Monday 23 March 2020

Sales of combustible tobacco are falling in Canada -- and in all sorts of other countries too.

During last week's investor day, British American Tobacco made public many of its estimates of legal and illegal tobacco sales around the world. Combined with official reports from countries which monitor sales (like Canada and France), and with estimates from BAT's competitors, these help give us a picture of what is happening to the global tobacco market.

Simply put, the sale of cigarettes and cigarette substitutes (like roll-your-own) continues to decline. It declines in countries (like Canada, England and the United States) where e-cigarettes and other nicotine substitutes are avaialble. It declines in countries (like Australia and Uruguay) where they are banned. In Japan, where heat-not-burn cigarettes (HNB) have played a uniquely strong role in the decline of cigarette smoking and where vaping products are banned, the sale of HNB products is also on the downturn.

For public health, this is a cheery prospect, although the rate of decline is not yet big enough to break out the champagne. For shareholders, however, the prospect of persistently decreasing sales creates concerns for the long-term value of their investments. Not surprising, then, that BAT couched its news about increasingly steep falls in tobacco use with a promise to go after  "new generations" and "new consumers" for other nicotine products.

This post compiles data from BAT and other sources on tobacco sales in 2019.

Cigarette sales in Canada are down by 7.5% in the past year.

Cigarette companies (including GRE) are required to provide Health Canada with monthly wholesale data, including the number sold for each brand and the average monthly price in each province. In February, this data was shared: cigarette sales fell from 25.8 billion sticks in 2018 to 23.9 billion in 2019. This was a sharper decline than in previous years.

The unexpected size of the decrease had been signalled earlier in September by Imperial Tobacco, which told an ontario court that "The tobacco industry in Canada appears to be experiencing a higher than historic downward trend in the volume of cigarettes sold.”  In February, Philip Morris International also reported on the decline (which it measured at 7.7%), attributing it "to the impact of cumulative price increases, as well as the growing prevalence of e-vapor products.”

The decline in legal shipments was greater in some parts of Canada than in others -- 3 times as much in Ontario as in Quebec. The difference in provinces may suggest the extent to which different factors - like increased contraband, lower smoking or more substitutions with vaping products -  are playing a role. Interprovincial comparison will be made easier once data on smoking prevalence for 2019 is made available with the release of the 2019 Canadian Community Health Survey and more information comes on line from the 2019 Canadian Tobacco and Nicotine Survey.

Cigarette sales are down by similar amounts in many other comparable countries

For several decades, national tobacco use has been viewed through the lense of a global epidemic, with differing market patterns as the epidemic takes hold and then as populations recover. Canada is among many countries which are considered to be in the "recovering" stage of this epidemic, as are Australia, France, the United Kingdom, the United States and others. Comparisons with such countries is useful to assess whether this year's progress is much better than expected, or whether it is in line with the normal trajectory.

It would appear that other developed countries are experiencing steady and sizeable reductions in sales. Canada's experience last year of a 7.5% reduction is about twice the global rate of decline -- but not much different than that experience in Japan or Australia. As mentioned above, these countries have taken very different approaches with respect to tobacco control generally and the regulation of alternative nicotine products.

Data is messy and country-comparisons are difficult

The chart above is not useful for drawing conclusions about why cigarettes sales in any one country are falling faster or slower than in another. There are too many obvious issues that could be influencing the difference to link the difference to a particular policy decision or economic event. Illicit sales could be increasing or decreasing, the smoking populations could be at different ages (North American Baby Boomers are now reaching their mid-70s, when deaths from smoking are expected). Prices could be causing smokers to cut down, or alternative products could be substituting for some or all of a nicotine-users tobacco consumption.

Illicit sales are said to account for some -- but only a little -- of the global decrease in consumption.

BAT helpfully presented its estimates of the volume of illegal sales over the same period, and the way in which these would have influenced legal consumption. The company estimates that the illicit market has grown from 10% of total sales in 2017 to 13% last year. If illicit sales are considered, then global consumption fell by 2.1% last year.

Lots more historic data!

Much of the heavy lifting has already been done in comparing historic cigarette consumption trends. Stephen Hoffman and colleagues at the Toronto-based global strategy lab compiled estimates for 40+ years, ending in 2015, and have made the dataset available for use.

The institute for Health metrics and Evaluation has also turned its head to this problem -- it's data has been made conveniently visualizable at 

The problem, always, is keeping these large and carefully constructed data sets up to date. Business intelligence, like that offered from Health Canada's reports and by British American Tobacco and Philip Morris International to their investors is a useful stopgap.

Data sources:

Wednesday 18 March 2020

BAT reboots and rebrands for "a better tomorrow".

In a series of presentations to investors today, British American Tobacco laid out its "new purpose" and unveiled its new look.  Last year it was "transforming tobacco" and "accelerating delivery". This year the catch phrase --- trademarked of course -- is "a better tomorrow.
The new corporate purpose laid out by BAT's management was "to reduce the health impact of our business through offering a greater choice of enjoyable and less risky products for our consumers." Their target is to develop a customer base of 50 million people for these products over the next decade.

