Recently, the four major international tobacco giants Philip Morris International, British American Tobacco, Imperial Tobacco, and Japan Tobacco have successively released their 2020 annual reports.
From the financial report data, the four tobacco companies present a situation of “two happy ones and two sad ones”: Philip Morris International and British American Tobacco, which have deployed new tobacco businesses early, have gained steady growth, while Imperial Tobacco, which is hesitant to transform and has tactical mistakes. The decline of Imperial Tobacco and Japan Tobacco is beginning to show.
1. Happy Philip Morris International and British American Tobacco: new tobacco has an early arrangeemnt and strong growth
Philip Morris International and British American Tobacco, which have focused on new tobacco technology and product innovation for many years, will usher in further market recognition in 2020.
Philip Morris International’s annual operating income increased by 15.3%. Behind the growth momentum, the company is increasingly relying on the market performance of new types of tobacco. The financial report shows that Philip Morris International’s cigarette shipments in 2020 will drop by 11.1%. However, shipments of new tobacco products increased by 27.6%.
Among them, the main product IQOS contributed 23.8% to the company’s revenue. In the global market (excluding China and the United States), the market share of IQOS increased by 1.7% to 6.1%. Philip Morris International estimates that by the end of 2020, the total number of global IQOS users is about 17.6 million, of which 12.7 million users have completely switched to IQOS and quit smoking successfully. The company also predicts that by 2025, the contribution of new tobacco products to the company’s total revenue will increase to more than 50%.
British American Tobacco’s new tobacco business also contributed to the company’s profit growth for the first time. According to the 2020 annual report, although British American Tobacco’s annual operating income fell 0.4% year-on-year, its net profit increased by 4.8%.
According to the 2020 annual report, the revenue of new tobacco businesses, including vaping e-cigarette products Vuse, Velo and heat-not-burn product Glo, increased by 15% year-on-year to £1.5 billion, of which the vaping e-cigarette business increased by 52.3%. Currently, the number of users of the company’s new tobacco products has reached 13.5 million, a year-on-year increase of 30%. British American Tobacco predicts that this number will further increase to 50 million by 2030.
The two companies with good growth momentum have already resolutely deployed new tobacco business and continued to invest heavily. Since 2016, Philip Morris International has defined the company’s vision as “creating a smoke-free future”, and even recently investors have predicted that many countries will completely stop cigarette sales within 10 to 15 years. Similarly, British American Tobacco invested nearly 1 billion pounds in this field last year, and is expected to contribute 5 billion pounds in sales to the company by 2025.
When the two tobacco giants were looking forward to 2021, they mentioned the product concept of “beyond nicotine” (not only nicotine) at the same time, and emphasized the need to “further shift to a better and more sustainable business” and “transform into technology and Innovative company”. This seems to mean that the tobacco giant has begun to continue to expand the market imagination of the new tobacco industry itself, such as nicotine-free products, atomizing medical and other fields, and it is very likely to become the next stop in the transformation.
2. The sad Imperial Tobacco and Japan Tobacco: Can layoffs and senior management shift be able to reverse the decline?
In contrast, Japan Tobacco and Imperial Tobacco are clearly behind.
According to Japan Tobacco’s 2020 financial report and 2021 performance outlook, the company’s 2020 profit will fall by 6.6%, and it is expected that in 2021, profit will continue to decline by 22.6%.
At the same time, Japan Tobacco also announced a plan for layoffs. The company said that due to the decline in sales of traditional cigarettes, it plans to merge the international tobacco business with the Japanese domestic tobacco business and lay off 1,000 employees. On the other hand, it will increase investment in risk reduction products, such as heat-not-burn products, and plan to launch new products in 2021 to improve its competitiveness in Japan.
Japan is the world’s largest market for heat-not-burn products. Philip Morris International’s IQOS launched in 2014 has quickly swept the Japanese market, leading the way. It was not until 2017 that Japan Tobacco launched the heated tobacco product Ploom to compete with it, but it has not been able to completely reverse the situation.
