This is what David posted -pro bono- in the Nicotine Policy Group on July 31 (one of many such posts)
BAT and JTI results: Reduced Risk Products Still Doing Well
Both BAT and Japan Tobacco International (JTI) have released second quarter results. The BAT info is available here, and JTI here.
Some highlights for those looking at risk reduction:
In Japan, cigarette sales continue to decline at a significant rate. As JTI says for the first half of the year:
Cigarette industry volume3 decreased 6.9% to 57 billion units due to the growth in the RRP category, the natural decline trend, the impact of consumption tax-led price revisions in October 2019 as well as regulatory changes in April 2020. In addition, temporarily weaker cigarette demand and increased RRP demand caused by restrictions on non-essential outings during the national declaration of a state of emergency during Q2 negatively impacted industry volume.
To put that into perspective we can look at cigarette sales in the first half of 2020 of 57.0 billion and compare that to the 86.3 billion in the same period in 2016, a decline of 34%. That is an unprecedented level of decline in cigarette sales in a major market. JTI reports that reduced risk products now have 26% of the market. So, the overall market (cigarettes + heated tobacco) has also declined by around 10.7% in those four years, which is in line with the rate of decline in domestic cigarette sales before HTP came onto the market.
The companies are racing to introduce new technology in Japan. BAT states in slide 21 that its new ‘glo hyper’ product is driving up sales in Japan. JT states that it has launched Ploom S 2.0 this month.
Analysts have highlighted Russia as a key market for RRPs, and Moscow is the trendsetter. Last week in its Q2 results, PMI stated in slide 42 of its presentation that their HTPs have a 14.4% market share in that city. Today BAT states in slide 19 that their HTPs had a 2.3% share in the first half of 2020, and 2.8% in June. So, the overall trend to heated tobacco is even more pronounced than what we see in the PMI numbers. JTI specifically mentions the decline in overall Russian cigarette sales on page 5 of its Q2 press release and on page 8 pegs the decline at 8.3% and specifically mentions RRPs as a cause.
JTI says the overall cigarette market was up in France and Germany and down in Italy and Spain (a reversal of what the company reported on Spain in the previous quarter). The company states that legal UK cigarette sales also increased in the quarter, albeit attributable to a decline in contraband.
Modern oral (basically snus without the tobacco) continues to make great gains for BAT (through Swedish Match started and still leads the category), with global sales up 73% (slide 23). It is noteworthy that countries subjected to the EU ban on snus such as Denmark have seen huge growth in this category. The demand for alternative products remains robust even where regulations stymie options.
In the US market BAT, at slide 31, pegs modern oral as now being 1% of the nicotine business. That is an extraordinary accomplishment in a very short period of time. Cigarettes are 83%, traditional oral tobacco is 10.5% and vaping is 5.5%. As this tabulation is on value rather than volume, and with non-combustibles being less expensive on a cigarette-equivalent basis, lower risk products actually account for a far higher portion of the market and getting a good estimate of that market share and the changes over time would give important insights. While the resilience of the RRP category in the US is notable in the face of the attacks on vaping, BAT also reports (slide 41) that the US cigarette market increased in size in the first half of the year. This is an astounding reversal of the extraordinary and accelerating declines in cigarette sales a year earlier.
Still, BAT states (slide 15) that the vapour business is returning to growth in all key markets, including the US. In Canada that slide shows huge growth of 73% compared to a year earlier and 38% in the last quarter.
BAT claims (slide 52) that it now has 11.6 million customers of non-combustibles and that these products are 10% of total sales. But, as their slide 42 shows, the company is still minting money from cigarettes and losing it on RRPs.
Overall, there are signs that the well-resourced attacks on low risk products are not preventing the growth of the market and the growth of that market is creating challenges for the cigarette business. That in turn helps explain why the market value of tobacco companies continues to get hammered. I think this is worth keeping in mind when we see all the attacks on alternatives and evidence of US consumers returning from vaping to smoking cigarettes. The financial markets look to the future, and are seeing a bleak one for the cigarette business and, as Pieter Vorster has articulated so well, a bright one for low risk alternatives. Something very significant hit the valuations of tobacco companies, and the impact coincides with when disruption hit the market and how well the companies have responded. Financial markets seem to be telling us that disruptive technology is winning.
Tobacco Company Five Year Stock Charts as of July 30, 2020
And, by way of comparison, Swedish Match has seen its stock price triple over this period of time . . .
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