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Like a snail with the baggage of its history/legacy of legislation on its back, the world cigarettes market slowly toiled downhill in 2014, recording a barely there volume decline of -0.4% and continuing its downward trajectory in every region of the world bar Asia-Pacific (only kept in the black itself by the behemoth that is China dragging the region, and indeed the world, with it).

Volume declines in cigarettes as price becomes main battleground

Cigarettes’ volume decline in developed markets belies the furious pace of manufacturer activity in the category, with fast-paced changes in pricing strategies as pricing becomes increasingly the main company battleground around the world. The era of cigarettes pricing being set across regions is long gone, each country warrants its own specific approach with sub-brand variants appearing under various price band cloaks and innovation applied to each level of pricing as brand owners seek to maintain value sales and thwart down-trading, either to cheaper brands or adjacency categories, or even illicit (which saw an increase of 4% globally, excluding China).

Price appeal of adjacency categories wanes as tax loopholes closed

World cigarettes value sales maintained growth of 3.4% (largely due to Taxation, though the share of world premium cigarettes sales saw marginal increase in 2014, even excluding China), perhaps in part due to manufacturer premiumisation efforts. Adjacency categories such as RYO and pipe lost their lower price appeal compared to cigarettes as the loopholes in the few markets where they enjoyed this (such as the US) were closed. Cigars & Cigarillos, dominated as they are by the US and WE, saw shrinking volumes in its mature markets leading to overall declines, with the only growth coming from developing markets with growing purchasing power, such as China, India and the GCC countries.

Non-combustibles market steams ahead – vapour now bigger than NRT

Smokeless tobacco sales reeled globally from the Indian gutkha bans with 15% volume declines in 2015, though snus products did well in both Northern Europe and the US. But the real non-combustible star remained the vapour category (e-cigarettes) which nearly doubled in size in 2014 compared to the previous year, registering over US$6bn sales. Tank systems now account for the bulk of sales in most of the world’s top 8 vapour markets with their attendant e-liquids now a formidable category in its own right at US$2bn sales in the same year. E-liquid manufacturing is also slowly moving out of China, which still dominates in e-liquid production as well as vapour devices production) as consumer demands for provenance of consumables has led to US-made e-liquids for example.

Vapour category’s future dependent on legislation

The bombastic predictions for vapour’s future could easily, well, vapourise if legislation brings about tobacco-level taxation (this has already pulled the bottom from the Italian and Portuguese markets), limits on tar levels, demands for child-proofing, public vaping bans, bans on tank systems, loose e-liquid, etc, though in the absence of these, Euromonitor predicts the vapour market can reach over $US50 billion in the next 15 years. By then, the market is also expected to be more consolidated than its current fragmented state, with brands in some of the larger regions starting to assert their presence – the closest thing to an international vapour brand currently is Imperial Tobacco’s blu (formerly part of the Reynolds portfolio).

Cigarettes’ cautious future

It’s important to note that despite the (cautious) optimism of the tobacco industry regarding non-combustibles, global vapour products sales equate to only the 20th largest cigarettes market in the world, and cigarettes will continue to dominate the tobacco industry, unsurpassed as a nicotine delivery device until such a time as a new generation product vapour device (or something entirely novel) comes to usurp its dominance. In the meantime, legislation will persist in its aim to de-normalise smoking, leaving price the main consumer purchasing decision and company battleground for years to come. To be sure, cigarettes volumes sales will remain flat over the next five years, barely mustering 0.3% increase on average per annum, compared to around 3.5% for value sales, showing that pricing power will prevail, albeit at a reduced rate.

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