Tobacco in America
The last few months have been growing in difficulty for US Tobacco producers, as news stories continue to pile up with kids and young adults being hospitalized for unknown reasons. Doctors and scientists haven’t been able to determine the root cause of the problem, but the clear link between the growing number of cases is the use of an E-Cigarette. The trend of smoking electronic cigarettes or “vaping” has exploded over the last few years, especially amongst teens and young adults. The trend grew so popular that the US Surgeon General labeled vaping “an epidemic” in December of 2018, well before the first reports of hospitalization. Since then, countless news stories have stoked the public’s fears of the potential dangers of vaping, which has caught the attention of politicians at every level of government. The Trump Administration in September first announced plans to ban the sale of any flavored e-cigarette, those most popular with children. Individual states also have placed bans on all sales of e-cigarettes, including Massachusetts and Michigan. It is clear that it will take some time before the government puts in place regulation around the sale of non-combustible cigarettes, but in the meantime, I thought it would be interesting to explore other alternatives for the future of the tobacco industry.
Throughout the world, the trend of smoking traditional cigarettes continues to fall at approximately 2% per year. The invention of e-cigarettes looked to be the solution to offset this decline, as the easy to handle sticks and tasty flavors could attract a new demographic of smokers. But these features also attracted a new concerning demographic of users, children. Although I believe it would be incredibly naïve to say tobacco companies don’t want to attract a new generation of loyal customers early, the speed and intensity of adoption amongst children was incredible. According to the latest National Youth Tobacco Survey, 20% of high school students admitted to using a e-cigarette in the last 30 days, this totals over 3 million users. Comparatively, in 2015, only 9.3% of students admitted to using traditional cigarettes. Tobacco manufactures may claim that e-cigarettes were created to provide a more healthy alternative to smoking. However, just this morning as Altria announced their Q3 earnings, a small graphic in the company’s presentation caught my eye.
Managing the risks presented by the FDA will be an overarching theme for the tobacco industry for the rest of 2019 and beyond. These short to medium term disruptions will be difficult for many tobacco firms, especially those that invested heavily in the Vapor market. Just this morning, Altria announced the intention to write down $4.5 Billion of their investment in the largest producer of E-cigs in the world, Juul Labs. The non-cash charge is related to overall industry concerns, including the potential ban of all flavored liquids and the bans implemented by state and local governments. I don’t believe that Altria will be the only major player to write down investments in the coming quarters, as returns from their initial investment fail to offset the global decline in smoking. For this reason, I believe that a key buzzword of the tobacco industry through 2020 will have to be; regulatory capture. Regulatory capture occurs when the government acts in the interest of the greater public, but inadvertently helps the special interests of groups that dominate an industry. In our case, the short term disruption in e-cigarette sales will harm the heavily indebted tobacco industry, and could precipitate consolidation as smaller companies fail to generate the returns necessary to justify their large investments. This consolidation will only come to benefit the largest players in the industry, as they can claim market share far more readily.
Tobacco manufactures may claim that e-cigarettes were created to provide a more healthy alternative to smoking. However, just this morning as Altria announced their Q3 earnings, a small graphic in the company’s presentation caught my eye. According to Altria, 40% of adult smokers have tried to convert to e-cigarettes but rejected the change. If this is the case, I believe it is clear that Tobacco firms may have overestimated the potential market size of their new healthy alternative. Although there is still a considerable market for potential new customers, the fact that nearly 3x as many people have rejected using e-cigs then who use both is very concerning.
It is unclear whether or not the future of the tobacco industry will involve e-cigarrettes, but if not, what other possible alternatives are there? Some in the Public Health community fear that the ban could lead users back to traditional cigarettes or bolster the black market which is likely the cause of so many vaping deaths. In October, the FDA had 9,300 participants submit sworn testimony to the FDA in regard to use of flavored vapes. Of the group, 38% stated they intended to return to smoking traditional while 59% said they would use the black market. If this in fact representative of the larger population, then many of the concerns from the public health community are very valid and could pose a greater health risk to the public.
Another alternative that I believe could take hold in the United States is the use of Snus. Very similar to chewing tobacco, users place a small pouch filled with nicotine on their gums in between the teeth and lips. The pouches provide the nicotine that users are searching for, but is far less deadly than cigarettes. Snus has been an important aspect of Scandinavian culture for centuries, especially in Sweden, as people began using the product all the way back in the 1600’s. Swedish Match, one of the world’s largest producers of Snus, estimates that 18% of Swedish men use Snus, doubling cigarette smokers. The health effects of the Snus are notable, as Swedish men have the lowest rate of Lung and Oral cancer in Europe. The Swedish National Institute of Health stated in a 2014 report that this fact was directly attributable to “the degree of dominance of snus use in the different age groups of Swedish men.” Snus is banned in many European nations, where residents are forced to turn to smoking alternatives.