percent compared to the previous year. Last year, the company generated $545 million in revenue, nearly 2 percent more than in 2021. “This is a year of records,” Sanchez-Harguindey said at the Festival del Habano, which took place Feb. 26—March 1.

    The company’s products are available on five continents. During 2023, the markets that contributed most to Habanos’ sales volume were Spain, France, China, Germany and Switzerland. Habanos is owned 50 percent by the Cuban government and 50 percent by a consortium of Asian investors under the umbrella of companies called Allied Cigar Group, which is rumored to be majority-owned by HuaBoa, a major Chinese tobacco flavoring company. By region, Europe remains the leading market for Habanos, accounting for 56 percent of total sales value, followed by Asia (21 percent), the Americas (13 percent) and Africa and the Middle East (10 percent).

    In 2023, the company launched 31 new products, including Cohiba Siglo de Oro, Cohiba Ideales, Romeo y Julieta Cupidos, Hoyo de Monterrey: Monterrey No. 4, and Bolivar New Gold Medal. With its 27 marcas and a presence in more than 130 countries, Jose Maria Lopez Inchaurbe, vice president of development for Habanos, credited the company’s success to “excellence, tradition and innovation.” A more obvious answer for the revenue jump is the boost in Cuban cigar prices globally. Habanos, said Lopez Inchaurbe, has transformed the Cuban cigar into a luxurious, high-end smoke in global markets, especially in China.

    During the media portion of the festival, several reporters asked for clarification of Habanos’ revenues. Andrea Rodriguez, from the Associated Press, questioned how revenues went from 2 percent in 2022 to 30 percent this year. Lopez Inchaurbe said that there are different reasons to justify the growth. He said, “It’s a reality that after the pandemic, both the luxury market and the consumption of premium goods around the world have been increasing considerably,” and that demand has been global.

    Lopez Inchaurbe said that the company also positioned its “super-premium” segment (Cohiba and Trinidad) more prominently and promoted the brands heavily in markets where luxury cigars are in greater demand. There has also been an increase in limited-edition cigar releases. “In the year 2023, we have launched 32 new products, nine of them in the premium standard category, which is the permanent portfolio of Havana, and 22 of them are in the concept of specialties,” he explained.

    In 2022, Habanos announced a new “global pricing standard,” which massively increased the prices of Cuban cigars worldwide. The company has already announced at least two additional price increases for 2024. The price increases have significantly impacted the costs of Cuban cigars. Five years ago, the Cohiba Siglo IV, the flagship of the Cohiba brand, cost less than $60 a stick. Today, the cigar costs nearly $400 a stick in most markets. However, not all markets are treated equally.

    Store shelves in Cuba were not heavily stocked during Tobacco Reporter’s visit. Finding large-ring-gauge cigars or anything with a Cohiba or Trinidad label was also difficult. Many local cigar shops in Havana said that they had not received shipments in more than a year, and some La Casa del Habanos (LCDH) locations said that it had been at least nine months since they had a cigar delivery. For the festival, however, every shop seemed to have received shipments of varying vitolas and marcas. Many shops had the new Romeo y Julieta Cupidos, 20 for $1,600, and boxes of the new Cohiba Siglo de Oro, priced at $4,500 for 18 sticks ($250 each).

    An interesting, unusual occurrence was the introduction of a new POS system for payments during the festival. This system now allows Americans to purchase Cuban cigars (for consumption while on the island) with their U.S.-based credit cards, which has long been impossible. However, it is unclear whether this is a coincidence or if it was a permanent addition to the Cuban payment system. Tobacco Reporter was told that the new payment system is currently being used in only two of the LCDH stores in Cuba; however, it is expected to expand to all LCDH locations.

    The Featured Event

    In the past, registration for the Habanos Festival opened months before the event. However, last year, registration opened a mere 40 days before the event, and this year, Habanos gave attendees only 27 days to register. Overall, this year’s festival was better than most. The entertainment was spectacular, and the cigars were the best in the world.

    Habanos celebrated several milestones this year, including the company’s 30th anniversary, the 50th anniversary of the Quai d’Orsay brand and the 55th anniversary of the Trinidad brand. Featuring an estimated 2,200 attendees and more than 200 journalists, the festival is where Habanos showcases its assets and previews a number of its major releases every year. The festival features multiple seminars, epic dinner events centered on various brands, and a trade show with over 200 exhibitors.

    Traditionally, Tuesdays are reserved for trips to Pinar del Rio, Cuba’s legendary tobacco-growing region. While many media attendees visited the famed Vegas Robaina farm, Tobacco Reporter visited a smaller farm in San Juan y Martinez, often called the “Mecca of tobacco.” The fields looked exceptionally healthy, with broad, green leaves. The curing barns had been freshly painted, and the workers seemed vibrant and plentiful. The barns were in the process of being filled.

    This year, attendees were also allowed to roll a cigar alongside professional rollers at one of five factories. It marked the first time the festival hosted its master rolling class in the same buildings where Habanos cigars are produced. Daymi Difurniao Rodriguez, communications and marketing specialist for Habanos, said that the venue change was to allow more attendees to learn firsthand about the “Totally by Hand” production process of a Habano.

