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Tobacco industry’s outlook, is it set for disruption?

  • Global tobacco industry
  • Current dynamics
  • Rise of the electronic cigarette (vaping) industry

 

The global smoking tobacco industry primarily constitutes players that manufacture and sell cigarettes, smoking tobacco, smokeless tobacco, cigars and cigarillos. The industry has a large global presence due to a widespread demand for its products and is considered as a stable and mature industry. The total global market size of the tobacco industry stood at ~USD 766 Bn in 2017.

                                                         

Cigarettes form the largest share of the global tobacco industry and constitute ~91% of the market share. Cigarette manufacturing is a consolidated industry with the presence of six large global players, which are Phillip Morris, Altria, Japan Tobacco, British American Tobacco, Imperial Tobacco Group and China National Tobacco Corporation.

The characteristics of the cigarette industry are:

  • No new entrants in the industry in the last few decades due to regulatory barriers and established brand value
  • Highly concentrated structure with large players controlling ~80% of the global sales volume
  • Strong pricing power due to the inelastic nature of the cigarette demand

 

The cigarette industry has long retained its label as a growth industry, primarily due to the rapid growth of smoking habits globally. Nicotine which is present in tobacco is highly addictive, which creates a stable demand base for the industry. The consolidated structure of the industry has borne well for the large players, which have strong pricing power, this has helped them to sustain revenue levels in recent years despite declining sales volume.  

 The industry has been experiencing a transition during the 2013-17 period, which resulted in a weakening of the sales growth trajectory. Global cigarette manufacturers witnessed sales volume decline at a CAGR of 3.2% during the period 2013-18. However, the industry was able to maintain profit margins (EBITDA) due to its pricing power.

The two key reasons behind declining sales volume trend in the smoking tobacco industry are:

1.       Regulatory Changes: regulatory tightening against the cigarette industry has been on the rise globally. The most prevalent regulatory actions against the cigarette smoking industry, which was credited with effective results across the world are mentioned below.

a.       Advertising ban on smoking – as per the WHO data, 37 countries have introduced a complete ban on tobacco advertising, promotion and sponsorships, which has effectively reduced the prevalence of smoking by around 7-16% in these countries.

b.       Graphical warnings on cigarette packaging – graphic warnings on cigarette packaging have a strong effect on consumption demand and reduced the number of new smokers (especially the younger generation) and has shown an increase in the rate at which existing smokers quit. Globally, 78 countries (housing ~44% of the world’s population) presently meet the best practices on pictorial warnings.

c.       Increased taxation on tobacco products – taxation on tobacco products have a strong impact on consumption demand as it directly impacts young and low-income consumers. Taxation policies have been utilised to limit the affordability of tobacco products by these groups.

d.       Ban on smoking in public places – smoking ban in public places is being implemented globally, which is restricting the social acceptability of smoking and has increased the difficulty of imbibing smoking as a habit.

2.       Societal changes: The societal acceptance of smoking has been declining rapidly post the turn of the millennium. Consumption patterns among millennials and younger generation reflect declining acceptability of conventional tobacco smoking in regions across the world. Emerging markets in Asia and Africa are the major ones, wherein the base of smokers is projected to grow going forward, while all other regions globally are witnessing a falling trend. According to the WHO global report on the trend of tobacco smoking, the prevalence of tobacco smoking is projected to decline from 22.1% of the world population in 2010 to the level of 18.9% by 2025. This reflects a substantial decline in the base of tobacco smokers across the globe.

These factors have resulted in a steady decline in cigarette sales volume during the period 2013-18.  Furthermore, the smoking tobacco industry’s woes are compounding with the emergence of viable substitutes like e-cigarettes (vaping).

Rise of the electronic cigarette (vaping) industry

E-cigarettes have gained popularity since their introduction and have become an additional threat to the growth of large tobacco corporations globally. E-cigarettes are products that provide nicotine to users by heating nicotine oil liquids into vapour without any combustion/smoke. The introduction of first e-cigarette can be traced back to the year 2003. However, the mainstream availability of the product around the world grew rapidly after the year 2010. Moreover, certain studies have shown that e-cigarettes can be ~95% less harmful than smoking. However, these studies have been criticised due to the limited availability of data to support these claims. Nonetheless, e-cigarettes have emerged as a fast-growing industry and are seen as a potential alternative to the conventional smoking industry.

The sales of e-cigarette and related products skyrocketed, showing a CAGR of ~50% during 2013-17. The major factors behind the rapid growth of the industry are the emergence of innovative devices and a wider selection of flavours for nicotine liquid. The new products have the capability of delivering smoking like experience which increases their appeal among existing smokers, who are looking for alternatives to smoke or are planning to quit the habit. This has attracted a growing base of consumers both existing and the potential smokers towards e-cigarettes as an alternative form of conventional tobacco smoking. Televisory believe that these products have the potential to create a significant shift in the demand for cigarettes as a growing number of smokers are projected to shift from tobacco smoking to e-cigarettes.

The smoking tobacco industry, which has been able to mitigate its declining sales volume by exercising pricing power is facing another threat of losing market share to alternative products. Televisory is of the opinion that at present the smoking tobacco industry is at a critical juncture. The combination of regulatory actions against tobacco smoking and the increasing penetration of e-cigarettes is all set to disrupt the growth story of the tobacco industry and the pricing power alone will not be sufficient to hold gates for the industry stalwarts.

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