1 of 4
Japan Tobacco’s Ploomline is successful inJapan and internationally. Credit: Japan Tobacco Inc.
2 of 4
Ploom S (black) and Ploom S (white) with inserted MEVIUS stick.Credit: Japan Tobacco Inc.
3 of 4
Dinesh Babu Thotakura, general manager, media & investor relations division, JapanTobacco Inc. Credit: Japan Tobacco Inc.
4 of 4
While some parties still refer to them as “heat-not-burn” (HNB) products, Japan’s tobacco industry players – much like of the rest of the world – prefer to either use the term “heated tobacco product” (HTP) or “reduced risk product” (RRP). But, whichever of these monikers one chooses, they all describe the same method of enjoying a smoke: electrically heating tobacco to just below combustion point and inhaling the practically odorless vapor.
The world’s largest HTP market
HTPs took Japan by storm when Philip Morris International (PMI) officially launched its trailblazing IQOS device in 2014 in the city of Nagoya, causing seemingly endless lines of curious consumers in front of retail stores. PMI subsequently expanded IQOS sales across the Far Eastern nation in 2016. But, the company didn’t remain the “only kid on the block” for long. Main competitors Japan Tobacco (JT) and British American Tobacco (BAT) soon both rolled out their own respective devices, too, causing a surprising development. “As of 2020, Japan has become the world’s largest HTP market,” claimed Dinesh Babu Thotakura, general manager of Japan Tobacco’s media & investor relations division.
No longer “a gimmick”
According to the National Health and Nutrition Survey conducted by Japan’s Ministry of Health, Labor, and Welfare in November 2019, the country has an adult smoking population of 16.7%, including consumers of conventional as well as next-generation products such as HTPs. Of this proportion, approximately 78% are male, and 22% are female. According to the same survey, more than a quarter of the total smoking population have taken to HTPs, with males clocking in at 27.2%, and females at 25.2%. These are impressive figures considering that HTPs not too many years ago were regarded as little more than “gimmicks”, which according to some industry observers were unlikely to prevail against traditional tobacco products in the long term.
Those observers have of course been proven wrong in the meantime. In terms of both sales volume and value, HTPs certainly hold their ground in Japan. According to data provided by the Tobacco Institute of Japan (TIOJ), approximately 99 billion combustible cigarettes across all brands were sold in the country in 2020, representing a value of about ¥2.475 trillion (US$22.58 bn). In the same year, some 41.3 billion HTP refills (sticks, cartridges, capsules) went over retail counters, generating ¥1.064 trillion in revenues. That’s not too shabby for a “gimmick”.
Numerous factors drive HTP popularity
Various interwoven – and mutually influencing – factors may explain the skyrocketing success of HTPs. “For example, citizens’ increasing health awareness surely plays a role, as do annually rising tobacco taxes every year,” said Yusuke Suzuki, general manager of TIOJ’s heated tobacco product planning division. “But then we also must consider the tightening of indoor smoking regulations, as well as the expansion of outdoor smoking bans,” he said. Meanwhile, JT’s Thotakura added the likewise important aspect that “heated tobacco products do not combust nor emit the smell of cigarette smoke, thus gaining popularity particular amongst consumers who are very conscious not to bother their environment.” Indeed, one of the biggest advantages of HTPs is that they merely generate water-based vapor instead of actual smoke particles from burning organic material.
With PMI’s IQOS taking the lead, JT in 2018 followed suit with its first-ever HTP, Ploom TECH, rolling it out nationwide. BAT’s own glo device likewise made its debut in Japan around the same time. The three company’s together dominate the market today, although Thotakura conceded that IQOS continues to have a commanding share. ”We take seriously the fact that we are behind our competitor in terms of speed of deployment,” he told Tobacco Asia.
Catching up to the market leader
To catch up, JT banks on a strategy that has already served the company well in its conventional tobacco business: providing consumer choice through product diversification. As an example, “in 2020 we launched Ploom S 2.0, which we consider to be an evolved heated tobacco product,” Thotakura explained. “[Our] consumer research indicates that about 70% of HTP consumers choose menthol flavor, so we have equipped the Ploom S 2.0 with a new heating mode, ‘TASTE ACCEL’, which effectively lengthens the duration of the peak heating temperature compared to that of its immediate predecessor, the Ploom S.” This, he added, achieved “a balance between the freshness of menthol, rich vapor, and clear tobacco taste, making it the ideal device for consumers who enjoy menthol flavors.”