    “I wanted the press to make their own Habano so they could understand the details and intricacies involved in creating the Habanos, the world’s finest cigars,” said Difurniao Rodriguez.

    The torcedor (cigar roller) who taught the El Laguito class was quality specialist Ana Isel Mederos Cano. She is also a nominee for the Habano Woman of the Year award in the production category for the festival. She has been at El Laguito for 25 years, 11 of them as a roller and the past 14 in her current position. “I love that I have been given this opportunity to teach the art of cigar rolling to the representatives of media from around the world,” she said.

    Visitors had the opportunity to visit the La Corona, Partagas, H. Upmann and Carlos Balino factories. El Laguito was for media only. La Corona has about 750 employees, 300 of whom are dedicated rollers. The rollers produce brands such as Hoyo de Monterrey, Montecristo, Cuaba, Diplomaticos and San Cristobal de la Habana.

    The H. Upmann factory produces H. Upmann, Montecristo, and Romeo y Julieta and several sizes of Cohiba. Partagas is one of Havana’s iconic factories, and Carlos Balino is the former El Rey del Mundo factory. The legendary El Laguito is home to Habanos’ premier marcas, Cohiba and Trinidad.

    As in previous years, the Gala Dinner takes place during the final night of the Habanos Festival. It includes the presentation of the prestigious Habanos Awards and the auction of several elaborate humidors. The proceeds from the auction are donated to the Cuban Public Healthcare System.

    This year’s auction included seven humidors, one for each of the company’s six global brands: Cohiba, H. Upmann, Hoyo de Monterrey, Montecristo, Partagas and Romeo y Julieta. Additionally, one humidor was dedicated to the 55th anniversary of the Trinidad brand. Eight lots were sold for a combined €17.8 million ($19.3 million), setting a record for the auction.

    The headliner for the festival’s gala dinner was none other than the Village People. As the crowd swayed to hits such as “YMCA” and “Macho Man,” the challenges of growing and selling cigars, and surviving in the country, could be forgotten for a while.

  • Green Pact

    Green Pact

    Greenbutts’ product is sold in bulk or as ready-made rods of filters and filter tips. Photo: Greenbutts

    Filtrona partners with Greenbutts to expand its range of sustainable filter offerings.

    By Stefanie Rossel

    Discarded cigarette butts are a major source of plastic pollution. Of the more than 5 trillion cigarettes produced globally per year, an estimated 4.5 trillion end up in the environment, with 40 percent making their way into our oceans and waterways. Smokers often are unaware that the products will not decompose. While most of a cigarette’s components disintegrate quickly when disposed of, the filter will not. Around 98 percent of cigarette filters consist of cellulose acetate (CA), a polymer that is very slow to degrade in the environment. Depending on the environmental conditions, a CA cigarette filter can take up to 14 years to degrade.

    While littering is illegal in many jurisdictions, the potential penalties, which can include fines, cleanup, community service or imprisonment, are insufficient to deter many consumers.

    By banning single-use plastics, such as disposable plastic cutlery, fast food packaging or cups, from July 2021, the European Union became a forerunner in the fight against marine litter and plastic pollution with its Single-Use Plastics Directive (SUPD). While the legislation does not prohibit CA cigarette filters, it has established extended producer responsibility schemes (EPR) requiring tobacco companies to tackle the single-use plastic pollution generated by the filters they put on the market.

    Although a February 2023 report by Rethink Plastic Alliance and other NGOs noted significant delays in implementation, the SUPD definitely helped trigger a rethink within the tobacco industry on the sustainability of its products. Experts believe that environmentally friendly filter solutions will be the next big thing in the industry, and they may be right.

    In February 2022, the United Nations Environment Programme partnered with the Secretariat of the World Health Organization Framework Convention on Tobacco Control to raise awareness and drive action on the environmental and human health impacts of microplastics in cigarette filters, which it designated as a form of single-use plastic. One month later, the U.N. Environmental Assembly adopted a resolution to draft a legally binding U.N. treaty on plastic pollution, which addresses the full life cycle of plastic, from production to product design to waste management. Public health organizations around the world argue that the Intergovernmental Negotiating Committee for the plastics treaty, the fourth session of which will be held this April, must consider a ban or strict regulation of all single-use plastics as a necessary measure to reduce pollution.

    Joining Forces

    Robert Pye

    To meet the growing demand for biodegradable filters, Singapore-based specialty filter manufacturer Filtrona in October 2023 announced a partnership with Greenbutts of California. Greenbutts has developed a patented substrate and filters that are made of all-natural, food-grade fibers, such as abaca fiber, cotton flock and industrial hemp as well as a starch-based binder, which debuted on the market in 2019. The product is sold in bulk or as ready-made rods of filters and filter tips.

    “Filtrona’s collaboration with Greenbutts strengthens our support for our customers in helping them shift away from CA to more sustainable materials,” says Filtrona CEO Robert Pye. “As a major supplier to this industry, we are committed to help companies move into more sustainable solutions while ensuring they get the supply. Filtrona will continue to invest in our equipment and technology as we continue our research in alternative materials. Together with our partners and suppliers, we are ready to help our customers make the transition to plastic-free filter solutions. We have expanded our portfolio by adding Greenbutts filters to our ECO Range portfolio, thus providing a wider array of tailor-made solutions to address specific customer requirements in certain territories/markets.”

