Notes from recent tobacco industry investor reports

Over the past few weeks there has been a flurry of reports from tobacco companies about their business activities over the past year and their plans for the coming months.

• On February 17, BAT issued its preliminary results for 2020 and the next day presented at the CAGNY investor meeting (Consumer Analyst Group of New York) 
• On February 10, Philip Morris International hosted an Investor Day, a week after it had issued its preliminary results for 2020
• On February 9, Japan Tobacco International reported on its preliminary results and its business plan for the coming year
• On February 18, Imperial Brands (which does not have significant operations in Canada) also presented at the CAGNY conference, after hosting an investor session earlier in January.
• U.S.-based Altria also presented at CAGNY this week, and issued its preliminary results last month.

These communications do more than meet the obligations of companies to provide business information to shareholders. Because they are designed to raise the confidence of investors and the business community in the companies, they contain lots of information about how this sector is reorganizing its business focus, refurbishing its image and remaining committed to extending nicotine use.

There is much in these presentations to interest the public health community - this post provides only a sampling. 

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COVID-19 AND THE GLOBAL TOBACCO MARKET

Cigarette sales were stable in the United States:  

Altria reported that sales in the USA did not fall in 2020, for the first time in 5 years. Altria is the only company to state the total market volume of combustible and other tobacco products in a comparable way. Its depiction of the market in the USA over the past 6 years (slide 4) shows a slight decline (1% per year) in the volume of all nicotine products, from the equivalent of 16.8 to 15.9 billion packages. From the information provided, we can calculate that after 5 years, tobacco sales had fallen by 1.7 billion packages, about half of which (the equivalent of 800 billion packages) was offset by increased sales in oral and e-vapour products. 

The reduction in U.S. cigarette sales may be slowing down. Combining this year's Altria reports with those from previous years shows that cigarette sales are not decreasing at a faster rate in the past 5 years when compared with the previous decade. Between 2007 and 2011, sales fell by an average of 5% per year. By 2020, they fell by only an average of 3% per year.

Compilation of data from Altria's earnings reports

Cigarette sales went down in most other countries. 

Despite this North American experience of increased or stable sales, Philip Morris International reported this month that on a global basis sales were down by 7% in 2020 over the previous year, more than twice the usual rate of decline. (Slide 66) 

Chief Operating Officer Jacek Olczak explained that one of the reasons for the drop was that restrictions on movement and socializing resulted in fewer occasions when smoking was embedded in social rituals  "physical journeys, the bust of the smoking break, the lunch break with colleagues, the evening and beer in the bar, et cetera, all of these things have almost disappeared during COVID time."  He reassured investors that  "social consumption will be a big part of the rebound coming forward."

He illustrated this decline by sharing consumer research on "smoking moments" conducted in 5 different markets, before and during COVID restrictions.  (Slide 67) 

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CIGARETTES REMAIN KING

Cigarettes remain the bread-and-butter of tobacco companies. PMI reports that ninety-four cents of every dollar spent in the globalized tobacco market (which excludes China and the USA) is exchanged for a cigarette. (Slide 11)

This is particularly true for developing countries, where BAT sells 70% of its products  and where BAT reported that the overall market did not decrease in the second half of 2020. (Page 7).

REGIONALIZATION OF ALTERNATE NICOTINE PRODUCTS

Cigarettes are the dominant form of tobacco use through much of the world, with some notable exceptions such as India. Over the past decade, these companies have introduced products which they are proposing as alternatives to cigarettes. These recent investor presentations show how regionalized the succesas of these products has besen.

*  Almost all (90%) of modern oral (snus and tobacco-free pouches) is sold in only 6 markets: the USA, Germany, Sweden, Norway, Denmark and Switzerland. 

