Cigarettes are losing their hold on the nicotine fix

In 2023, the number of cigarettes sold in the U.S. shrank by around 8%, double the long-term average. (Bloomberg)
In 2023, the number of cigarettes sold in the U.S. shrank by around 8%, double the long-term average. (Bloomberg)

Summary

Consumers have more nicotine alternatives than ever and they’re making the switch faster than expected, putting fresh pressure on tobacco giants.

Pretty soon, Americans who crave a nicotine hit will be more likely to reach for a vape or an oral nicotine pouch than a cigarette. Few tobacco companies look ready for this milestone.

According to data from Marlboro maker Altria, cigarettes’ share of the U.S. nicotine industry fell to 60% last year, down from 80% in 2018. Smokers are switching to smoke-free products such as vapes in higher numbers than expected. If the trend continues, it will only take another three years for cigarettes’ share to slip below 50%.

In another bearish sign for cigarettes, British American Tobacco recently announced a £27.3 billion noncash impairment of some of its U.S. tobacco brands, equivalent to $34.6 billion at current exchange rates. The move reduced the book value of brands such as Camel and Newport by a third, in an admission that their long-term prospects have deteriorated since BAT took control of their maker Reynolds American in 2017.

In 2023, the number of cigarettes sold in the U.S. shrank by around 8%, double the long-term average. There is a debate within the tobacco industry about what is causing volumes to contract so fast and whether the trend is short-term. Tobacco use has been out of kilter for a few years: It was unusually high during the pandemic when people were stuck at home and smoked more, but has been lower than normal recently.

Inflation and price increases may have forced some smokers to cut back on cigarettes, or to quit altogether. Both BAT and Altria announced new price increases that took effect in January, after raising them three and four times respectively in 2023. In the years leading up to the pandemic, two price increases a year were the norm.

But costlier cigarettes don’t entirely explain the collapse because smokers have the option to trade down to cheaper brands if they are feeling pinched. According to a Goldman Sachs survey representing 67,000 U.S. convenience stores and gas stations that sell cigarettes, retailers think the recent price increases are causing smokers to look outside the cigarette category altogether.

The challenge for tobacco companies is that consumers have more nicotine alternatives than ever. Along with oral nicotine pouches, illicit disposable vapes imported from China were the fastest-growing nicotine product in the U.S. last year. As cigarette sales slip, they are getting less retail space, compounding the problem.

Cigarette companies’ defense against falling volumes has long been their amazing ability to raise prices. Between 2018 and 2023, Altria grew its operating profit by 27%, even as cigarette industry volumes in the U.S. shrank by more than a fifth.

But the old trick may be stalling. BAT’s U.S. cigarette revenue fell 6% in 2023 as price rises only partially offset volume declines of more than 11%. Altria’s operating profit from cigarettes has fallen for two consecutive quarters. The Marlboro maker is spending more on promotions to keep smokers loyal to its brands, but its ability to raise prices may also be slipping.

The plunge in cigarette volumes might be inevitable, even without inflation pressures. According to Philip Morris International Chief Executive Jacek Olczak, noncombustible brands start to push out cigarettes at a faster rate once they reach around 7% of a country’s total nicotine market and become more visible in the street. 

In Japan, heated tobacco sticks—a technology pioneered by PMI that gives users a nicotine hit without the harmful smoke—now make up around 40% of the country’s total tobacco market.

If major tobacco companies want to remain as profitable as they have been in the past, they need to grow their smoke-free brands quickly. Progress looks mixed. At BAT, sales of smokeless products grew 21% last year but they still generate less than a fifth of the company’s total revenue. Altria’s on! nicotine pouches are booming, but its smokeless portfolio is small.

PMI, which owns the Marlboro brand outside the U.S., started investing in smokeless products earlier than its rivals and they now account for 40% of its net revenue. 

The company will take over the U.S. rollout of its IQOS heated tobacco sticks in May, when a distribution agreement with Altria expires. If the product takes off, it could put even more pressure on cigarette volumes. But heated tobacco sticks are unproven in the U.S., where vaping is much more popular.

With old-school cigarettes in fast decline, the battle for share of the smokeless market is really heating up.

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