New Tobacco Data – What is it Telling Us?

One of the questions I increasingly find myself fielding is whether the tobacco industry is in terminal decline. The short answer is that it appears to be heading that way. Euromonitor’s latest tobacco data for 2013 shows volume declines for cigarettes of around 4% globally last year, excluding China and also shows two of the largest markets for cigarettes in the world after China – Russia and the US – losing a combined total equivalent to the entire annual sales of Bangladesh in the next five years. Is this a sign of things to come? And are e-cigarettes the answer?

Cigarettes in Terminal Decline

As one of the world’s most valuable fast moving consumer goods industries, totalling US$800 billion globally, the Tobacco industry is at a crossroads with seven of its top 10 global markets posting volume declines in 2013. Together, these countries lost a combined 55 billion sticks in 2013, more than the equivalent of Iran or Spain’s entire annual sales. Such wholesale declines were driven by a perfect storm of growing health awareness, increased tobacco control and rising unit prices.

Predictably, China remains the largest and one of only three top 10 markets where cigarette volumes have not declined, with US$205 billion sales in 2013. It and the other two growth countries amongst the top 10, Indonesia and Vietnam, managed to offset (just) the volume declines in all other top 10 markets, adding a combined 60 billion additional sticks in 2013.

Impaired Volumes the Norm in Developed Markets

In addition, by 2018 impaired volumes (a combination of illicit trade, duty paid economy and RYO stick equivalents) will make up more than half of consumption in almost half of developed markets, and this in turn has led to barely discernible world (excluding China) value growth of under half a percent in 2013, in an industry traditionally unused to declining profits.

Illicit Trade the Only Growth Area

To compound the bleak picture, whilst duty paid sales were on a downward global trajectory, illicit trade grew by 5% to account for one in 10 cigarettes consumed globally and is set to continue to exhibit double digit growth in developed markets over the next five years, with only Asia-Pacific, skewed by Chinese declines, set to buck the general trend towards illicit growth across all regions. Those cigarette smokers not lured to illicit trade are migrating to RYO (roll-your-own) tobacco, which is set to feature the highest growth over the next five years as cigarette smokers seek out cheaper variants despite increased taxation in its largest markets.

Are E-Cigarettes the Answer?

So, in light of combustible cigarettes’ downward trajectory, are e-cigarettes the answer? To be sure, e-cigarettes (or the vapour category as it is known) are already bigger than nicotine replacement therapy (NRT) products, worth approaching US$7 billion globally by the end of this year and forecast to be worth US$51 billion by 2030.

E-cigarettes are the one area that all tobacco manufacturers are seeking to expand into, although current generation products are likely not going to continue to see the triple or even double digit growth they have hitherto enjoyed, particularly given legislation’s recent catch-up, though once a new generation product which addresses issues such as consistency of draw appears on the market, we may well be witnessing a lasting replacement for the traditional and iconic white stick combustible cigarette.