Providing consumers with more competitive products has become a top priority for the company. Recently, Japan Tobacco CEO Masamichi Terabatake said that considering the decline in sales of traditional cigarettes in recent years and the highly uncertain business environment, the company had to make some “difficult and necessary decisions.”
2020 is also a difficult year for Imperial Tobacco. The annual report shows that the company’s 2020 operating income was 7.99 billion pounds, a decrease of 0.1% from 2019. Net profit was 3.53 billion pounds, a decrease from 3.74 billion pounds last year. Although Imperial Tobacco has been trying its best to keep pace with its competitors and actively launch new tobacco products (Blu), the company encountered problems with unsatisfactory product and market mix in 2020, and its stock has fallen by 18% in the past year.
The former CEO of the company resigned in 2019 due to investor pressure due to a severe setback in the US e-cigarette market. The new CEO Stefan Bomhard recently announced his plan for the next five years, saying that he will implement a more “disciplined” new tobacco layout strategy, and carefully adjust its heating tobacco in Europe and e-cigarette strategy in the United States based on market research.
In February, Stefan Bonhard also appointed a new CFO and expressed confidence in the measures taken to improve the operation of next-generation products. However, market analysis believes that compared with Philip Morris International and British American Tobacco, Imperial Tobacco’s new strategy is conservative, and speculated that it may be because the new CEO hopes to stabilize the transition and stabilize the decline.
3. On the eve of the change in the international tobacco landscape, opportunities for Chinese companies emerged
It is not difficult to see that the transition period from the traditional tobacco industry to new types of tobacco has arrived. British American Tobacco CEO Jack Bowles said in an interview with the Financial Times that “the cigarette market is currently declining at an average annual rate of 3%.” As harm reduction has gradually become an important development direction and research and development hotspot for the tobacco industry , The demand and market potential of new tobacco are huge.
The global tobacco market (excluding the Chinese market) long occupied by the four major tobacco giants has therefore entered a period of transformation. Whether to firmly turn the bow in time and transform the new tobacco business has undoubtedly become a watershed in changing the international competitive landscape.
In this great transformation of trans-epochal significance, opportunities are also in the hands of Chinese companies. China is the world’s largest e-cigarette production base, and it is in an absolute leading position in the upper and middle reaches of the industrial chain. The export value in 2019 has reached 76.585 billion yuan. The global e-cigarette market has always shown a pattern of “production in China and consumption in Europe and America”.
In recent years, this pattern is gradually being broken. Some Chinese companies such as China Tobacco, Wuxin Technology (RELX‘s parent company), Smoore International and other companies are entering the international market with their technology accumulation and influential domestic brands. Chinese companies are relying on the innovation of new types of tobacco to open the door to the long-closed global tobacco market and gradually show their competitiveness.
In the latest market value ranking of leading companies in the tobacco and new tobacco industries that have been publicly listed in the world, Philip Morris International has a market value of US$126 billion, while Chinese companies Smoore International and Wuxin Technology have respectively received US$58 billion and US$38 billion, ranking fourth and fifth.
But to further fight for the right to speak in this global competition, solid technology accumulation is needed. The latest report issued by the US Patent Office shows that in the field of innovation, the number of patent applications for new tobacco technology has ranked second. Philip Morris International and other companies have also accumulated hundreds of thousands of pages of documents to study the health effects of their products from the aspects of toxicology, clinical, in vitro, and epidemiology.
At present, the China scientific research of atomization inhalation is still in its infancy. According to the prospectus of Wuxin Technology, the company has also set up physical and chemical laboratories and life science laboratories, and has strengthened scientific research investment through measures such as establishing a global scientific research platform, leading the industry to expand its cognitive radius.
It is undeniable that traditional cigarettes are still the mainstream of the global tobacco market, and their position in the Chinese market will be unshakable for a long time. However, whether to firmly deploy and expand advantages in the new tobacco field will directly determine the position of Chinese companies in the future international tobacco industry. Undoubtedly, China must work hard to seize this opportunity to promote and support more and more new tobacco innovation companies to participate in the global market competition from the policy level, and further master this field on the basis of the existing global industrial chain advantages of global value chain.