    According to Pye, Filtrona alone can currently not meet the volumes required for sustainable filter conversion. “Filtrona currently works with various suppliers to select the most appropriate materials to create sustainable filter solutions that meet the unique requirements of our customers. We are constantly scouting the market for new, innovative materials. To give our customers wider options, we will offer Greenbutts filters that can be customized according to various product specifications.”

    Under the joint development agreement, Filtrona will lease a machine from Greenbutts to produce biodegradable filters using proprietary technology. The company aimed to have the machine at its site in Greensboro, North Carolina, USA, by the end of February and begin production shortly thereafter.

    The U.S. has been chosen as a location because the state of New York recently reintroduced the Tobacco Product Waste Reduction Act to the State Senate. The act would prohibit the sale of cigarettes using single-use filters as well as ban the sale of single-use electronic cigarettes. “With New York having proposed a law that would ban the sale of single-use filtered cigarettes and single-use e-cigarettes, we believe North America will eventually follow the EU in implementing the SUPD and EPR in the future,” Pye says. “We want to be ahead of the curve while expanding our capabilities to make our ECO Range available globally.”

    Greenbutts has developed a patented substrate made of all-natural, food grade fibers. Photo: Greenbutts

    Significant Market Potential

    For the time being, biodegradable filters remain more expensive than CA varieties, but this may change as output increases. “Globally, consumers and regulators are pushing for more environmentally sustainable solutions and biodegradable products,” says Pye.

    “Consumers are increasingly seeking sustainable products while tobacco companies want to be compliant to regulations by reducing the use of single-use plastics and be the first to market sustainable, plastic-free products. But having said that, pricing is still an important factor and will be affected by the scale of production. As the production of biodegradable products grows, we expect prices to become more competitive.”

    Beyond the U.S. and Europe, Pye sees potential for environmentally friendly filter solutions in Indonesia, where Filtrona is already supporting the kretek cigarette market with its ECO Range of filter solutions. He also anticipates increasing demand for sustainable filters for heated-tobacco products (HTPs). “We offer a range of patented sustainable HTP filter solutions that has a carbon footprint that is four times lower when compared with a similar offering made with CA, in line with our commitment to develop more renewable, degradable and sustainable products,” says Pye. “We see it as a logical next step for the HTP category to evolve as the market continues to grow rapidly. Filtrona is also at the forefront of revolutionizing the botanicals sector with our sustainable and compliant ECO Range.”

  • System Overload

    System Overload

    The broken U.S. new tobacco product application process revealed by the numbers

    By Steven McDonald

    “How long will it take?” is a question often raised by project managers and executives alike. Typically, a reasonable estimate can be generated, but when it comes to predicting the time it will take for a review of a tobacco product application with the U.S. Food and Drug Administration’s Center for Tobacco Products (CTP), any time estimate is met with skepticism.

    The CTP provides performance metrics for new tobacco product applications, which were evaluated for this article to determine if the time an application meanders through the regulatory pathways could be deduced. The backlog of applications brings into question the agency’s capabilities of managing its processes and ability to conduct timely reviews. Unfortunately, the backlog distorts the CTP’s internal process data for reviews and obfuscates the time estimation for a submission. In addition, significant gaps in the data do not allow for robust deductions.

    Following is an overview of the steps for the different regulatory pathways, the collection and evaluation of the CTP’s (performance) metrics and reporting data, and the ramifications thereof for future submissions. Readers should be aware that the CTP’s past performance may not be an indicator of future results.

    Application Process and Performance Metrics

    In 2009, Congress passed the Family Smoking Prevention and Tobacco Control Act, which gave the FDA broad authority to regulate the manufacturing, distribution and marketing of tobacco products. This includes decisions on whether new tobacco products can be marketed and evaluation of new tobacco product applications.

    New tobacco products can be submitted for review through three pathways: substantial equivalence (SE), exempt from SE (EX), or premarket tobacco product application (PMTA). A fourth submission type, modified-risk tobacco product application, is not a pathway for new tobacco products but a pathway to obtain permission to make advertising “claims” specific to a particular product.

    Historically, the applications accepted through the SE and EX pathways have been for cigarettes, smokeless tobacco and roll-your-own products. In August 2016, the FDA’s tobacco authority was extended to all “deemed” tobacco products, including electronic nicotine-delivery systems (ENDS), cigars, hookah and pipe tobaccos. In addition, in 2022, Congress passed a law clarifying the FDA’s authority to regulate tobacco products containing nicotine from any source (nontobacco-derived nicotine (NTN)). The vast majority of applications in the PMTA pathway have been for ENDS. Both the deeming rule and the NTN law led to a crushing number of new product applications submitted to the FDA in 2020 and 2022, respectively.

