Tobacco's Alternate Universe: 2020

By 
Angel Abcede, Senior Editor/Tobacco, CSP

Melissa Vonder Haar, Freelance Writer

tobacco 2020

Welcome to 2017, whatever that means.

In many ways, the tobacco industry began the year with fewer unknowns than it has faced in decades. Gone are questions of when the U.S. Food and Drug Administration’s (FDA) deeming regulations would come down, or whether the next president would favor less industry regulations or demand even more.

On the other hand, many of these historic unknowns are far from settled. For example, though the deeming rule went into effect August 2016, it is still entirely possible that the rule could change drastically through lawsuits or government intervention.

Yes, a Republican-controlled Congress and White House is widely considered a plus for the industry. But it is simply too early to tell exactly what a Donald Trump presidency means for tobacco.

Andrew Perraut, a consultant for Radiant Strategies, San Francisco, believes the spectrum of possibilities is vast. Will deeming regulations play out as planned? Could they be indefinitely delayed? Might they substantially revise—or outright overturn—deeming, or even older regulations such as the Tobacco Control Act of 2009?

“At this point, I don’t think we can really predict what the Trump administration’s track on tobacco issues is going to be,” Perraut says.

Don Burke, senior vice president of Pittsburgh-based Management Science Associates (MSA), agrees it’s too soon to know, but he’s confident the outcome will be largely positive for tobacco retailers.

“This new political environment will have a huge impact on this industry, at least in changing the way the industry has been trending over the past several years,” he says.

As we enter a new year and a new administration with plenty of potential for optimism, CSP speculates what this brave new world might mean for the tobacco industry by the end of Trump’s first term and beyond ...

Prediction: CTP Gets a New Leader

Prediction: CTP Gets a New Leader

cigarettes
On Dec. ­23, 2016, President Trump mandated that all politically appointed ambassadors leave their posts by his inauguration, a move that broke a long-standing precedent of flexibility in such deadlines. According to The New York Times, a senior Trump transition aide described the move as a way to ensure President Barack Obama’s appointees left their government roles “on schedule.”

Ambassadors aren’t the only presidentially appointed positions in Washington, D.C. Another is the FDA commissioner.

At press time, Trump had yet to announce his choice to head the FDA, much less what happens with Mitch Zeller, director of the FDA Center for Tobacco Products (CTP). But the administration’s actions so far strongly indicate a change is likely.

“I assume that there will be (a shakeup),” says Perraut, who worked at the White House Office of Information and Regulatory Affairs (OIRA) during the transition from President Bush to President Obama. “It’s pretty unlikely that the political officers will be asked to stay in place.”

Who could step into Zeller’s place is anyone’s guess, but other appointments made by Trump would suggest these new leaders would favor less regulation.

“What we’re seeing with the new administration in terms of regulations is likely to be positive,” Burke says.

Perraut observed the change from former CTP director Lawrence R. Deyton to Zeller firsthand. He says such a transition not only requires time for the new director to become fully acquainted with the CTP and its responsibilities, but it can also mark a radical shift in policy.

Though there wasn’t a major difference between Deyton and Zeller’s priorities, “we can fairly safely assume there will be significant differences” between a Trump-approved director and the current CTP leadership, Perraut says.

Given that the tobacco industry largely decried Zeller’s major regulatory action—deeming—as bad for business, a shift in scribed attitude at CTP would be welcome news.

And even if Zeller were to remain in his current role, Perraut anticipates a slowdown in regulatory actions at the CTP and beyond.

“The Trump administration has signaled that they are intending to undertake pretty significant changes to the rule-making process,” Perraut says, pointing to the “one in, two out” executive order signed Jan. 30, 2017, which requires agencies to eliminate two existing rules for every major new rule they want to enact.

“FDA is going to be facing some very difficult choices in what to prioritize,” says Perraut.

FACT

Created in 2009 as part of the Tobacco Control Act, the FDA's Center for Tobacco Products has operated only under President Barack Obama.

Prediction: Young Demos Spur Techie Tobacco Boom

Prediction: Young Demos Spur Techie Tobacco Boom

e cig
A less regulation-happy CTP could mean good things for the e-vapor category, which many fear could be all but wiped out if the FDA deeming regulations move forward as written. Regardless, those familiar with the category believe there’s another reason to be hopeful: attitudes of younger consumers.

“When you look at engagement by age, this is a category that has clearly resonated with younger consumers,” says Viven Azer, a tobacco analyst for New York-based Cowen Group. “We say that your experimenter of today is your committed consumer of tomorrow; I think that very much holds true with e-cigarettes.”

