A second price increase in 2022 for certain styles of the top-selling electronic cigarette Vuse could be the first step toward the products becoming sustainably profitable in the U.S. for R.J. Reynolds Vapor Co., an industry analyst said last week.
The latest in a series of tobacco-product price hikes took effect May 31 for most Reynolds Vapor and R.J. