Bonnie Herzog, a leading tobacco analyst at Wells Fargo, kicked off Tobacco Plus Expo by predicting a decline in cigarette sales volume of 3.5 percent for 2017 and continuing price increases from the major manufacturers. While not exactly upbeat, neither was the news surprising to industry veterans, who were already well aware that the category is in secular decline and were more interested in Herzog’s prediction that consumers will be trading up to pricier brands.
“The price gap between premium and value brands has narrowed,” she noted, adding that relatively low gas prices are giving consumers more spending power. “That protects down-trading pressure and encourages consumers to trade up to premium brands.”
Herzog also praised Marlboro’s mobile consumer app for building brand loyalty through regular communications with consumers. “A lot of retailers accept the coupons that consumer receive on the app, so it’s a great way for them to build brand equity,” she said.
Up with Vapor?
In the vapor category, Herzog sees uncertainty taking a toll on growth. “I am still bullish on the category, but I think it will go through tremendous changes,” she says, noting that it’s still “early days” for the vape sector. “If you think about the fact that the global tobacco market is $900 billion and more than half of smoker shave tried vaping—that is the opportunity it represents.”
However, it may take some time for that opportunity to play out, acknowledged Herzog, who noted that many retailers have been disappointed in the category’s sluggish growth and are concerned about the regulatory environment. “Inventory overhang is a liability issue for retailers, who are being very cautious about adding new items,” she noted, adding that products from long-established tobacco manufacturers such as Reynolds’ Vuse and Altria’s MarkTen are likely to grab share as smaller manufacturers struggle with FDA compliance. “The other concern is that innovation will be stalled and stifled under the deeming regulations, which is very frustrating.”
The latter is paving the way for a shift toward the next-generation products being developed by Big Tobacco, such as Philip Morris International’s iQOs, which has already been rolled out in 20 markets outside the U.S. “They have filed a modified risk application with the FDA,” said Herzog, who noted that PMI has already taken 5 share points from Japan Tobacco and other players in the Japanese market. “Of those smokers who have tried iQOs, 60 to 70 percent have converted either fully or predominantly. PMI will not be the only game in town, but they were the first mover and are leading.”
Dubbing the coming market-share battle as “a global arms race,” Herzog pointed out that British American Tobacco has a heat-not-burn entry called Glow, Japan Tobacco has Ploom and Reynolds is testing a heat-not-burn product called Core. “I think eventually all the big manufacturers will have a portfolio of these products,” says Herzog. “Ultimately, we think that 30 percent of the developed market could shift to heat-not-burn technology.”
– Story by Jennifer Gelfand
This story first appeared in the March/April 2017 issue of Tobacco Business magazine. Members of the tobacco industry are eligible for a complimentary subscription to our magazine. Click here for details.