Stock analysts who are bullish for e-cigarettes have been calling a sharp drop in tobacco sales. They see the cash cow of cigarettes staggering to an early grave with the bulls believing that in just ten years e-cigarettes will have overtaken cigarettes. By contrast the bears say that’s a generation away. The tobacco share price hovers between these views.
Dark Hand thinks the bulls are right for three reasons:
First the kids. Tobacco company revenue forecasts have been built on a perpetual stream of gullible teenagers of teenagers getting hooked into paying large slice of their lifetime disposable income on tobacco. The stream is running dry. Look through the plumes of vapour and smoke, peer through the moral panic of Congressmen and you start to see that kids are outvaping adults. And not smoking. The US CDC Data data shows that since vaping started to take off teenage smoking has collapsed from 19.5% in 2009 to 15.7% in 2013. That’s a reduction of almost one fifth while the e-cigarette revolution was still gathering pace. Since that 15.7% figure the number of vaping stores across America has shot up. A much more recent survey among trend-setting French youth points to where the western teenage market is heading. In the research led by one of France’s top academics 13,000 Parisian high school students were interviewed about their tobacco use. Among 12 to 15 year olds it has collapsed from 20% in 2011 to 11.2% in May 2014. That's well over two fifths down. These are catastrophic figures for tobacco companies.
If you can understand why teenagers are behaving like this, you can see that the future of the tobacco smoking is disappearing like a cloud on a hot summer’s day.
Think teenager. Think that you have an e-cigarette in one hand and a tobacco cigarette in the other. One is smelly, unhealthy and expensive. The other has an attractive taste. It doesn’t taste like an ashtray. It won’t make your tongue taste like one to your girl/boyfriend. Professor Bertrand Dautzenberg, the author of the French study, says that e-cigarettes have repositioned their tobacco counterparts as “a dirty and nerdy product.” In France and America the cigarette is no longer cool. The new is driving out the old just as in East Germany youths drive Golfs not Trabants and play Nintendo and not Space Invaders.
It’s easy to see how mainstream opinion has been blinded to this phenomenon. The intelligentsia has been suckered into seeing e-cigarettes as a faithful recruiting officer for tobacco with gullible journalists echoing the World Health Organisation line that e-cigarettes threaten a “new wave of the tobacco epidemic.” Yet survey after survey after survey is showing that e-cigarette use is not initiating tobacco use. Why give up something cool for something which is much less attractive? At all ages the e-cigarette market is dominated by smokers who are using them to quit or dramatically cut down. Illusory scare stories about e-cigarettes will continue to be thrown to a media that thrives on fear. But the financial markets won't buy it for much longer. The teenage traffic between smoking and vaping is a one-way street.
The revenues that tobacco companies are losing in teenage tobacco sales are not being recouped in e-cigarette sales. Big tobacco isn’t producing sweet flavoured e-cigarettes. (And even its lobbying power couldn’t convince the Hill to back bubble-gum flavoured cigarettes.) There’s more bad news for teenage revenues: even if the tobacco industry could convince kids to like its e-cigarettes, teens are not proving to be sticky users of e-cigarettes. E-cigarettes are not a product for generating life-time users because they are less addictive. The typical e-cigarette delivers well under one third of the nicotine of tobacco smoke. And users show the ability to graduate down the strengths.
Second the adults. The June 2014 Harvard study reported that even in 2012 there were already some 30 million European who had tried e-cigarettes. It was “a staggering number, especially taking into account that this was before the significant boom of the industry.” However in some European markets e-cigarette use may have plateaued over recent months. In the UK, where regular vapers had trebled to 2.1 million in two years, the last few months have seen a slight dip. A third of users are entirely off tobacco. The rest move from an average 20 to 4 cigarettes a day. While that is hardly dual use from the perspective of a tobacco CFO, has the e-cigarette threat to tobacco sales stabilised? Or is this a pause before another resumption in growth? This is harder to call. Most continuing smokers have tried e-cigarettes. Often these were the Trabants of e-cigarettes where the fumes didn’t necessarily contain much nicotine. These early triers might be enticed back by the much improved products coming onto the market. There is also data suggesting that trust in e-cigarettes has been diminished by a relentless stream of negative media. That media onslaught won’t continue forever. Journalists will move on, picking up on the death of tobacco narrative and the improved products. The media will turn from doom-monger to cheerleader. The health establishment’s hostility is lessening. Such sentiment matters. As tobacco use declines the social benefits of smoking will edge below the tipping point. Standing on the smoking corner is no good for networking if you're the only one there.
What about tobacco company sales of e-cigarettes to adults? Again the question is whether the products being offered are the right ones. Cigalike sales are being outperformed by mods. The hobbyist character of the market is not well suited to big companies. Nor will tobacco owned brands be an easy sell to those who see themselves as having escaped the market. That said, tobacco companies will produce high quality e-cigarettes and have phenomenal distribution channels. These are no small advantages. The question for financial analysts is whether they can out-innovate their competition or will instead go defensive and spend their energies in the complex challenge of persuading medicinal regulators to out-law their competition. The jury is out.
Thirdly there is the international market. Low tobacco control regulations and high economic growth make the developing market ripe for further smoking growth. To help matters, some Asia Pacific markets such as Singapore and Western Australia actually ban e-cigarettes. These last gasp outposts of anti-vaping will succumb to reality. E-cigarettes aren’t medicines, but they are proving more successful in ‘curing’ smoking than NRTs. The pharma industry’s grip on regulators is like an exhausted octopus clinging to a boat that has long since left port. E-cigarettes will break through in these markets through a mixture of consumer sentiment and pricing. With cigarettes sometimes under $1 a pack, e-cigarettes are currently uncompetitive. But there is no reason to see why the combination of advancing micro-technology and big-scale production won’t get e-cigarette pricing to the point where the devices will mimic the rapid adoption of mobile phones across Asia. Perhaps, just perhaps, it will be a tobacco company that seizes the opportunity.
What are your views?
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