A 2014 National Health Interview Survey supports the idea that younger consumers are the predominant experimenters in the vape category, showing 21.6% of adults ages 18 to 24 had tried an e-cigarette, nearly twice the rate of adults overall (12.6%).

Though vape is not a large part of her business, Chelsea Capps, a merchandise manager for American Retail Services (ARS), Oceanside, Calif., views the category as uniquely “catering to” millennials. She acknowledges that vape shops currently own the lion’s share of that business, but she predicts that if vape does become more prominent in c-stores, it will be driven by millennials.

“What I see happening is not a quick thing,” says Capps.

Burke of MSA believes things will speed up as younger generations—such as tech-savvy Gen Zers—get older: “Since they’re more open to technology, [it’s] likely vaping will become a more acceptable format as we go forward. Every year, it will become more and more acceptable.”

What products will attract millennials and Gen Z vapers in ­2020 remains unclear but, as Azer says, the e-cig boom has proved “there’s always room for innovation.”

44%

Amount of vapers in 2013 who were millennials

Source: Forbes

Prediction: iQOS Sales Skyrocket

Prediction: iQOS Sales Skyrocket

iqos
When it comes to vaping innovation, Azer says it’s all about iQOS.

“The company has been incredibly clear about their aspirations to convert every smoker in the world to this reduced-risk proposition,” she says of New York-based Philip Morris International’s long-anticipated heat-not-burn product.

While the FDA has yet to approve iQOS for sale in the United States, Philip Morris is already doubling down on the product. Azer cites an “impressive amount of transparency” on the premarket studies and test runs conducted in a number of countries, with varying degrees of success.

“Philip Morris is really being very intellectually honest about it; they’re not just showing us Japan,” she says, referencing a country where iQOS has already garnered a 2.4% share of the cigarette market less than one year after launching.

“They’re explaining very clearly what they’re doing to adjust their go-to-market strategy when appropriate,” particularly in markets where iQOS is not performing well, says Azer.

Bonnie Herzog, senior tobacco analyst for New York-based Wells Fargo, was so impressed by the data presented by Philip Morris International at the March 2016 Society for  Research on Nicotine and Tobacco conference that she predicts iQOS could capture as much as 30% of the worldwide cigarette market by ­2025.

“We believe iQOS represents the industry’s first legitimate step toward mainstreaming reduced-risk products and reshaping the global smoking industry,” Herzog recently wrote in a research note.

The transparency on iQOS is all the more impressive when you consider what stands to be a competitive market: Both British American Tobacco, London, and Japan Tobacco International, Tokyo, are in heat-not-burn launch mode.

“It reflects Philip Morris’ belief that not only do they have superior technology, but they also have a meaningful first-mover advantage,” says Azer.

70%

Amount of Swiss iQOS users who described themselves as “fully converted” or “predominantly converted” away from cigarettes to exclusive iQOS use as of December 2015

Source: Philip Morris International

Prediction: Indies Thrive in Trump’s America

Photo credit: www.vaping360.com/iqos-phillip-morris/ 

Prediction: Indies Thrive in Trump’s America

One of the first major tobacco headlines of the new year was the Jan. 17 acquisition of superpremium cigarette and cigar maker Nat Sherman, New York, by Altria Group Inc., Richmond, Va. It was the continuation of a trend we’ve witnessed for years: the biggest companies getting bigger via acquisition.

But the tide may change should deeming or other existing regulations see revisions or repeal, says Burke.

“If a company wanted to get into a new category, they could acquire firms that had approved products in these categories,” he says. “It was far more desirable to pursue the acquisition and not go through substantial equivalence (SE) or premarket tobacco applications (PMTA) to get a new product approved.” But if those difficult rules are lifted by the Trump administration, manufacturers may opt to expand their product portfolios in-house.

This is good for retailers such as Capps, who changed the tobacco sets at ARS locations in order to combat contracts and invest in niche but pro table “craft tobacco” products. Capps has identified an opportunity with the craft consumer, who is interested in not only a higher-end beer but also a more unique tobacco experience.

“The biggest element in craft is an expansion of choice,” she says. “Ultimately, in Big Tobacco, we have limited choices to consumers.”

Though millennial craft smokers may smoke less frequently than the average smoker, Capps believes the large basket rings of a consumer picking up a six-pack of craft beer and pack of Natural American Spirits makes them “far more lucrative than one who strictly buys a Marlboro Reds.”

