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Drop-
of the
nelists
op of-
the fu-
STATE
OF
THE
INDUSTRY
A look at where we
stand and what to
expect in 2017.
Bonnie Herzog, a leading tobacco ana-
lyst at Wells Fargo, kicked off the show
by predicting a decline in cigarette sales
volume of 3.5 percent for 2017 and con-
tinuing price increases from the major
manufacturers. While not exactly up-
beat, neither was the news surprising
to industry veterans, who were already
well aware that the category is in secu-
lar 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 downtrading pressure
and encourages consumers to trade up
to premium brands.”
Herzog also praised Marlboro’s mo-
bile 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 un-
certainty 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 smok-
er shave tried vaping—that is the oppor-
tunity 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 regu-
latory 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-es-
tablished tobacco manufacturers such as
Reynolds’ Vuse and Altria’s MarkTen are
likely to grab share as smaller manufactur-
ers struggle with FDA compliance. “The
other concern is that innovation will be
stalled and stifled under the deeming regu-
lations, which is very frustrating.”
ACING ALTERNATIVES
The latter is paving the way for a shift to-
ward 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 mod-
ified 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 To-
bacco 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 eventual-
ly all the big manufacturers will have a
portfolio of these products,” says Her-
zog. “Ultimately, we think that 30 per-
cent of the developed market could shift
to heat-not-burn technology.”
WINNING
WITH PHILLIPS & KING
Kretek International’s Phillips & King
booth held its annual prize drawing
giveway on Day Two of the show. TB
congratulates the following winners:
B
I
G
BEST PRODUCT
AWARD WINNERS
A
B
G
[ 20 ]
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