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Big tobacco firms come late to the vaping party

by Aaron Payne

IMPERIAL Tobacco yesterday an­nounced increased market share and revenue from its growth brands, with revenues steady across the business.

The firm’s report did not reveal what impact, if any, had been made by its $27bn (£17.5bn) purchase of e-cigarette brands from Reynolds American.

E-cigarettes made headlines yesterday as a government-commissioned report by Public Health England (PHE) de­clared e-cigarettes to be up to 95 per cent safer than traditional, or “combustible”, cigarettes.

Big tobacco manufacturers like Imperial are turning an increasing amount of attention to e-cigarettes.

As government regulation and taxation grow more aggressive in the face of campaigns for improved public health, the so-called vaping products offer a new market and the chance of serious growth.

But different approaches by governments are putting a veil of smoke in front of the real commercial prospects for e-cigarettes.

According to Shane MacGuill, senior tobacco analyst at Euromonitor, for big tobacco companies, “everything about this is uncertain”.

India is planning an outright ban on e-cigarettes, while in Europe, Portugal and Italy have introduced a tax on e-liquids which has hit sales.

But reports such as PHE’s could un­der­mine calls for more taxation of e-cigarettes due to public health worries. At present, tobacco giants have a small share of the e-cigarette market, for two main reasons. First, big tobacco came to the e-cigarette market late, and second, they are yet to seriously develop and market the type of vaping products consumers prefer.

Rather than “closed-system” variants that retain the look of traditional cigarettes, vapers are far more likely to use the boxier, metallic “tank-system” products.

The closed-system type offers tobacco companies greater influence on consumers, as they will not be able to switch between different vapour brands as they do now.

Some analysts believe a forthcoming EU report into vaping could shift the market in favour of closed-system products, due in part to child safety requirements.

Expansion into the e-cigarette market is definitely a long game for tobacco manufacturers, as most revenue available to cigarette companies is still heavily biased towards traditional tobacco products.

John Fell, a former equity adviser on tobacco and beverages, said: “Unless the market was to double and double and double again very, very rapidly the revenue pool is just not going to be a big enough size to impact [tobacco manufacturers’] profitability in the next few years.

“It will take time, patience and investment. But that doesn’t mean it’s not critical for them to keep developing products and investing.”

Analysts are divided as to the regions that will become major targets for growth.

Some believe that it makes long-term sense for manufacturers to target e-cigarettes in developed countries where smoking is becoming “de-normalised”, while countries where health awareness is less prevalent will remain receptive to growth in traditional products.

Fell disagrees. “It’s naive to assume that smokers in development markets aren’t going to want a similar choice of experience [to those in developed countries],” he said.

While not commenting on the role e-cigarettes are playing for her company so far, Alison Cooper, chief executive of Imperial, said: “This has been another good quarter, building on the progress we made in the first half.

“We are on track to deliver against full year expectations and to create further sustainable value for our shareholders.”

Shares in Imp­erial closed 0.49 per cent down, at 3,224p.

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