Big Tobacco Keeps Tabs On Growth Of Vaping

Source from:  Financial Times 03/20/2018

Sweet smelling “vape” shops that sell electronic cigarettes and vapers puffing out clouds of fragrant white smoke have become common sights on UK high streets. As traditional cigarette smoking has become less fashionable and vaping more popular, big tobacco has muscled in on this once-niche scene.

The number of smokers in the UK has been falling since 1974 and it is now the world’s second biggest vape market after the US. At the last count, there were about 8m smokers of regular cigarettes in the UK, but there were also 3m vapers, up from 700,000 in 2012.

Tobacco companies have taken note. They started buying ecigarette companies more than a decade ago and now own the five top brands, according to research compiled for The Grocer trade magazine.

At Philip Morris International, owner of brands such as Marlboro, ecigarette sales grew nearly 400 per cent between 2016 and 2017, to account for 5 per cent of total sales. Meanwhile, Nicandro Durante, chief executive of British American Tobacco, which owns brands including Lucky Strike, said earlier this year that sales of BAT’s “alternative” cigarette products are expected to grow to more than £5bn by 2022.

As the number of cigarette smokers declines, analysts say, success in the ecigarette market is vital. But some have questioned whether this market really has the potential that the industry sees.

After an initial surge, the rate of growth in UK vaping numbers is slowing: data from public health charity Action on Smoking and Health reports only 100,000 new vapers in 2017 compared with 800,000 in 2014, and the total number of UK ecigarette users has plateaued since 2016.

Mike van Dulken, head of research at Accendo Markets, also asks if the prevalence of vape shops on UK high streets is genuine evidence of a boom, or “part of the death of the high street narrative”, with shops benefiting from rising vacancies that have pushed down rents.

BAT and PMI point to two explanations for the vaping slowdown: first, public perception of ecigarettes is worsening. Compared with two years earlier, last year fewer people perceived them as significantly less harmful to health than smoking.

Second, customers want new products, they say. Current products are “reaching their limits in terms of performance”, said David O’Reilly, BAT’s scientific and research and development director.

Peter Nixon, UK managing director of PMI, said: “Everybody you speak to will have tried vaping now, and it’s not for everyone.”

As such, product development is high on their agenda. “Heat not burn” cigarettes — which look similar to conventional cigarettes but warm rather than burn tobacco — have become popular in Japan but are still new to the UK, and could be a “game changer” said Mr Nixon.

PMI has spent more than $700m on ecigarette research in the past five years.

Perhaps more importantly for the industry, evidence so far suggests ecigarettes do not act as a “gateway” that leads to smoking, and those who have never smoked make up only about 3 per cent of UK ecigarette users.

According to ASH, the most common reasons given for using ecigarettes are to cut down on or quit smoking.

“In the very long term, it’s not a sustainable future if you’re not going to attract any new people in,” said Deborah Arnott, chief executive of ASH.

Crucially, the number of young people taking up smoking is also declining.

Smoking is “almost entirely an addiction of childhood”, said Ms Arnott, ”if you don’t get addicted then, you probably won’t.”

The regular use of ecigarettes among children is rare and largely among current or former smokers, said ASH.

Although people used to experiment with cigarettes, “the new wave of puritanism in the UK doesn’t seem to play that way”, said Steve Clayton, head of equity funds at investment management company Hargreaves Lansdown.

“That does raise a long term issue,” he said, but “where we are today doesn’t necessarily say much about where we’ll be in five years’ time”.

In the short to medium term, both BAT and PMI say they are confident the business is sustainable. With more than 1bn smokers worldwide, the majority of whom do not use ecigarettes, there is plenty of scope for growth, said Mr O’Reilly.

“We’re trying to help the current generation of smokers,” he said. “I’m not concerning myself with 100 years’ time.”  Enditem