    The CTP posts the estimated number of submissions that are currently at each step on a somewhat regular basis and then publishes the totals for the fiscal year. Unfortunately, the level of detail provided and the frequency for the updates has not been consistent. However, by making use of the currently available information (through fiscal year 2023), annual values for the process steps can be estimated. The data and information, primarily gathered from the Tobacco Product Applications: Metrics and Reporting webpage was collected and compiled for SE, EX and PMTA submissions. For new tobacco product applications, the procedures for the SE and EX pathways are identical, and the PMTA pathway includes an additional step: acceptance review, filing review (PMTA only), scientific cycle reviews and determination.

    The enormous number of submissions from fiscal years 2020 and 2022 is working its way through the system, evident from the data, but the backlog indicates that the review process may have overwhelmed the CTP’s capabilities and distorts the internal process data.

    Substantial Equivalence

    The data for SE is provided in Table 1 for the calendar years 2013–2016 and the federal fiscal years (October to September) hence. It is assumed that these values for SE, in particular, marketing orders, Not Substantially Equivalent (NSE) Orders and Withdrawn, include the provisional SE report applications. Briefly, a “provisional tobacco product” is one that was introduced between Feb. 15, 2007, and March 22, 2011, and for which a provisional SE report had been submitted on or before March 23, 2011. The final three rows, Estimated Administrative (Admin) Backlog, Estimated Office of Science (OS) Backlog and Estimated Total Backlog, are calculated values derived from the data provided. Since there may be additional (unreported) applications, these estimates should be considered conservative.

    Table 1: Annual Data for Substantial Equivalence

    The metrics are divided into the different phases of the regulatory process: administrative review of the submissions (Accepted, Refuse-to-Accept, Total Received), determinations (Marketing Orders, NSE Orders, Withdrawns) and the calculated values (Total Final Actions, Estimated Admin Backlog, Estimated OS Backlog, Estimated Total Backlog).

    The calculated values for Total Final Actions are annual determinations: the sum of RTA, SE, NSE and Withdrawn. The remainder of the calculated values (Backlogs) should be considered estimates as the data missing from prior years may impact the accuracy of the results.

    The Estimated Administrative Backlog is a cumulative value, the difference between those applications received and those processed (Accepted or Refused). For example, the Estimated Administrative Backlog for fiscal year 2021 includes the values from fiscal years 2020 and 2021. The Estimated OS Backlog is calculated similarly, beginning in fiscal year 2020, as the difference between those applications accepted to be reviewed and those with determinations (SE, NSE or Withdrawn).

    Of note is the over 7,000 applications received by the CTP in 2020, which was likely due to the court-ordered submission deadline for newly deemed products such as cigars, pipe tobacco and waterpipe tobacco. Yet at the end of fiscal year 2021, the backlog of applications (neither accepted nor refused to accept) is less than 500. That number has since swelled to over 1,000, including over 100 submissions in fiscal year 2023 that remained unopened. In fact, during the October 2023 stakeholder engagement meeting, the CTP admitted that none of the SE reports submitted after Sept. 8, 2020, have undergone even an acceptance review.

    The thousands of applications from the Estimated OS Backlog and Estimated Total Backlog is staggering. This is in stark contrast to the few hundred Total Final Actions, interrupted only by a spike of Refuse-to-Accept determinations in fiscal year 2021.

    Using the historical CTP data and calculated estimates, projections for the CTP’s future throughput can be made. For example, it will take more than six years for the backlog of applications to work through the system with a 20 percent increase in staff and an insignificant number of future SE report submissions. In addition, if one considers a “first in, first out” application process, the time delay for a marketing order for any new SE report applications will be significant.

    Exempt from SE

    The annual data for Exempt from SE is provided in Table 2. The table structure and calculations are the same as Table 1. Similar to SE applications, the calculated Backlog values should be considered estimates as the data missing from prior years may impact the accuracy of the results.

    Table 2: Annual Data for Exempt from Substantial Equivalence (EX)

    The Estimated Administrative Backlog for fiscal year 2023 is less than 100 (during the October 2023 stakeholder engagement meeting, the CTP asserted that the EX backlog had been cleared). The Estimated OS Backlog and Total Backlog has been consistently over 1,000. This is in stark contrast to the few hundred Found Exempt Orders averaged annually.

    Calculated similarly as that of the SE report throughput (a 20 percent increase in staff and an insignificant number of future Exempt submissions), it will take 16 months for these applications to work through the system if the same rate for reviews is maintained. As with the SE applications, the large number from the Total Backlog suggests that the time delay for marketing orders for any new EX applications will be more than a year (but significantly less than an SE submission) if one considers a “first in, first out” application process.

    Premarket Tobacco Product Application

    The annual data for PMTAs is provided in Table 3. Again, the final three rows are estimates, calculated values derived from the data provided, and since there may be additional (unreported) applications, these estimates should be considered conservative.

    Table 3: Annual Data for Premarket Tobacco Product Application

    The metrics provided by the CTP are divided into the different phases of the regulatory process: administrative, filing and determination. A staggering number of applications were received in the fiscal year 2020 through 2022 time frame, and to date, nearly 25 million applications have been rejected without substantive review. The calculated values in the table are generated similarly as for the SE and EX tables.

