CSP Tobacco: Heated Questions

Are heat-not-burn products the future of cigarettes or e-vapor—or something else?

Melissa Vonder Haar, Freelance Writer

It may come as a surprise that at an event filled with some of the most successful electronic-cigarette and vapor manufacturers, the overwhelming message was: We’re not quite there yet.

While attending the Wells Fargo E-Cig Forum last November, Joe Murillo, president of Richmond, Va.-based Altria’s vaping subsidiary, NuMark, described the industry as being in the first or second inning of a baseball game, with no single product “hitting it out of the park” right now.

“The winning product hasn’t been invented yet,” agreed fellow attendee Craig Weiss, CEO of NJOY, Scottsdale, Ariz. “If it had, all smokers would be using it."

An argument can be made that vaporizers, tanks and mods (VTMs) emerged in 2014 as a step in the right direction, providing a better experience than that of electronic cigarettes. While this may be true, UBS tobacco analyst Nik Modi believes the data suggests interest in VTMs may have peaked: Google Analytics shows the year-over-year rate of change in search interest of “vape shops” is declining for the first time, similar to what happened with searches of “electronic cigarettes” before we started seeing their deceleration.

“I wonder if we’ll be saying the same thing about vape/open systems a year from now,” Modi said during a CSP-hosted Tobacco Update webinar.

Almost on cue, two major tobacco players announced major investments not in vaporizers, but in products that heat actual tobacco (as opposed to vaporizing liquid nicotine). First came Philip Morris International’s (PMI) $680 million investment in two Italian manufacturing plants dedicated to producing next-generation heat-not-burn tobacco options, releasing the first of such products (iQos) in Italy and Japan last spring. Then there was Reynolds American Inc.’s November 2014 announcement that the Winston-Salem, N.C.-based company planned to test Revo, a rebranded version of its retired heat-not-burn Eclipse brand, at 2,000 Wisconsin locations.

It’s clearly premature to peg heat-not-burn as the next big trend in e-vapor, much less as the product that might eventually replace combustible cigarettes. Revo began testing only in February 2015, and Altria has merely entered into an exclusive agreement with PMI to potentially bring iQos to this country. But Big Tobacco committing to this segment, combined with the fact that heat-not-burn may offer an experience that duplicates actual cigarette smoking, has many in the industry excited about its potential.

“If you look at the decline that’s happening in disposables right now,” says Don Burke, senior vice president of Management Science Associates (MSA), “while consumers may enter the e-vapor category using a disposable, once they’ve tried it, they likely may continue to look for a satisfaction level closer to what they get from a combustible cigarette. By far, the heat-not-burn approach gives smokers a closer approximation to the experience with a combustible cigarette than the current disposable does.”

Heat-not-burn is hardly a new phenomenon. There have been a number of pricier dry vaporizers on the market that heat loose tobacco, and Reynolds’ Eclipse was first made widely available in the mid-1990s. While dry vaporizers continue to be something of a niche market, Eclipse never quite took off and was pulled from shelves in the mid-2000s.

So why should we expect something different from virtually the same product?

“Times have changed since making Eclipse widely available,” says Reynolds spokesperson Richard Smith. “We believe when it was introduced, Eclipse was a product ahead of its time. The expectations and interest in innovative tobacco products of today’s adult tobacco consumers are different than they were 20 years ago.”

Many, Reynolds included, believe the e-cig boom is largely to thank for this shift in consumer interests. Wells Fargo senior analyst Bonnie Herzog likens it to smartphones paving the way for touch-screen tablets.

“I think the consumer today is more willing and able to accept this kind of technology,” she says.

Vivien Azer, a tobacco analyst at The Cowen Group, New York, says consumers might not have been able to ascertain the reduced-risk potential of heat-not-burn products when Eclipse was first released (something manufacturers are not  legally allowed to claim without approval from the U.S. Food and Drug Administration). Thanks to e-vapor, that is no longer the case.

“There’s almost an implicit reduced-risk aspect to [e-vapor] without the companies being able to communicate that,” she says, pointing out that the modern consumer is therefore better equipped to make that association about heat-not-burn on their own.

The evolution of a consumer market willing to embrace heat-not-burn isn’t merely about e-vapor products, but also the expansion of the entire tobacco category. “When Eclipse was first made widely available in the mid-1990s, the market for tobacco products was less diverse than it is today,” Smith says. “With the growing popularity of innovative, nontraditional tobacco products, adult tobacco consumers are demonstrating their interest in different options.”

Though cigarettes continue to dominate c-store tobacco sales, any retailer can tell you that they are no longer the only game in town. Sales of OTP continue to climb, and a variety of new products have established themselves in recent years.

“Consumers are looking for different ways to enjoy tobacco and the tobacco experience,” says David Sylvia, Altria’s director of strategy and business development, who points to increased interest in smokeless, hookah and, yes, e-vapor. “Consumers are now showing an interest in looking for alternatives to conventional cigarettes.”

CONTINUED: An Alternative for Core Cigarette Consumers?