The shrinking tobacco market
Global tobacco market outside China is dominated by four major tobacco companies, Philip Morris International, British American Tobacco, Japan Tobacco, and Imperial Tobacco whom covers 200, 180, 160, and 120 countries or regions respectively. PMI and Imperial Tobacco both own 46 factories, which is higher than BAT’s 45 factories and Japan tobacco’s 37 factories. PMI also has the highest number of employees among the four major tobacco companies.
PMI’s traditional tobacco business in 2018 is still underperforming. The total sales for the year totaled 3.7403 billion, down 2.8% year-on-year. Except for Asia (the sales volume of cigarettes in South and Southeast Asia increased from 171.6 billion to 178.496 billion). Growth of 4.0%), sales in Europe, the Middle East, Latin America, and other regions have declined.
The traditional tobacco industry is shrinking. In terms of industrial scale, since 2014, the global cigarette industry has continued to decline under the combined influence of health awareness, tobacco control policies, and tax policies. Global tobacco sales have a compound annual growth rate of -2.5% and are expected to continue to decline at a rate of 2%-3% per year.
Since 2015, PMI’s traditional cigarette market share has continued to decline. However, since the launch of HTU products, relying on the strong growth of IQOS, the overall share decline has been checked, and PMI’s started to regain its lost market share. It shows that new tobacco products may become the breakthrough point of the company in these troubled times.
The rising of new tobacco
In terms of IQOS pods, global sales in the fourth quarter showed a sequential growth of 41%
While, in East Asia & Australia the market stopped falling and rebounded, and the sales increased by 55.4%.
The growth momentum in the EU/Middle East/East Europe was maintained.
East Asia & Australia contributed 65% of global sales of IQOS pods, and in 2017 years it was even higher as 90%, indicating that IQOS global promotion has achieved the initial goal.
Huge number of existing smokers boosts IOQS sales
IQOS pods sold 44.3 billion units in 2018, a year-on-year increase of 93.2%. It showed that users of IQOS will keep increasing in the next few years.
The number of smokers reached 9.6 million in Q4 of 2018 (including 6.6 million IQOS users who have already withdrawn from traditional tobacco), an increase of 800,000 compared with Q3. About one-third of them are outside of Asia.
In 2016-2018, sales of pods corresponding to a single IQOS device continued to grow, indicating that the loyalty of smokers is increasing.
Stabilized Japanese market, and an emerging EU market.
Japanese market: The market share is generally stable, is expected to be stable in the future. In the Q4 2018, the sales volume of IQOS pods was 5.6 billion units (Q3 was 7.5 billion). Albeit a sharp decline in sales volume, the market share has remained basically stable:
The main reason is that on October 1 due to tax adjustment, which was transmitted to the product, causing the smokers to purchase in advance. At the same time, data shows that after the listing of IQOS3 in the Japanese market, the sales of pods in terminals has continued to grow.
In the long run, we are optimistic about
the growth of the Japanese market. The company believes that the reason is:
1) It takes time for the conversion and loyalty of smokers to be improved;
2) The competing products are crowding into the market, but the poor quality has increased the hesitation of the smokers.
South Korean market: following the occupation of all profitable sectors, the market share has returned to growth. In the early period, the Korean Ministry of Food and Drug Safety claimed that the IQOS tar content was higher than that of traditional tobacco, which led to a decline in the PMI market share.
However, according to the latest data, the market share of IQOS in South Korea in 2018 has reached a record high of 8.5%, which is 3% higher than that of Q4 in 2017. The pods brand HEETS has a 75% market share. The company said that with the listing of IQOS3, it has confidence in the future share growth.
EU & Eastern Europe / Middle East Market: an expectable growth in customers and market shares in the future.
In the Q4 2018 years, the number of IQOS users in the EU market reached nearly 1.8 million, and the market share increased by 0.5% to 1.7%.
The market share of Greece, Portugal, Czech Republic, Italy, and other countries has increased significantly year-on-year. At the same time, the regional tobacco market with IQOS products sold in EU countries only accounts for 47% of the total EU market, so the future development of the EU market is promising.
In the Eastern European market, the core success of IQOS promotion comes from Russia. IQOS started in Russia in 2018, with a current user base of about 800,000 and a market share of 1.8%. IQOS is only available in seven cities in Russia, and PMI plans to expand its sales area in 2019 to support its expansion strategy.
IQOS sales have increased steadily
The total sales of IQOS devices in 2018 was $900 million, accounting for 22% of the revenue of RRP series products, which was the same as in 2017.
Smokers grow continuously speeding up the globalization of IQOS
The global performance of IQOS in 2018, although the growth rate of the pods volume is not obvious due to the influence of the channel destocking, the terminal sales volume nearly doubles, indicating that the market is on a high-speed growth track; In the global market structure, IQOS is gradually improving the situation of over-reliance on the Japanese and Korean markets. The successful breakthrough in Europe will lay the foundation for the future advancement of IQOS. As for the products, PMI’s IQOS3 products will help attract new consumers and lead to fourth quarter smoke. The increase in the number of smokers is slightly higher than expected, and the converted smokers are expected to gradually become a continuous consumer group of IQOS products.
FDA permits sale of IQOS in the U.S.
On April 30, 2019, the FDA and PMI announced on the same day that the FDA authorized FMI to sell IQOS devices and three pods in the US market. Since FMI parent company Altria is a leader in the US tobacco industry, it has 230,000 channels in the United States. The managerial level of Altria said that it is “optimistic about the performance of IQOS in the US market and personnel/channels are ready, only waiting for FDA’s permission”. It can be estimated that Altria’s channel capabilities will help IQOS expand its market in the United States.
Once IQOS begins to sale in the US, sales can be explosive. First, there will be an important butterfly effect on IQOS suppliers. At the same time, with the release of IQOS in the US market, the heat-not-burn market will expand significantly.
The more profound meaning is that heat-not-burn electronic cigarettes is a new thing, and it is still in the incipient stage. Therefore, many countries and regions have doubts about heat-not-burn electronic cigarettes. Internationally, the FDA is recognized as the world’s leading food and drug regulatory agencies, many other countries seek and receive FDA assistance to promote and monitor the safety of their products in the country. IQOS has an endorsement effect from the FDA, which will greatly affect the attitudes and policies of other countries and regions for heat-not-burn electronic cigarettes, and even the amendment of relevant laws and regulations.
Chinese new tobacco market still needs approval from government
In China, the previous number new tobacco companies who got financed is small, but now, the situation changed with entering of venture capitals such as IDG and Sequoia, but they all prefer small vape products. Although traditional cigarettes still dominate the mainstream, the rise of new tobacco in China cannot be ignored.
1 The regulatory policy is clear: in 2018, China’s new tobacco-related policies have been issued continuously, and the follow-up still depends on the government’s corresponding classification and management ideas for various new types of tobacco products;
2 Product patent reserve: At present, China’s patent accumulation in e-cigarettes is relatively mature. At present, China is already the world’s largest e-cigarette producer, but it still needs to break through the patent blockade of IQOS in terms of heat-not-burn. At present, the domestic market has not been opened yet., but the potential of the Chinese market can be expected.
Although the current market size of new tobacco products is still small compared to traditional cigarettes, in terms of supply, demand, and policy, the mainstream new tobacco products such as e-cigarettes and heat-not-burn tobacco products has already got the best chance to challenge the dominance of traditional cigarettes in the future.