    As the CTP has stated on several occasions (most recently on Jan. 22, 2024, in the press release announcing the marketing denial order (MDO) for flavored Blu e-cigarette products), the “FDA has received applications for more than 26 million deemed products and has made determinations on 99 percent of these applications.” The Estimated Admin Backlog at the end of fiscal year 2023 is over 60,000, and the Estimated OS Backlog is over 300,000. It is difficult to estimate the time for these applications to receive substantive review; however, if one considers the Marketing Granted Order (MGO) and MDO values from fiscal year 2022 as a guideline, values can be determined.

    Based on these estimated values, a modest 20 percent increase in staff, and a limited number of future PMTA submissions, it will take more than 16 years for the applications under scientific review (Estimated OS Backlog) to receive a determination. If one considers the Estimated Total Backlog of applications calculated with the same parameters, it will take nearly 30 years for all the currently submitted applications to receive a determination.

    Finally, the substantive review of the PMTAs for specific “covered applications” (brand names of Juul, Vuse, Njoy, Logic, Blu, Smok, Suorin or Puff Bar, and those that have a 2 percent or more sales volume as determined by Nielsen) is under a Maryland Federal District Court order (Am. Acad. of Pediatrics v. FDA (AAP), 379 F.Supp.3d 461, 492 (D. Md. 2019)). The original court-imposed deadline to complete the reviews was Sept. 9, 2021, which the agency was unable to meet. Based on the most recent (Jan. 24, 2024) status report filed with the district court, the CTP will take action on 100 percent of these applications by June 2024. This date has been pushed back on several occasions, indicating that even the CTP cannot predict how long it will take.

  • The Invisible Advantage

    The Invisible Advantage

    IQOS joined the Tobacco 10 ranking in 2023, achieving a brand value of $3.25 billion—higher than combustible brands such as Chesterfield or Rothmans. Photo: elenavah

    Intangible assets remain a major contributor to the real value generated by the tobacco industry.

    By Stefanie Rossel

    Brand value is a nonphysical asset but one of the most important issues for every brand owner. Brand valuations are used for several purposes such as tax calculation, finance and marketing. They function as interpreters between the language of marketers and finance teams and provide structure for both to work together to maximize returns. Measuring such intangible assets is complex—the most common metrics on which brand performance and thus brand equity can be judged include market penetration, frequency of purchase, repeat purchase, customer loyalty and the ability of a brand to command a price premium versus other brands in its sector.

    In 2023, the global value of intangible assets owned by the world’s largest companies stood at $61.9 trillion in 2023, up from $57.3 trillion one year previously, according to the Global Intangible Finance Tracker (GIFT) report, which is published annually by Brand Finance, an independent, U.K.-based brand valuation and strategy consultancy.

    While tech giants like Apple (with intangible assets of $2.7 trillion) and Microsoft ($2.3 trillion) continued to lead the pack in the 2023 analysis, last year’s most intangible sector in relative terms, with 91 percent of total enterprise value, was tobacco and e-cigarettes, as companies invested heavily in proprietary technology and patented intellectual property around vaping devices to drive growth, according to Brand Finance.

    In the company’s Tobacco 10 ranking, Marlboro remained the undisputed leader with a brand value of $34.74 billion followed by Pall Mall ($6.54 billion) and L&M ($6.35 billion). The list is dominated by combustible brands, but there are two noteworthy exceptions—smokeless tobacco brand Copenhagen and heated-tobacco product (HTP) IQOS.

    Despite being the most intangible sector, tobacco products across all categories experienced significant brand value losses. “The performance decline witnessed in combustibles across extensive tobacco portfolios during the years 2022 and 2023 directly contributed to the decrease in brand value within our rankings,” explains Brand Finance’s global managing director, Richard Haigh. “Specifically, the decline in the volume sold of traditional oral cigarettes has been a consistent trend over the years. This can be attributed to reduced consumption and an accelerated shift in consumer preferences, leading to category switching. As we delve into the intricacies of this development, it becomes apparent that the challenges faced by combustible brands played a pivotal role in shaping the dynamics of brand value within the Tobacco 10 for 2023.”

    BAT’s $31.5 billion impairment on the value of some of its U.S. cigarette brands last December resonates with Haigh’s observations. “The decision to write down the value of some of its brands was a bold step for BAT because despite the short-term pain, the reality is that the market for cigarettes is shrinking, and pretending otherwise would be irresponsible on the part of management,” he says.

    Nevertheless, it is difficult to predict at this point who will need to follow BAT’s example. “The decision by BAT to impair its U.S. cigarette brands may not necessarily set a direct precedent for other companies. Each tobacco company’s considerations and actions are likely to be influenced by their unique brand portfolios, acquisition histories and strategic priorities within the evolving tobacco industry landscape.”

