1 of 3
Smokers around the world are still lighting up. Photo credit: geri-tech
2 of 3
If supply of legal cigarettes were to disappear while there was still demand, there would be a gold rush for illicit cigarettes.
3 of 3
Combustible cigarettes remain the core segment for tobacco companies, providing the largest share of revenue. Photo credit: Marco Verch, Creative Commons 2.0.
Amid the cacophony of complete bans, increasingly limiting regulations, and a decades-long stigma placed on combustible cigarettes, new tobacco products have been receiving more attention from tobacco companies, consumers, and the media. The spotlight appears to be shining brightly on products such as vapes, heated tobacco, and nicotine pouches – so much so that at times it might seem that combustible cigarettes are going the way of the dodo and, as Philip Morris International (PMI) c.e.o. Jacek Olczak recently announced, belong in museums as artifacts to be gazed upon.
But perhaps that is not quite the case just yet. While a growing number of consumers in western countries may be turning to alternative tobacco products, there still remains a strong demand for good old combustible cigarettes. This may be partly because many smokers feel that the newer tobacco products simply do not give them the same experience as cigarettes, whether it be the mouth-feel, nicotine hit, or just the ritual of lighting up a cigarette and smoking it. It could also be because in large swaths of the world outside the group of western countries and a few more westernized ones, smokers do not have access to these new products due to regulations, bans, or lack of availability.
A quick glance at some financial results in 2022 shows that there is still demand for combustibles: PMI sold 621 billion cigarettes, with shipments increasing almost 5% in Africa and the Middle East, 2% in the Americas, and 1.5% in South and Southeast Asia; British American Tobacco (BAT) sold 605 billion sticks worldwide; Imperial Brands saw a 35 basis point improvement in aggregate market share in its top five markets after five year of consecutive decline; JT Group sold 519.4 billion cigarettes with increased volume for various markets; KT&G maintained its #1 position in its domestic market with a 65.4% market share, increased its sales volume by 0.2%, and saw a 47.2% increase in full year revenue from overseas sales of combustibles, largely from increased market presence in Latin America and its subsidiary KT&G Indonesia; in Q4/2022, ITC saw its cigarette volumes grow by 15% compared to the same period the previous year.
Statista figures show that in 2022 revenue from the cigarettes segment of the tobacco products market was highest in China at US$273 billion, followed by the US at US$82.7 billion, Indonesia at US$33.1 billion, Germany at US$30.5 billion, and Japan at US$24.9 billion.
Obviously, the demand for conventional cigarettes is there, despite a growing selection of new alternatives coming to market and a never-ending stream of anti-tobacco messages being forced upon the masses. As such it is a no-brainer that there would need to be supply to answer that demand. But, tobacco companies are constantly attacked and pressured to stop doing just that. If they really were to ignore the 1.3 billion smokers globally and stop selling combustible cigarettes entirely, what would be the likely outcome?
There would be a gold rush for illicit cigarettes. When there is demand for a product but supply is scarce, the black market thrives. Currently, even with tobacco companies manufacturing and selling cigarettes legitimately, illicit cigarettes remain a thorny issue that grows larger each year.
This threatens not only the health and wellbeing of consumers, but also the tax revenue governments could have had to use. The World Health Organization (WHO) estimates that up to 1 in every 10 cigarettes consumed worldwide come from the illicit tobacco market. A recent KPMG report commissioned by PMI on illicit tobacco in Europe revealed that consumption of illegal cigarettes in the EU increased by 0.3 billion cigarettes in 2022, with France accounting for 47% of the entire region’s illicit consumption at 16.9 billion sticks. These illegal cigarettes would have brought in €11.3 billion in taxes. In Ukraine, 7.4 billion illegal cigarettes accounted for 20% of the market, a record-high. Figures from the Confederation of Malaysian Tobacco Manufacturers (CMTM) show that the country’s illicit cigarette prevalence is at 55.3%, despite a 1.3% drop from the previous year. Independent research puts South Africa’s illicit tobacco at 54% of the market, but British American Tobacco South Africa (BATSA) said almost 70% of all cigarettes consumed in the country were illicit brands. According to BAT Kenya, illegal cigarettes took up 25.5% of the market last year, more than double the 11.3% three years prior.
Tobacco companies are subject to regulations, taxes, and intense scrutiny, and their cigarettes have standards that must be met and are produced in facilities that employ the latest technology and know-how. With counterfeit cigarettes, there is no guarantee nor control over product quality or safety, which would end up harming consumers even more than the combustibles sold by tobacco companies.
Combustibles remain the core segment for tobacco companies, even as they diversify their product portfolios and increase investment and r&d in reduced risk products. PMI may be the most aggressive company, pushing forward to achieve a smoke-free future and no combustible cigarettes at all. For now, though, combustible sales provide the biggest chunk of revenue that drives the company’s smoke-free endeavors – not only in new tobacco products but also its diversification into health and wellness products. Other tobacco companies, such as Altria, BAT, RJ Reynold, JT Group, KT&G, and Imperial Brands, adopted a more well-rounded strategy and will continue to sell their combustible cigarettes as well as their less harmful products.
The fact that any new tobacco product would have to jump through regulatory hoops before they can be marketed, which adds years to the process on top of the time required for r&d and innovation, also means that it will take more time for consumers to completely switch from combustibles to new products. During that time, combustibles would still be needed. Aside from that, it would be unrealistic to expect every smoker to want to quit smoking cigarettes.
Reducing the demand for combustibles may happen, but eradicating it entirely does not seem possible, at least for the foreseeable future.