* Similarly, 90% of revenue from heated tobacco (like IQOS and glo) comes from only 9 countries - Japan, South Korea, Russia, Italy, Romania, Germany, Ukraine, Poland and the Czech Republic. (Page 58 and Slide 16) 

* Only 5 countries account for 75% of the value of vaping product sales. Canada was second on the ordered list - behind the USA, but ahead of the United Kingdom, France and Germany. Given that Canada is one-tenth the size of the USA and half that of the UK, France and Germany, this suggests that per capita expenditure on this category of vaping products is higher in Canada than in any other country. (Page 58) BAT also reported that during 2020 its VUSE devices and liquids out-sold other products on the market. For every $1 spent in Canada on closed vaping systems, 46 cents was spent on a VUSE product. (Page 11)

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FUTURE PLANS - ALTERNATE NICOTINE AND BEYOND

In their recent presentations to investors, PMI and BAT spent more time telling investors about the non-cigarette products they planned on selling than about the ones they currently sold.

BAT profiled ongoing changes to its non-cigarette nicotine products (slide 34):

* VUSE vapour products 

*  GLO heated tobacco products 

*  VELO tobacco-free modern oral 

Investors, of course, are focused on financial returns. BAT noted that their new product categories are a way to woo back former clients and to generate new ones. The company encouraged investors to see that the greater social acceptability of these new products would allow them to recover former smokers ('usage regain') and recruit new clients ('additional' business). (Slide 35)

PMI has concentrated its new product development on its IQOS heated tobacco products, for which new models were talked up (ILUMA and LIL). But this company too will start selling vaping products (VEEV), nicotine pouches and more novel nicotine and tobacco products (P2 and P3). (slides 50-60)

Both BAT and PMI are developing new drug systems that are not focused on nicotine delivery. BAT is already test-marketing cannabis-based CBD vaping liquids. The other drug systems it is working on are spoken about mroe vaguely - products which will deliver "on the go wellbeing and stimulation", "boost energy", help "clarity and focus" and "calm and relax". (slide 36). 

PMI says it is looking at "new adjacent areas" to sell "botanicals" that will provide "new sensorial experiences" "sleep aid", "energy and focus", "calm and control" and systems to provide other drug delivery through the lungs. It also intends to use its growing database of consumers (recruited and monitored through package scans) to offer other non-nicotine products and services. (slide 33-34)

The two other multinational tobacco comapnies (Imperial Brands and Japan Tobacco) seem to have had poorer results with new products and are implicitly scaling back their plans for alternative nicotine products. JTI, for example, does not even mention its once-touted LOGIC vaping systems in this year's business plan. Imperial Brands withdrew its BLU vaping products from Canada last year. 

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TALKING UP THEIR NEW CORPORATE IMAGE

These presentations also give insight into the public relations focus of PMI and BAT, and their attempts to present themselves as the solution to the tobacco problem, not the cause.

ESG (Environmental, Social and Governance) issues are front and centre, no longer relegated to supplementary reports as they were in the past. Altria's CAGNY presentation this week illustrates how they area contextualizing their new business lines and regulatory priorities in the ESG framework. (slide 5). 

Their recently-trademarked slogans reflect their transformation goals: PMI is "delivering a Smoke-Free Future", BAT has "A Better Tomorrow", Altria is "Moving beyond smoking." 

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DISSING ON THEIR OPPONENTS

The companies are not only more openly promoting their agenda, they are more openly slagging their opponents. The presentation by PMI CEO Andre Calantzopoulos is particularly clear in how they want investors (and regulators) to see those whom they see as standing in the way of their ambition.

Regulators risk being confused by "dogmatic opposition", "ideology", "retribution" of "lavishly-funded" groups who are "afraid to be stigmatized". It was this opposition, not the companies, that "effectively perpetuates smoking". The World Health Organization is clearly in PMI's cross-hairs: "WHO anachronistic positions based on special interest influence and funding, not facts and science." (slide 25)

How Canadians compare: we smoke less, are a little more likely to vape or drink heavily and a lot more likely to toke.

