Trends affecting our industry
While the total tobacco and nicotine market comprises a growing user pool of over one billion individual adult consumers, global trends are shifting and our industry is experiencing a period of ongoing change.
Generational differences, as well as shifting attitudes towards health and wellness, are expected to increase the growth of new categories of products including and beyond tobacco and nicotine, which are able to provide stimulation and pleasure for consumers in ways previously associated with cigarettes. This is expected to play a role in off-setting the predicted steady decline in cigarette consumption.
While combustible cigarettes remain the largest global tobacco category, their volumes have seen a gradual fall over many years driven by increased regulation and changing societal attitudes. Total tobacco consumption, including illicit, declined 2% from 2018 to 2019; this decline rate is forecasted to remain between 2%-3% over the next three years, while the retail value of tobacco sales is expected to increase by between 2%-4% each year, driven principally by pricing. The most recent estimates for the legal global tobacco market (2018) indicate that sales are worth approximately US$814 billion. More than US$700 billion of this comes from the sale of conventional cigarettes, with over 5,300 billion cigarettes consumed per year by over 19% of the world’s population. A contributing factor to the decline of legal tobacco volumes is the continued rise in the consumption of illicit products.
Cigarettes are a reliable source of tax revenue for governments worldwide, and price differentials between markets, regulatory changes and broader macroeconomic pressures have driven the establishment of a significant and growing illicit cigarette trade, now estimated to account for 11.2% of the global tobacco market. It is generally accepted that there is a direct correlation between steep and ad hoc increases in taxes and an increase in illicit sales, with the current sanctions in many countries doing little to deter criminals for whom profits from the illegal sale of tobacco remain an appealing prospect. For example, following successive excise increases, the Australasia region has seen legal volumes decline substantially. However, in markets such as South Africa, where effective action has reduced the prevalence of illegal tobacco, legal volumes have been restored.
Tobacco is one of the world’s most regulated and most taxed industries, contributing in excess of $200 billion to government treasuries each year. Manufacturers are required to comply with a swath of regulations that vary considerably across markets. Legislation and subsequent regulation has been focused mainly on the introduction of plain packaging, product-specific regulation, graphic health warnings on packs, tougher restrictions on smoking in enclosed public places and bans on shops displaying tobacco products at the point of sale. In more recent years, governments have begun considering and adopting regulations aimed at menthol flavourings, as well as environmental concerns resulting from the litter associated with cigarette consumption.
The THP and vapour markets are relatively nascent. Regulation is in its early stages in many countries and, while many governments are considering regulation specific to this category, it has often not been enacted. Globally, there is a mix of attitudes between regulators who aim to encourage THPs and vapour as products that are potentially lower risk for smokers and those who view them with greater scepticism – including some countries where they are banned. Although many jurisdictions have yet to implement clear regulations concerning new category products, an increasing number of governments are passing laws that allow and encourage the growth of these categories, while also balancing concerns regarding increased youth usage. The UK is an example of what can happen with the support of regulators and public health bodies. Driven by influential reports from Public Health England and the Royal College of Physicians on the reduced risk potential of vapour products, the UK Government has implemented a balanced regulatory regime that discourages youth uptake while also encouraging adult smokers to migrate to potentially less harmful products.
Legal and regulatory court proceedings continue in a number of forms against the tobacco industry, and more recently the vaping industry, with the most common being third-party reimbursement cases, class actions and individual lawsuits. Special factors that led to product liability litigation in the US and Canada are not typically replicated in other countries, which is why large volume and high-value litigation has not generally spread to other parts of the globe. The industry has a proven track record of defending its rights and managing risks such as these.