    Marlboro remained the undisputed leader in Brand Finance’s tobacco ranking, with a brand value of $34.74 billion. Photo: jetcityimage

    A Win-Win Move

    In the GIFT ranking, BAT retained its position as the most intangible entity within the sector, boasting a total intangible value of $135.2 billion despite several acquisitions by its competitors. According to Brand Finance, China National Tobacco Corp. (CNTC) stood out in the 2023 GIFT study for accumulating substantial disclosed intangibles and goodwill. Its position was bolstered by its $63.4 million acquisition of China Tobacco International Brazil in late December 2021. Similarly, Philip Morris International’s acquisition of Swedish Match added approximately $18 million in goodwill and intangible assets to its financial statements.

    “The acquisition of Swedish Match by Philip Morris International has proven to be mutually beneficial for both companies,” says Haigh. “PMI gains access to significant smoke-free brands, enriching its portfolio, while Swedish Match benefits from the resources and expertise offered by a larger organization. An intriguing aspect of this acquisition is the creation of an impressive, combined portfolio of smoke-free brands.”

    He adds that the Tobacco 10 2023 ranking, which closely followed the November 2022 acquisition, did not show immediate noticeable impacts on the brand values of Swedish Match. “It was considered too early to discern any substantial changes. The anticipation now shifts to the upcoming 2024 tobacco ranking, where the performance of Swedish Match within this context will be pivotal in assessing the positive impact on both the financial and brand value performance for both Swedish Match and PMI. This evaluation will shed light on the effectiveness and synergies generated by the acquisition, providing valuable insights into the long-term implications for the brands involved.”

    “The decision by BAT to impair its U.S. cigarette brands may not necessarily set a direct precedent for other companies.”

    On the Way Up

    Even before its takeover of Swedish Match, PMI succeeded in building a valuable reduced-risk brand. In 2023, its HTP IQOS joined the Tobacco 10 ranking for the first time, achieving a brand value of $3.25 billion—higher than combustible brands such as Chesterfield or Rothmans. In the 2024 ranking, IQOS has climbed three spots following an 8 percent brand value increase, Haigh points out. “The brand is currently valued at $3.5 billion. This notable increase is attributed to robust performance in the recent financial year. The brand has demonstrated improvement in revenues, expanded market share and witnessed a significant influx of customers switching to IQOS. These factors collectively contribute to the upward trajectory of IQOS in terms of brand value since its initial tracking in 2020.”

    There is, however, still a substantial gap in terms of brand value between IQOS and Marlboro, which is valued at $32.5 billion in this year’s ranking. Since 2015, Marlboro has maintained its position as the world’s most valuable tobacco brand, and its resilience is evident, as the company celebrated its 50th anniversary in 2022, he says. “Despite recent challenges, such as disposable income pressures in various markets and the impact of cannibalization from IQOS, Marlboro has demonstrated enduring strength.”

    The considerable difference in brand value between the two products is attributed to Marlboro’s extensive market presence, reflected in higher shipment volumes and revenue generation within the Philip Morris portfolio, Haigh explains. “Although IQOS exhibits consistent growth, surpassing Marlboro in brand value necessitates a substantial increase in its revenue contribution within the PMI portfolio. As IQOS continues to expand its market share and revenue, the potential for it to catch up with or overtake Marlboro in brand value remains contingent on its sustained growth and further integration within PMI’s overall portfolio. The journey to equivalence or overtaking Marlboro is a dynamic process, influenced by various factors that will shape the evolving landscape of PMI’s brand portfolio in the coming years.”

    CNTC stood out in 2023 for accumulating substantial intangibles and goodwill.

    There’s Value in Alternatives

    So far, no vape product brand has made it onto Brand Finance’s Tobacco 10, which, according to Haigh, has been dominated by combustibles, traditional oral and smoke-free brands since 2015. The market for reduced-risk products (RRPs), in particular e-cigarettes, is highly fragmented. Since their first introduction to the market 20 years ago, a myriad of smaller brands has emerged, manufactured by smaller players, among them, only very few iconic ones.

    However, there has been a gradual but steady entry of smaller RRPs into the rankings, says Haigh. “While the Tobacco 10 ranking primarily features established names, it is noteworthy that smaller players in the reduced-risk product category are gaining visibility in our rankings,” says Haigh. “Notable examples include IQOS, Glo (brand value $2.3 billion in 2023), Vuse ($1.4 billion) and Velo ($580 million). These brands, although not reaching the high values necessary to secure a spot in the top 10 globally, have made a significant impact on the market and our ranking. Over the past three years, all these brands have exhibited double-digit growth, reflecting their increasing presence in markets and contributing to their upward trajectory in our ranking. While their individual brand values may not place them among the top 10, the consistent growth signifies a notable trend in the industry. This gradual ascent of reduced-risk products and the sustained growth of these brands underscore their evolving significance in the market and their potential to further reshape the dynamics of the tobacco industry in the coming years.”

    Establishing an iconic e-cigarette brand necessitates a dual focus, Haigh stresses, judging from his experience of evaluating the prominence of e-cigarette brands within leading tobacco companies. “It requires technological advancement, involving continuous product development and research and development. Simultaneously, building a robust online presence across multiple channels emerges as a crucial strategy to drive sales and effectively capitalize on the growing market demand for these products.”

    With combustible cigarettes experiencing declining volumes, smoke-free products have been consistently ascending in rankings over the last three years.