JT doesn’t restrict itself to introducing new Ploom device versions in its drive to creating consumer choice, though. Even before marketing its conventional “heated tobacco sticks,” the company began rolling out “MEVIUS infused tobacco capsules” for Ploom devices. In these latter products, a liquid is heated electronically at low temperature, which generates a vapor that passes through the capsule, infusing the contained tobacco and picking up flavor and nicotine before being inhaled by the user. “We believe in the importance of being able to continuously offer a variety of options to our consumers, as demand in the heated tobacco market continues to grow and diversify constantly,” Thotakura said.
Prioritizing investment and r&d
In response to these evolving consumer needs, JT is prioritizing its investments in r&d and marketing, as well as improving the functionalities and features of current products. Thotakura insisted that progress was steady in all these areas, with the company even already having yet another expansion of the Ploom series in the pipeline. “We are on schedule for the launch of our next-generation product, Ploom X, in Japan and other international markets in the second half of 2021,” he divulged. This carefully curated approach has secured JT an overall market share in the HTP segment of an estimated 26% as per 2020, Thotakura said, citing the company’s published first-quarter 2021 results report.
HTPs must of course not be confused with vaping devices; and particularly not in Japan, where the latter product segment holds a very curious position. Under the country’s pharmaceutical affairs law, all nicotine-containing e-liquids are classified as “drugs”, with liquid-inhaling devices (i.e. vaporizers) that use such nicotine-enriched liquids being “medical devices”. As a consequence of that legal classification, any vaping products freely available over the counter must be entirely nicotine-free, regardless of whether it may be an open or closed vaping system, an individual e-liquid pod or a refill bottle. That effectively excludes the whole vaping segment from being considered as “tobacco products”.
On the other hand, HTPs and their tobacco containers are regarded exactly that; namely tobacco products that are subject to relevant taxes. While the retail price for a standard conventional cigarette pack incorporates 61.8% of various tobacco and other taxes, things are not nearly as clean-cut with HTPs.
In October 2018 a new taxation category for “heated tobacco products” was added to Japan’s tax code. This new item deploys an extraordinarily convoluted tax calculation method, taking into account an HTP container’s “taxable tobacco weight” and converting it into “cigarette units”, then using the actual retail price of these “cigarette units” to eventually determine the proportional tax amount (excluding consumption tax) levied on HTP. Without losing ourselves in confusing details, let’s be content with Dinesh Babu Thotakura’s assertion that one retail pack of six MEVIUS capsules would work out at an ad valorem tax amount equivalent to the tax levied on 10.339 cigarette units.
Smoking restrictions also apply to HTP users
Although neither vaping nor heated tobacco products emit obnoxious smoke and their vapors are practically odorless, users of both are nevertheless restricted to designated smoking areas just like consumers of conventional tobacco products are. Luckily, Japanese gastronomy operators ought to be among the most tolerant and welcoming in the world. Most restaurants and cafés have set up separate smoking areas with physical separation and good air circulation and ventilation, smaller numbers of them deploying high-tech “air curtains”. “And some establishments now even have areas just reserved for users of HTPs only, so they don’t have to mingle with conventional smokers,” pointed out Thotakura. Smoking of any kind – including using vaporizers and HTPs – is banned in all government buildings, as well as in schools, hospitals and similar facilities; though again with the exception of appropriate outdoors smoking areas. Bars, clubs and other facilities “where smoking is the main purpose” are exempt from having to set aside smoking areas.
Unlike PMI, which in line with its global strategy is planning to “phase out conventional cigarettes in Japan within 10 years”, JT is not pursuing such a goal. This again ties in with the Japanese company’s resolve to provide as much consumer choice as possible. Given its pronounced investment and r&d focus on HTPs, it should be possible for JT to meet PMI’s challenge in the HTP arena. And as per combustibles, the company doesn’t need to worry either. It currently enjoys a very comfortable market share lead with 59.8% according to its own data research, with PMI (20.9%) and BAT (16.2%) trailing behind. Its MEVIUS brand tops the popularity scale with a domestic market share of 27.6% by volume.