BAT reported today that they estimate that there are currently 68 million consumers using non-combustible products, of whom 11 million (16%) use BAT products. By their estimates, non-combustible consumers are less than 6% of the total nicotine market. (They do not include China or India in their estimates).

Recapturing consumer moments

A key goal for BAT is to regain the ground they have lost  - "to recapture consumer moments" - through the sale of electronic cigarettes, heat not burn and oral nicotine.  As they present it, these products can be used by smokers who are no longer able to use tobacco at work, in transit or with other people. Vaping products are helping them regain such moments - and they expect that future product offerings will help them get "more moments and more consumers".

Not fewer smokers, but more vapers
To further emphasize that their strategy is based on recruiting consumers for non-combustible cigarettes and not based on reducing smokers, BAT provides forecasts of its revenues for both categories. There was no emphasis in these reports on converting existing smokers, but there was on "stimulating the senses of new adult consumers" (emphasis added).

To finding new products for new consumers, BAT plans to leverage big data (it has a data base of 7 million consumers), to expand e-commerce and social media. Product design and innovation are emphasized.  People don't like the new hybrid heat-not-burn and vapour product (Glo Sens) so they are rolling out a new concept (Glo Hyper), which allows uysers to customize their taste experience of heat-not-burn products.

Important details are shared:

BAT reveals that younger people like ePOD, while older people prefer ePen, that they use artificial intelligence to develop food pairing, that upscaling (premiumisation) is a way to add imagery to products and that their chain of 750 "inspiration stores" are exceeding expectations.

They give numbers to the changing vaping marketplace. Open systems and vape shops are out, and closed systems and convenience stores or e-commerce are in.

BAT signals that it is consolidating its vape portfolio: abandoning 10 of its vape products to concentrate on 2 (ePod and ePen 3), shifting to the Vuse brand name, reducing flavours from over 1000 (!) to a mere 170. These changes are driven by digital technologies - big data, artificial intelligence, direct marketing, "leveraging social media listening", etc.

And for Canada?
Only modest information is given about the Canadian market. Citing point of sale scanner data, BAT says that JUUL and Vype have roughly equal schare of devices, and that about two-thirds of the pods sold are JUUL, compared to slightly over one quarter which are Vype.

Cigarette sales are down in many countries 
The presentations also offered a lot of data on trends in cigarette sales. Details on those trends, and comparisons with Canadian sales data, will be shared later this week.

Links to BAT presentations* 
  1. Building a better tomorrow
  2. A better tomorrow driving shareholder returns
  3. From our purpose to consumers, brands and capabilities.
  4. Step changing new categories
  5. Combustibles underpin sustainable value growth
  6. Digital to unlock business value
  7. Closing remarks
*you will need to identify yourself as a shareholder to access)

Tuesday 17 March 2020

St. Patrick's Day and Imperial Tobacco's marketing tactics.

Vype ad - March 2020
It's St. Patrick's Day today -- and so this week Imperial Tobacco Canada has dressed its Vype promotions in green.

"Feeling lucky?" it asks visitors to its web-site before inviting them to "Go gold."

Only a month ago -- on Valentine's day -- the ads were similarly dressed for the day. Looking for romance? "Find an e-pod you'll love".

Lifestyle advertising and feeling lucky or finding love

One might have hoped that the existing federal law would have discouraged this company from using these feast days to promote nicotine products.

Vype ad - February 2020
After all, the Tobacco and Vaping Products Act (TVPA) bans ads which evoke "a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring." 

Advertisements which link products to deeply-embedded cultural events do both. By linking these products with these much celebrated feast days, they imbue nicotine with the deeply embedded values of the day -  like Irishness, luck or romance.
Such associations function as lifestyle promotions.

The general impression of no harm and misleading advertising 

The TVPA, like other consumer protection laws, prohibits ads which "are likely to create an erroneous impression about, the characteristics, health effects or health hazards of the vaping product or its emissions."

With their theme of feast-day celebrations and their sub-message of elegance and romance, these messages are like those which were condemned by the Quebec courts as giving the general impression that the product is not harmful to health and therefore being misleading advertising. (See para 518-541 of Justice Riordan's 2015 ruling.

Vype ad - June 2018
A change of style, but not of impact

Over the past year, Imperial Tobacco has modified the style of its direct advertising, but it has not changed its power or purpose. The Father's day ad from 2018, for example, shows more conventional symbols of lifestyle imagery, but it did not necessarily communicate lifestyle values more effectively.

Federal proposals on promotions won't affect these age-gated ads

In December 2019, Health Canada proposed to strengthen the TVPA with regulations to restrict permitted advertising. These important adjustments to the law would require ads like the St. Patricks' Day and Valentine's Day ads to carry warnings, but would not otherwise impose new restrictions on the styles of ads that are allowed. Unlike tobacco advertising, which is restricted to 'informational' messaging, vaping manufacturers will continue to be able to use non-product attributes in their ads.

Imperial Tobacco responds to concerns about flavours by adding more.

Many health organizations have called for restrictions on the use of flavours in vaping products. In January, Canada's chief medical officers of health called on the federal government to "Ban all flavoured vaping products and then provide regulatory exemptions or market authorizations for a minimum set of flavours to support smokers who choose to use vaping to end or reduce their use of nicotine-containing products."

