No Smoke Without Fire

They say there’s no smoke without fire, but can there be smokers without fire? FTSE heavyweight and the world’s fourth largest cigarette producer, Imperial Brands, will certainly be hoping so.

These days there are a multitude of ways to get a nicotine hit without having to hold a small piece of tobacco wrapped in orange and white paper. However, according to the World Health Organisation, the amount of cigarette smokers in the world today has remained fairly constant, with 1.1 billion admitting to regularly lighting up compared to 1.14 billion back in 2000.

The worry for big tobacco multinationals comes in the form of vaping, the process of breathing in aerosol rather than tobacco smoke. Coming in many forms, e-cigarettes, vape pens and other paraphernalia, the phenomenon is still relatively small; globally, it is estimated that 7 million people regularly vaped in 2011 but estimates show that the number should rise to 55 million by 2021. The global vaping market is now estimated to be worth $22.6bn, up from just $4.2bn just five years ago. The US, Japan and the UK act as the craze’s largest markets, with those looking to reduce their tobacco spending combined $16.3bn.

Imperial Brands, who replaced the word “Tobacco” for “Brands” in their name during 2016, has seen its share price fall over 20% this year and is desperately trying to tap into what is considered a fast-growing market. Imperial is set to try and plug the hole in its range of lowered tobacco products by introducing the heating, not burning “Pulze”. The premise of this new product is that it will warm up the tobacco enough to release a small amount of nicotine but with most of the flavour.

The announcements of such innovations, tapping into what is undeniably a trend that will threaten Imperial’s core products, have been met with a surprisingly lukewarm reaction by its shareholders. The rapid success of vaping could well prove to be its own downfall, where there are profits, in time there will also be regulation. It is clear that although e-cigarettes are less dangerous than actual cigarettes, they are still detrimental to an individual’s health. As the Financial Times put it, “users are jumping from the 1st floor rather than the 10th floor” in smoking them.

Initially heralded as a “healthier alternative” to smoking or a way to help people quit, regulators are increasingly worried that tobacco companies are targeting those who never smoked to begin with, even targeting those not old enough to smoke. Big tobacco multinationals have been repeatedly criticised for advertising vapes on Instagram, or other non-age verified apps, giving their products names like Cherry Crush or Chocolate Treat, which they know will appeal to minors. Such hysteria will only lead to a review and subsequent clampdown of the whole sector.

With misdirected marketing and an abundance of health issues still remaining, it is regulation, not disruption, that will lead to profits going up in smoke for big tobacco conglomerates, with many companies in the sector still carrying a health warning.

 

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This article is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Any opinions expressed in the Investment newsletter are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

 

Tags: Analysis, Other, Economy, Investment, Market, Newsletter

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