This week the Canadian Institutes of Health Information released the results of a health survey conducted simultaneously in Canada and 10 other developed countries. Between March and June last year (in the first wave of COVID-19), surveyors asked more than 5,000 adult Canadians about certain health behaviours and about their access to health-care services. The same questions were put to adults in 7 European countries (France, Germany, Netherlands, Norway, Sweden, Switzerland and the United Kingdom), and also in the United States, Australia and New Zealand. 

The Commonwealth Fund's 2020 survey of the General Population is sponsored by the U.S.-based health charity the Commonwealth Fund, and partnered in Canada by CIHI and provincial agencies.

The survey asked about commonly-used drugs use. These included questions on the use of tobacco and e-cigarettes, heavy drinking, and cannabis use. This blog presents data from the survey which can be downloaded from CIHI.

Tobacco use is lower in Canada 

This survey found that one in five (21%) Canadians identified as a smoker, 15% on a daily basis and 6% on an occasional basis. On this score Canada did better than in all but 3 countries - the USA, Australia and New Zealand.

This is noticeably higher than the estimates produced by other government surveys (15% in 2019 for the Canadian Community Health Survey and 12% in 2019 by the Canadian Tobacco and Nicotine Survey.) In addition to the inherent fluctuations of survey estimates, the design of the survey may also have produced higher results: it did not include people as young as 12 and 15 as the other surveys did, it asked about all tobacco use, and not just cigarette smoking, and it the nature of the study may have encouraged different types of people to participate. The response rate of this study was 19%, compared with 44% for the CTNS (8,500 respondents). 

By asking about all tobacco use, the surveyors avoided one of the challenges of comparing cigarette-smoking countries (like Canada and Australia) with countries where oral tobacco is more common (the U.S.A, Norway and Sweden).  

Vaping is higher  in Canada 

Canada is among a small set of countries which have higher vaping rates - outflanked only by the USA, France, the U.K. and New Zealand.

The view of Canada as a heavy-vaping country was reinforced by a presentation made by Philip Morris International to investors earlier this week. In it, the company included Canada among the 8 countries which made up almost two-thirds of the vaping market outside the USA and China. Others in this group included France, Germany and the U.K.

For this behaviour, this survey produced very similar results to the Canadian Tobacco and Nicotine Survey, including for the age-breakdown that was provided for vaping behaviour. Both surveys found that vaping was higher for those under 35 years of age (11%), compared with 2%-3% for those over 35 years old. 

Canadian clinicians counsel one-half of smokers to quit

Canada is middle-of-the-pack when it comes to providing smokers with advice or assistance to quit smoking.  

Canada is 'average' when it comes to heavy drinking.

Canadians may think of Australians and the French as heavier drinkers, but when it comes to drinking in excess of lower-risk guidelines, Canadians are in the same ball-park.

Canadians are much more likely to use (or to admit using) cannabis

This survey found that one-quarter of Canadian adults had used cannabis in the past year, three to four times the rate in Europe and double the rate in Australasia. The findings are consistent with other government surveys of cannabis use. 

The Canadian Institutes of Health Information has made their reporrt and data tables available here. 

BAT targets Canadian vaping market with higher nicotine and more flavours

This post reports on our recent review of BAT's vapour product offerings  in the 18 other countries.in which it operates a country-specific web-site. 

From an inventory of the different devices and liquids they sell, it is apparent that BAT sells higher nicotine concentrations in Canada than it does in most other countries and that BAT sells more flavours for its high-nicotine ePOD device in Canada than it does in any other country.

Low-nicotine devices are gone. High nicotine device remains

Last week Imperial Tobacco Canada (BAT) sent an e-mail informing its Canadian clients that it was withdrawing the ePEN device and that the EPOD was their only remaining vaping product in this country.

 eTank, ePen, eStick
Introduced to Canada in 2018
withdrawn by 2020

Over the past 31 months, BAT has introduced 4 vaping products into Canada and has withdrawn 3 - the eStick, the eTank and the ePen. 