“(I) strongly believe (that) customer … has been stifled in the market because manufacturers are driving decisions within retail,” she says.

A tobacco market where smaller manufacturers can remain independent and launch new products without hefty regulatory hurdles could bring the craft trend to the backbar.

6.5%

Total cigarette share of non-Big Tobacco companies in 2016

Source: Nielsen

Prediction: Big Tobacco Goes Global

Prediction: Big Tobacco Goes Global

cigarettes
Stateside mergers and acquisitions may slow down in upcoming years, but analysts anticipate acquisitions on a global scale will become even more enticing. Setting the tone: British American Tobacco PLC’s (BAT) January deal to acquire the remaining 57.8% share of Reynolds American Inc., Winston-Salem, N.C., that it does not already own.

Herzog views the $49.4 billion move announced Jan. 17 as a big win for both BAT and Reynolds:

  • BAT will have ownership in the U.S. market, complementing its existing presence in high-growth and emerging markets.
  • The deal promises signif­icant synergies, cost savings and geographic diversification.
  • It creates the world’s largest listed reduced-risk-products (RRP) company.

Burke takes a broader view, saying the deal is indicative of a global trend that spans across all consumer packaged goods (CPGs).

“We live in a global economy, so all U.S. industries will continue to feel an increased impact from foreign developments,” he says. “Most (CPG) firms are trying to develop global brands because of the efficiency associated not only with production, but also with the sales and marketing of those products. Virtually every manufacturer is trying to develop global brands.”

Herzog believes the Reynolds-BAT deal adds pressure for the U.S. tobacco industry to go global—especially when it comes to rumors that the No. 1 tobacco company in the country (Altria Group Inc.) will merge with another major global player (Philip Morris International).

“The (BAT) deal increases the likelihood of Philip Morris acquiring Altria,” Herzog wrote in a research note. “We don’t expect Philip Morris to sit idly by as BAT becomes the world’s largest global tobacco and RRP company.”

$698.5 billion

Worldwide cigarette sales in 2015

Source: Euromonitor International

Prediction: Pot Pays for Trump’s Wall

Prediction: Pot Pays for Trump’s Wall

marijuana
While Trump’s policies are generally expected to benef­it the tobacco industry, many have questioned what a more conservative White House means for the burgeoning marijuana industry. Some believe the huge sales figures from states such as Colorado and Washington will appeal to Trump’s pro-business agenda.

“I do believe the government will be embracing marijuana,” Burke says, citing potential tax revenues and consumer support behind medical and recreational legalization. “(The federal government could) either tax it themselves or at least support state decisions to legalize the product.”

Others worry about what the nomination of Jeff Sessions as attorney general means for the 28 states (plus Washington, D.C.) that have legalized marijuana on a medical or recreational basis. As recently as April 2016, Sessions said “good people don’t smoke marijuana,” and that it is “not the kind of thing that ought to be legalized.”

Perraut of Radiant Strategies says the marijuana industry developed into a $6.7 billion business in 2016 because the Justice Department largely opted to leave it alone. Shortly after Colorado and Washington became the first states to legalize recreational marijuana in 2012, Obama told ABC News the Justice Department would take a hands-off approach so long as the states maintained strict rules in the sales and distribution of the drug (such as prohibiting sales to minors).

“The sort of enforcement discretion put into place by the Justice Department is very tenuous,” he says. “That can be reversed immediately if Jeff Sessions decides he no longer wants to give that enforcement discretion. I’m really worried about it.”

Burke believes the decision may come down to dollars and cents.

“If Trump is going to consider all this infrastructure building he’s planning on doing, with projections being that this will significantly affect the deficit, they’ve got to look for additional tax areas,” Perraut says. “[Marijuana] has got to be one worth considering, especially as they have experience with several states that shows it really has not created any issues.”

After all, Trump admits that (at least initially) the United States will have to foot the bill for his proposed wall along the Mexico border; marijuana taxes could go a long way toward funding that project. Though marijuana is not technically part of the tobacco category, state or federal legalization is anticipated to benefit the industry. Burke says it’s a natural fit for tobacco companies.

“The opportunity is there for the government to expand its tax revenue and for tobacco firms to find a growing industry for their business,” he says. “I think many factors are coming together to make legalization a very attractive approach to consider.”

FACT

CNBC predicts the 1,300-mile "wall" to secure the Mexican border will cost $2 billion. Legalized marijuana sales in 2016 reached an estimated $6.7 billion.