NEW YORK— For convenience-store retailers watching the steady decline of cigarettes, a prediction of how quickly the core category may fall into oblivion came with a recent Morgan Stanley report, which points to the U.S. Food and Drug Administration (FDA) as the main reason, according to CNBC.
Central to the radical destruction of the cigarette industry is the FDA’s control—and potential gutting—of nicotine levels, according to New York-based Morgan Stanley. Although other analysts have been suggesting a more upbeat future for the tobacco industry, here are key insights into the June 16 report …
Cutting nicotine, cutting profits
With the FDA set to publish a proposal on nicotine levels in October, the amount allowed in both cigarettes and other tobacco products (OTP) could fall to “minimally addictive” levels, the agency said. If adopted, the proposed rule “would have significant public health benefits,” the FDA said.
If adopted by 2035, the rule would also cost the industry roughly $165 billion in lost profits, Morgan Stanley analysts wrote.
Slashing smoking rates in half
“Reducing nicotine in cigarettes to nonaddictive or minimally addictive levels, in our view, would be a potential game changer for the U.S. industry,” the analysts wrote. Morgan Stanley kept its tobacco stock recommendations low, essentially recommending investors sell.
In recent months, Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities, New York, has been suggesting a brighter future for tobacco companies, saying that while cigarette consumption has been on a slow decline, price elasticity and portfolio diversification has been helping tobacco companies prepare for the future.
Smoking rates dropping to zero?
The FDA regulation of nicotine levels could lead to rates of smoking declining to zero, the report said. “We don’t believe a smoker will continue to purchase nonaddictive cigarettes, particularly with the presence of alternative nicotine-delivery devices,” the Morgan Stanley analysts wrote.
Who will endure?
While Altria Group, the maker of Marlboro-branded cigarettes, has the most to lose, Morgan Stanley analysts said the Richmond, Va.-based company was “best placed” to transition to a focus on alternative nicotine products because of its 35% stake in vaping company Juul, San Francisco, and the company’s agreement with Philip Morris International to sell the New York-based company's heated-tobacco product, IQOS, in the United States.