    Remaining Agile

    The report underscores that despite increasing regulations on traditional tobacco products in developed markets, e-cigarettes remain in a nascent stage and are currently generating high intangible value. “This is primarily due to the lack of marketing regulations governing these products,” says Haigh. “The absence of stringent rules allows e-cigarette manufacturers to continuously iterate on device design, flavors and other product attributes, enhancing appeal and driving sales growth.” Of course, this sector’s outlook may be dampened by anti-tobacco harm reduction sentiments, especially in the wake of the recent Conference of the Parties to the World Health Organization Framework Convention on Tobacco Control.

    “As e-cigarettes are currently enjoying high intangible value partly due to a lack of marketing regulation, any future regulations may influence the competitive landscape and strategies of tobacco companies, potentially affecting the brand value of RRPs,” says Haigh. “The ability of companies to adapt their marketing approaches and navigate evolving regulatory environments will likely play a crucial role in determining the impact on brand value in the realm of RRPs.”

    In the near term, Haigh expects the development of nicotine brands’ value to undergo several significant shifts as global cigarette sales volumes continue to decline. “With combustible cigarettes experiencing declining volumes, smoke-free products have been consistently ascending in rankings over the last three years,” says Haigh. “This ascent is driven by their increased market share and revenue generation, signaling a notable trend in consumer preferences toward reduced-risk alternatives.”

    Business model transformations will become another important factor. In response to the risk posed by declining shipments and revenue in the traditional cigarette market, companies are actively initiating transformations in their business models. “This involves a strategic shift toward becoming truly multi-category consumer products businesses,” says Haigh. “By diversifying their product portfolios to include smoke-free alternatives, companies aim to adapt to changing consumer demands and mitigate the impact of declining cigarette sales.”

    Finally, tobacco companies will likely place greater emphasis on sustainability. “Consumers are prioritizing sustainable practices, and major tobacco companies are responding accordingly,” says Haigh. “Initiatives such as sustainable farming and waste reduction are being embraced, exemplified by [BAT’s] hiring of its first chief sustainable officer in late 2022. Similarly, Philip Morris International has introduced a bespoke sustainability index, demonstrating a commitment to measuring its ESG performance.”

  • A New Reality

    A New Reality

    Photo: Delovoy Petersburg

    Two years into the Ukrainian conflict, tobacco businesses still scramble to adapt.

    Contributed

    Since Russian forces crossed the Ukrainian border on Feb. 24, 2022, tobacco business on both sides of the conflict has been a roller-coaster ride. As the second anniversary approaches, tobacco companies have yet to fully adapt to the new reality.

    In 2022, sweeping Western sanctions triggered massive disruptions in the supply of raw materials for tobacco factories in Russia and Belarus. The logistics havoc that followed the first EU sanctions packages took a heavy toll on production costs. Besides, the restrictions directly prohibited the delivery of some raw materials to the country.

    Nearly two years since, this issue is yet to be fully solved, according to Sergey Glushkov, head of the communications department at Japan Tobacco International Russia.

    “Two years ago, 100 percent tobacco and more than 90 percent of nontobacco materials were produced abroad. However, after necessary raw materials were included in the list of dual-use products and were placed under the U.S., EU and Japanese sanctions, tobacco companies operating in Russia started diligently looking for suppliers in China, India and other markets,” Glushkov said on the company’s social media networks in Russia.

    In addition, to mitigate risks, the company puts a lot of effort into import replacement. JTI Russia has localized foil, plastic film, cardboard packaging, most paints and some raw materials. As a result, the share of localized raw materials has nearly tripled compared to pre-sanction times, though it is still falling miles short of the desired level.

    Raw material supply is still a pressing issue, which is far from being sorted out, Glushkov admitted.

    There are many reasons why sanctions keep executives of the Russian tobacco factories awake at night. As Western technologies are no longer available on the Russian market, modernization issues also come to the fore.

    Some necessary equipment and production lines are nearly impossible to get, Glushkov stated, adding that this situation might push factories to somehow rejiggle operations. He didn’t elaborate, only admitting that this would incur costs.

    Numerous reports indicated that Russian businesses find creative and effective ways of circumventing Western sanctions, sourcing necessary raw materials in third countries like Turkiye, China, Kazakhstan and Georgia.

    However, as Western countries double down on their efforts to close the existing loopholes allowing Russian firms to bypass the restrictions, this work is growing trickier by the day. U.S. President Joe Biden signed an executive order in December announcing secondary sanctions on foreign banks suspected of supporting Russia’s campaign in Ukraine.

    This move has seemingly hit the target, as banks in Turkiye, one of the largest hubs for re-exporting Western goods to Russia, have started closing Russian corporate accounts following threats of secondary sanctions from the United States, the local press reported, citing market players.

    There are problems in China as well. A major Chinese bank for Russian importers, Chouzhou Commercial Bank, ceased operations with Russian and Belarusian companies. Occasional reports indicate difficulties Russian business has in other jurisdictions.

    In Ukraine, plans are drafted to move cigarette factories to safer territories (Photo: Fifth Channel)

    Seeking a Safe Harbor

    On May 28, a kamikaze drone hit Imperial Tobacco Group’s factory near Kyiv, Ukraine. Although the destructions reportedly were insignificant, this event once again reminded foreign investors operating in the country that in the context of constant shelling, no place can be considered entirely safe.

