3 Factors Driving the Cigarette and E-Cig Markets

CHICAGO -- The “bifurcation” story playing out among consumers—one portion aspiring for superpremium products as the other embraces budget brands—is seeping into the tobacco category, according to one tobacco-category analyst. Increasing prices and taxes on cigarettes are driving smokers to switch cigarette brands, while higher-priced vaping devices are experiencing growth.

During a CSP webinar sponsored by Swedish Match, Nik Modi, tobacco analyst for RBC Capital Markets, New York, said pricing continues to play a role with today’s cigarette shopper in terms of overall demand and what brands people choose.

Industry cigarette volumes fell 5.5% in March 2018 vs. March 2017, Modi said, largely due to the California tax increase implemented in 2017, according to RBC figures. Modi said he expects declines to continue in the historic range of nearly 4%.

Here are more insights Modi provided during the May 10 webinar ...

Shares of Marlboro cigarettes have been down in eight of the past nine quarters, Modi said.

In an InfoScout-RBC report tracking “lapsed” Marlboro customers (or people who have left the Marlboro brand overall or a Marlboro-branded segment), the bulk of those shoppers (46%) stopped buying Marlboro Light. Thirty-two percent stopped buying from the overarching Marlboro brand of cigarette products from Altria Group Distribution Co., Richmond, Va.

Of customers who stopped buying Marlboro brands, the No. 1 reason reported (65%) was because they switched to another brand. The second-highest percentage (18%) said they quit or were trying to quit smoking.

Of those who said they switched away from Marlboro, 58% said lower price was the deciding factor, while 28% said they wanted to try something new.

Despite these numbers, retailers are gaining confidence in Marlboro brands going forward, due to efforts the tobacco manufacturer is implementing to combat its current challenges. When RBC asked which brands retailers expect to gain more share in 2018, 48% said Marlboro, 35% said Newport and 17% said Camel.

Commenting on the current success of San Francisco-based Juul Labs—decried as marketing to teenagers—Modi said its sales have shown a “remarkable” compound annual growth rate of 35% since 2016. He said the physical form and makeup of its vaping device and its use of “nicotine salts” to provide a desirable nicotine-delivery experience are important components of its success.

In a general sense, Modi said the demographics around traditional cigarettes tend to be older, Caucasian and lower-income, while users of electronic cigarettes tend to be 20- to 30-year-olds, ethnically diverse and higher income.