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November 17, 2012

Flavour Capsule Cigarettes - Bursting Into the Tobacco Mainstream

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Analyst Insight by Shane MacGuill, Tobacco Analyst at Euromonitor International

With an estimated shipment volume of over 30 billion sticks in 2011, vertiginous growth rates and variants in every international brand portfolio, flavour capsule technology is a confirmed recent tobacco industry success story. A flavour capsule embedded in the cigarette's filter allows consumers to crush the bead when desired, adding flavour to their smoking experience. It is a phenomenon which stems from a trend to customisation existing on the margins of the industry for almost thirty years; 1985 saw the introduction by Philip Morris of Concord’s ‘Flavor Control Filter’, a product which sees a modern day incarnation in L&M U-Spin, allowing consumers to vary the strength of the cigarette by twisting a moveable filter. Capsule technology also echoes wider FMCG tendencies to increased consumer choice and individualisation.  As the technology rapidly gains the industry mainstream, Euromonitor International looks at recent developments in the tobacco industry, considering what further innovation is likely and how large the segment can become before capsule growth is, so to speak, crushed.

Current flavour capsule offerings revolve around menthol flavouring, a product segment which in its non-capsule form is growing in each of its major markets. While several so-called double-mentholated (menthol-to-menthol) capsule products exist the dynamism in the segment, particularly in developed markets, is being seen in hybrid, that is, regular-to-menthol capsule cigarettes. Hybrid  took its bow with Reynolds American’s Camel Crush in the US in 2008, which by 2009 had gained a 1% share of the overall US market by volume. 

Rapid expansion for hybrid capsules in last five years

Having entered a licensing agreement with Reynolds regarding capsule technology British American Tobacco (BAT) were next into the fray with Lucky Strike Click & Roll in several international markets in 2009 and Kent Convertibles (performing spectacularly in Eastern Europe and Central Asia) in 2010. Philip Morris International (PMI) soon followed with L&M Forward and Marlboro Beyond.  By 2011 the segment had grown to over 30 billion sticks globally with BAT (30%), PMI and Reynolds (27% each), sharing some 85% of volume between them. 

Currently, every major tobacco multinational has hybrid capsule brand variants in its portfolio and new extensions continue to appear. Recently Altria launched Marlborro NXT in the US - the group’s first, belated foray into the capsule segment. Although traditionally featured in international brands sold at premium price points, the technology is also increasingly deployed as a premiumising device for economy and value cigarettes and in some cases localised brands: BAT’s Pall Mall and PMI’s Philip Morris Caps were launched towards the end of 2011 and have reported success in their respective markets while in early November 2012 Japan Tobacco announced the launch in the UK of Sterling Fresh Taste On Demand, a hybrid capsule extension to its very successful Sterling economy brand umbrella.  

The next generation - clove capsules?

While the majority of activity in capsule technology is in the hybrid (regular-to-menthol) or menthol-to-menthol spheres there is a cohort of more exotic products which may point to the future of the segment, crucially, regulation permitting. In early 2012 KT&G launched a capsule extension to its popular Bohem Mojito brand, called Bohem Mohito Double, which provides additional lemon mint flavouring when the capsule is crushed. While in Indonesia, Sampoerna have marketed A Flava, a kretek cigarette with a hybrid menthol capsule, for a number of years. This latter product points to a potentially new capsule variant which could prove lucrative but would also almost inevitably be regulation-baiting. 

Kreteks, clove-flavoured cigarettes, are indigenous to and dominate the substantial Indonesian market. However, as a material clove is unstable in price terms and adds extra complexity to manufacturers’ supply chains. Specific aspects of a kretek’s taste and composition mean that innovations in paper, filter and tar level are not always easily scalable. As such, synthetic, clove-flavoured capsules would allow tobacco companies to compensate for vagaries in clove sourcing and, offer a way to entice traditional kretek consumers into the more predictable (for multinational companies) white cigarette segment, migrating them into higher value international brands in the process. Conversely, clove flavour capsule filters would also potentially allow manufacturers to globalise the kretek phenomenon and add further value to developed cigarette markets. This latter however, depends, as does the future of flavour capsule technology as a whole, on regulatory climates.

The flavour of future regulation

In 2009 the US regulator of tobacco, the FDA, introduced a flavour ban on candy and fruit flavour cigarettes (including kreteks) in the US. The ban currently excludes menthol, which accounts for around 30% of total cigarettes sold in the US, making it by far the largest market for menthol cigarettes. However, early in 2012 Brazil (sixth-largest menthol market in the world) instituted a ban on cigarette flavouring which encompasses menthol. Any expansion of the US flavour ban to include menthol and/or the introduction of flavouring restrictions in other markets would have the effect of severely depressing growth in the capsule segment. For example, the revised EU Tobacco Products Directive, which has recently been thrown into some disarray by the resignation of John Dalli from the Commission, is expected to incorporate a recommendation for a ban on menthol and other flavourings.  

However, in a scenario which excludes menthol bans, the capsule segment will flourish. All industry indications are that the triple-digit growth rates seen since the first appearance of capsule technology will have been maintained in 2012 as a plethora of new launches, critically, in further geographies and price bands, and increased consumer awareness, pile on additional volumes rather than cannibalise the sales of first movers. Capsule cigarettes are a much coveted source of premiumised revenue for tobacco companies, and although more difficult, and therefore, expensive to produce, as demand soars, capsule margins follow. While the industry may never get back-to-the-future of RJR’s 1967 Vitamin A-containing filter prototype, capsules offer a new window of innovation. How well capitalised on by the industry and how long it remains ajar, through demand or regulation, remains to be seen.


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