The devices they pulled from the market are those which were designed to use lower-concentration nicotine liquids. 

The device they continue to sell is the one designed to be used with higher-nicotine (salted) liquids, which was introduced by BAT in January 2019 as a competitor to JUUL. 

This device, notably, is reported by BAT to now be the market leader, with 40% market share by value.

BAT has not withdrawn the lower-nicotine pod devices from most other markets (other than Kuwait). Although the e-Tank has generally been withdrawn, there are few signs that BAT is replacing the ePEN with teh ePOD in many othe rmarkets -- and only the lower-nicotine ePEN is offered for sale in Latin America and Italy. 

The ePOD was introduced
in Canada in January 2019.

BAT markets its e-cigarettes differently in different markets.

As we reported earlier, over the past year BAT has further globalized its vaping products, and sells the same product lines through near-identical web-sites in North America, Europe, Latin America, the Middle East and New Zealand. We conducted an inventory of the products offered for sale through global sites in January 2020 and again this month. 

In one year, BAT has nearly tripled the number of ePOD flavours in Canada

Over the past year, BAT has more than doubled the number of flavours offered in Canada for its ePOD device. In January 2020, there were only 8 flavours offered, and a year later the number had grown to 22. The range of tobacco flavours has increased from 1 to 4 (Golden Tobacco, Aromatic Tobacco, Smooth Tobacco, Rich Tobacco); mint and cooling flavours has increased from 1 to 3 (Smooth Mint, Cool Peppermint, Polar Mint); fruit flavours have increased from 5 to 12 (Watermelon, Cucumber, Berry, Lemon Berry, Passionfruit, Blueberry, Peach, Mango, Blood Orange, Strawberry, Lychee and Pinapple Melon), and from 1 to 3 other flavours (Flavourless, Vanilla and Citrus Gin).

BAT sells more ePOD flavours in Canada than elsewhere 

BAT sells the ePOD with fewer than half as many flavours in other countries. In Europe, the number of flavours offered by BAT ranged from 5 to 12. In the U.S.A. there are only 3 flavours and in other countries no more than 9. 

BAT sells higher nicotine liquids in Canada than in most other countries 

The European Union restricts the amount of nicotine that can be sold in vaping liquids to 20 mg/ml (a regulation that Health Canada is also proposing). But in Europe, the majority of products offered for sale by BAT fall well under that maximum. Of all the vaping liquid options they sell in the United Kingdom, for example, three-quarters (75%) are for liquids with less than 18 mg/ml of nicotine. The situation is similar in France (89%), Belgium (75%), Germany (82%), etc. 

In Canada the situation is reversed. Only 15% of BAT's vaping liquids offered for sale have nicotine levels lower than 18 mg/ml. After the withdrawal of the ePEN liquids, that percentage will drop to 3%. The only other countries demonstrating a predominance of high-nicotine are Kuwait, New Zealand and the United States. 

The law of supply and demand

Regulatory differences, like maximum nicotine levels, explain some of the differences in BAT's market offerings between countries. But there are other differences that may drive different patterns of use and sale. 

In Canada, the vaping market is one where half the customers are teenagers and young adults, half are using vaping products as a form of recreational drug (not as a way to quit smoking) and 40% are never smokers. (Statistics Canada CTNS, 2019). In the United Kingdom, by contrast, the vaping market is one that largely serves older customers who are former smokers - only 4% are never smokers. (UK Office of National Statistics, 2019). 

Because of these differences in markets, products and usage, research conclusions on the impact of vaping on nicotine and tobacco use may not be generalizable.

Download fact sheet: 

• BAT marketing of VUSE/VYPE A comparison of British American Tobacco’s marketing of the Vype e Pen 3 and Vype ePod in Canada and elsewhere (January 2020 and 2021).