The Assault on Tobacco Continues, but what does the Future Hold for the Industry?

With the rise in sustainable and, to a point, ethical investing recently, there is now concerted pressure being placed upon the large tobacco companies from investors and policymakers. In today’s post we will look at this pressure and how it is building, and also in what direction the industry may move once the inevitable move from cigarettes and cigars takes place. There are suggestions that the traditional tobacco companies may move into vaping industries in a much more concerted way, but there are a number of potential issues awaiting them if they choose to do that.

A British governmental report this year proudly stated that there is an ‘ambition to go “smoke-free” in England by 2030’. This was accompanied by ‘an ultimatum for industry to make smoked tobacco obsolete by 2030, with smokers quitting or moving to reduced risk products like e-cigarettes’. This policy movement is being witnesses against a financial movement which is seeing the largest traditional tobacco companies being pressured to move into alternative markets by their own shareholders. Imperial Brands, one of the largest industry players, is currently facing a showdown with its shareholders who want to see a number of traditional arms of the company divested, in response to a consistent reduction in the share price over the past few years. It is being reported in the Financial Times that plans to divest the company’s cigar businesses is being deemed as not enough, with a wider divestment being targeted by the firm’s largest shareholders. Those same shareholders argue that a. ‘their core business is in decline’, and that b. ‘they are talking about moving away from combustible products, but that’s all they know. If you want a fresh outlook, you need a fresh team’. This request for a change in management is based on the belief that the company needs to move into e-cigarettes in a more systematic way.

All of the financial forecasts suggest that this move will be required. It has been suggested that the global e-cigarette market could reach $58 billion by 2026, from just under $10 billion in 2017. It has also been suggested that the leading tobacco firms could, and will move into the legal cannabis market, with one forecast valuing that particular market as being worth more than $150 billion by 2025 – as a response to a growing number of jurisdictions legalising the product. So, it is very unlikely that the large firms will struggle in the new environment, as they are already adapting to the changing environment around them. We should expect nothing less of course, but there are associated issues with this newly diversified growth. Perhaps the biggest issue, societally speaking, is that the move to e-cigarettes is becoming a potential ‘epidemic’ in its own right. This is the opinion of the US Food and Drug Administration who, in relation to teenagers using the products, recently warned that if the products were not kept away from those deemed underage, then there would be substantial penalties. This is based on the realisation that, as the products are under-regulated (particularly when viewed against cigarettes and cigars), there are three associated issues. First, the number of teenagers taking up ‘vaping’ is steadily rising. It is currently being suggested, via legal trials in the US, that Juul Labs (one of the leading Vaping companies) is actively marketing their products towards young people. Second, ‘vaping’ is being seen as a healthy alternative to smoking, even for those who are not smokers – a study recently suggested that 5% of vapers had never smoked before, but that the majority of vapers actually smoke combustible products too. Third, and most importantly, it is often perceived that vaping is ‘risk-free’, but this is apparently not the case according to a variety of studies. There are a number of potential health risks associated with the practice, In addition to this, it can be the case that alternative cigarettes contain more nicotine than traditional cigarettes, as it can be concentrated much more in the alternative forms. Combining this potential with the conscious marketing to the young and non-smokers, and it becomes clear that there is a potential of developing a new level of dependency. It is worth noting, however, that governments are seeking to regulate this element, with the UK capping the amount of nicotine that can be contained in any one cartridge to 20mg.

It appears that the future for the industry is one of adapting to its environment. The tobacco industry have been past-masters at contorting the environment to its will, but that era is about to end. Instead, the industry is being pushed, from outside and within, to move towards alternative technologies and products, all in the name of consumer and societal health. However, it is important to note that these companies have garnered extreme levels of wealth from dealing in products that are highly addictive and particularly harmful, and this (forced) shift in focus should not be construed as moving away from that profitable model. Juul Labs has become a massive player in the alternative cigarette market, and the traditional tobacco companies will surely be aiming to dominate that marketplace now that they are, essentially, being pushed into it. If that is the case, then how will these companies achieve that? It is almost certain that they will deploy the same tactics to dominate the new market (Juul is already 35% owned by the owners of Marlboro Cigarettes), tactics that will likely include pushing addictive substances, aiming towards ‘new’ demographics like young adults and non-smokers, and then raising prices. It is likely the case that a wave of negative sentiment and corresponding regulations will follow that phase, almost confirming the cyclical nature of this particular marketplace.

Keywords – smoking, vaping, e-cigarettes, business, law, @finregmatters