Figuring Out the Future of Tobacco

Steve Sandman
November 29, 2017
CSD Staff

While some segments such as smokeless remain steadfast, the dynamics surrounding other tobacco products—including vape—are changing in part because of manufacturers’ aspirations to get their offerings to market.

The largest single category in c-stores—tobacco—is changing faster than many of us may realize. Given the speed of technology today and the advances in the marketplace, it’s not surprising.

While the headline grabbers these days in the technology world remind us of Uber, Amazon and Tesla, the idea of smoking tobacco is changing just as rapidly, and those changes will be landing upon our doorstep before most of us hear the thud.

MOVING ON

With the quick rise of vaping, and the settling down of the category after years of chaos at retail, many stakeholders in the industry put their interest in tobacco technology behind them and moved on, but there’s so much happening it’s hard to narrow it down to a few key developments, but let’s take a stab at it because decisions will have to be made and the category will look significantly different in the next five years.

The most important thing to know is that recently appointed U.S. Food and Drug Administration (FDA) commissioner Scott Gottlieb publicly pronounced two key changes to tobacco, which will intersect soon at a store near you.

First, Gottlieb stated the FDA will seek to reduce nicotine levels in cigarettes in order to reduce harm by discouraging smokers to burn tobacco, and the menthol ban looms even if it’s only at some local levels, currently.

Secondly, he’s announced not only a sharp focus on reduced-risk products, but encouraged the tobacco industry to bring them forward. These two tracks will speed innovation of reduced risk products, and have all the appearance of quicker acceptance from the FDA and ultimately the public in general.

So what kind of products are we talking about? Philip Morris International (PMI) has invested over $3 billion in research, almost $2 billion in manufacturing changes for a product called IQOS. In fact, the product boasts more than 3 million users worldwide.

And while the product hasn’t been introduced to the U.S. yet, applications are filed and the Altria Group, parent of PMI, is the exclusive distributor here. The innovative product heats tobacco, but doesn’t burn the tobacco, allowing the smoker to have all the smoking satisfaction of a cigarette without ingesting the cancer-causing agents created when burning the product.

SMOKE FREE

By 2025, PMI expects 30% of their volume to be “smoke free.” RJ Reynolds (RJR) has not only invested in the VUSE brand, but RJR’s heat-not-burn technology dates back to the 1980’s and the company has filed applications with the FDA this past summer for improved versions of the technology.

PAX Labs markets and currently sells JUUL, which utilizes a nicotine liquid filled pod in a device that exclusively holds the disposable pod. The actual device, in some way similar in looks and feel to IQOS, looks like something from the future, with sleek and simple lines. What’s most impressive is the true satisfaction smokers apparently are receiving from the device.

Some c-stores have never seen the product at retail, and one reason is because the company can’t seem to produce enough pods. Retailers that have been stocking the product are sold out within a few days of shipment, usually a short-shipment, and spend the rest of the week out of stock. The majority of retailers I have spoken with are clearly stating these sales are coming from smokers, which differs to some extent from many who used vape because it was new and different.

What’s also different here is that the company will sell directly to consumers, presenting another challenge for retailers on determining whether or not to support a business model where the manufacturer competes directly for consumers with their stores.

We can all be certain that the other major cigarette companies are developing technologies that will compete in the reduced-risk category, not to mention some OTP manufacturers such as Swedish Match that may be nearing regulatory approval to claim-reduced risk for its General-branded SNUs products.

The FDA has really told the market, out with the old and in with the new when it comes to tobacco. According to BAT/RJR Investor Day presentation, 46% of smoking consumers are open to change and are looking for products to better suit their desires. These new products are the real deal, and there’s no question we can expect to see them on store shelves in the next few years, if not sooner.

British American Tobacco (BAT), which has a portfolio that includes the leading smokeless brand, Grizzly, is determined to turn its vaping business into a billion-dollar enterprise. Recently the manufacturer said it expects to double sales of “new generation products” to more than $1.3 billion in 2018. The company also expects that revenue from all tobacco products, including e-cigarettes and tobacco that heats without burning, to reach $6.6 billion by 2022.

Steve Sandman has worked in the tobacco industry for more than 30 years, most recently as president of Republic Tobacco. His extensive experience includes product management. He can be reached at (812) 569-1388.