    Imperial Tobacco Group resumed operation soon after the Russian troops fell back from Kyiv. Galina Vorobieva, director of Imperial Tobacco Production Ukraine, claimed that the company faced a hard choice whether to resume operation, as safety risks were undeniable.

    Plans were drafted to move the production to a Western region, which is considered safer, but the wheels are yet to be set in motion.

    Philip Morris International, in turn, has recently confirmed plans to build a new cigarette factory near Lviv, not far from the Polish border, to manufacture around 7 billion cigarettes per year.

    Maxim Barabash, director of Philip Morris Ukraine, explained that the company is primarily driven by safety concerns, as the factory in Kharkiv in the eastern part of Ukraine sits too close to the battlefields.

    The Ukrainian authorities estimated that every third building in Kharkiv had been damaged by shelling. For this reason, putting the local factory into operation never seemed like a feasible option.

    “We understand that in the medium term, it will be challenging for us to put the Kharkiv factory back into full operation. And we need local production as soon as possible to meet the demand on the Ukrainian market,” Barabash told local press.

    In the good old days, the Kharkiv factory manufactured 20 billion cigarettes per year, of which nearly half was exported. It is hard to imagine this now, but a share even landed on the Russian market.

    The Lviv factory will manufacture less because export is not in the cards. Besides, the demand on the domestic market has plummeted by roughly a third as millions of Ukrainians fled from the country seeking shelter in the neighboring countries.

    The fate of the Kharkiv factory remains vague. According to Barabash, Philip Morris is not contemplating shutting it down completely, but the company also won’t need two production assets.

    Almost all smaller tobacco factories continue operation in the country despite multiple challenges, spanning from worsening labor shortage to waning demand and flourishing illegal trade. A recent report by the Kyiv School of Economy indicated that the share of the shadow segment of the cigarette market in Ukraine spiked to a record-breaking 20 percent.

    Illicit cigarettes remain a problem in both Russia and Ukraine. (Photo: Russian government)

    Looming Nationalization

    Since early 2022, all leading Western firms have been pressured to sever their ties with the Russian and Belarussian markets. Not all tobacco firms, however, were quick to do so.

    In August 2023, Ukraine’s National Agency on Corruption Prevention even added Philip Morris International and Japan Tobacco International to the list of “international war sponsors” for not pulling a plug on Russian operations. The Ukrainian government agency claimed that both companies generated solid revenue in Russia and kept paying taxes to the Russian budget.

    Imperial Brands was the first of the global tobacco firms to leave Russia in April 2022, followed by BAT in September 2023.

    JTI Russia decided to continue its business in the country to not deprive customers of the products they are accustomed to, Glushkov unveiled. Despite that, JTI will not introduce a new generation of tobacco-heating devices to the Russian market. JTI also complies with all regulatory rules when working on the Russian market, Glushkov emphasized.

    In March 2022, JTI announced that it suspended new investments and marketing activities in Russia. In April 2022, the company claimed it mulled various options for developing its business in Russia, including transferring it to new management.

    Negotiations on the sale of PMI’s Russian business have reached a dead end, Jacek Olczak, CEO of PMI, told the Financial Times in February 2023. He explained that PMI’s position was that it would rather keep its business in Russia than sell it on unfavorable terms, at an unfair price to shareholders.

    However, the reality is that Western firms running business in Russia no longer have an option to sell it, at least under reasonable terms. Since the middle of 2022, the Russian authorities have been consistently tightening screws for the foreign companies seeking an exit from the market.

    In October 2023, the Russian government stipulated that to sell Russian assets, investors from the countries deemed as unfriendly will need to make a voluntary contribution to the Russian budget comprising at least 15 percent of the cost of the deal. During the previous year, this contribution was limited to 10 percent.

    Besides, the Russian government commission on foreign assets requires Western firms to offer a nearly 50 percent discount on their assets for the deal to get a green light from the Russian regulator.

    However, even fulfilling these terms doesn’t guarantee a success. In July 2023, Russian President Vladimir Putin signed an order to nationalize the Russian operations of Danone and Carlsberg—both companies were working on selling their Russian assets.

    The move, among other things, has largely discouraged other foreign firms from executing their exit plans. The threat of forced nationalization has been looming over assets of foreign firms during the past two years.

    The Russian tobacco industry must be nationalized, claimed Biysultan Khamzaev, a member of the State Duma Committee on Security and Anti-Corruption, in an interview with state press on Jan. 19, 2024.

    “I would nationalize [assets of] all tobacco corporations in Russia. I would do it following the example of China. They established the China National Tobacco Corp. The system should be in the hands of the state, not private corporations. But it turns out that they earn money while the burden on the state, healthcare and social services rise,” Khamzaev said.

    Although the public attention to hostilities in Ukraine has tangibly diminished, the challenges they brought to the tobacco business are still as real as ever. As the war grinds into the third year, the future of the tobacco factories in all countries involved remains highly uncertain.