Imperial Tobacco has responded to concerns about flavours not by reducing the number of flavour they offer, but by increasing them. Since the MOH call for restrictions, the company has introduced 4 additional flavours - Infused Cucumber and Blood Orange (January) and Passionfruit Fields and Lychee Orchard (March).

How low will prices go?

The Vype ePOD was introduced a year ago with a starter kit price tag of $44.95. Today Imperial Tobacco is selling it for $9.99. (The other major competitors, JUUL and Logic Compact, are also selling their products at less than half the January 2019 price.)

To date, Canadian tobacco control laws have focussed less on the pricing component of the marketing mix, using taxes instead as a way of establishing a minimum price.

The 20% tax on devices that is now in place in B.C. and that is planned by Nova Scotia and Alberta would raise prices somewhat, but would not prevent the companies from using lost-leaders or price promotions to attract new users.

Evocative ads. New flavours. Lower prices.  In the face of concerns about vaping, Imperial Tobacco is ramping up its marketing efforts.

Thursday 5 March 2020

First government survey since e-cigarettes were legalized suggests it is kids, not adult smokers, who have been most affected.

Today Statistics Canada released the not-too-long awaited results of the one-time Canadian Tobacco and Nicotine Survey. This survey was conducted of Canadians over 15 years of age in November and December  of 2019.

It came after a long drought. Monitoring of e-cigarette use became a casualty of the restructuring of Health Canada's national drug use surveillance, last conducted in 2017. Both cannabis and e-cigarettes were legalized in the same year, but only cannabis received intensified surveillance. No federal agency was asking Canadians about their e-cigarette use for 23 months - including the first 17 months after the products began appearing in convenience stores.

Some of the survey results were posted at 8:30 this morning in Statistics Canada's The Daily. Information on the prevalence of use, the perceptions of harm and the reasons for using these products were made public. Not yet available are detailed tables, or information on how the use of these products is related to cigarette smoking behaviour.

Survey methodologists might cringe at comparing today's results with those done with a previous survey instrument, but such concerns may need to take a back seat as we try to grapple with what we are facing not quite 2 years after the nicotine market was so radically changed.

The law may have been intended to help adult smokers, but it is kids who have been mostly affected.

Among surveyed Canadians under 25 years of age, the proportion who have used e-cigarettes in the past month has grown almost 3-fold, from 6% to 15%.  Yet among adult Canadians (over 25+). the change is so modest that further analysis may be required to establish whether it is statistically significant.

Graph prepared by Physicians for a Smoke-Free Canada

Half of Canadian vapers are young people. 

The limited information on today's release (which did not provide population estimates) requires other population estimates to be used to establish how many of Canada's vapers are youthful. Such ball-park estimates show that roughly half of those who have vaped in the past month are under 25, with a quarter under 19 years of age. About 4 in 10 daily vapers are under 25 - more than double their share of the overall population.

These numbers are staggering: more than quarter of a million underaged children are using e-cigarettes recently - and almost 100,000 on a daily basis.

Graph prepared by Physicians for a Smoke-Free Canada

It's not harm reduction but drug effect and marketing that is driving youth use

Statistics Canada made available today the results of the questions on why people tried vaping. Just over one-third of all vapers identified reducing smoking as the main reason they vaped. The drug effects (enjoyment, reduce stress) and curiosity were most often cited by young people.

Chart prepared by Statistics Canada

What we still don't know

The Canadian Tobacco and Nicotine Survey also asked Canadians detailed questions about their smoking behaviour, about their cannabis and alcohol use and about their quitting attempts. Sadly, none of these important factors were referred to in today's release. 

Important too is to understand when vaping is related to nicotine or cannabis use. Today it was reported that about 9 in 10 young people used nicotine when vaping, but other studies suggest that children who self-report e-cigarette use are often confused or fail to recognize when they are consuming nicotine. 

Hopefully more than could fit into today's 800 word government summary will soon be made available.

Wednesday 4 March 2020

Keeping track!

A lot is happening quickly in the field of tobacco and vaping regulation. This blog is to share attempts to visualize and keep track of developments.

In the past month alone, three Canadian provinces  and one territory (Nova Scotia, Alberta, Ontario and Nunavut) have announced new measures. This week Prince Edward Island became the first Canadian jurisdiction to increase the legal age for tobacco or vaping products to 21 years.

As illustrated below, while there remain major gaps to fill, provincial and federal regulators are plugging away at the problem.

Download: Snapshot of Canadian vaping regs.

There is a lot of action outside of Canada as well. 

Last week alone, one more large country banned e-cigarette imports (Turkey) and three others announced new regulatory measuers (New Zealand, Romania and the Philippines). In the United States, Congress passed legislation to ban e-cigarete flavours, and 39 states announced an investigation into JUUL's adherence to consumer protection laws. Oh, and JUUL announced it was withdrawing from Indonesia.

That's a lot to keep track of. More than 150 events are logged on our tracking sheet -- and the number keeps growing.

Download: Vaping Regulations Timeline

Let us know if we missed something!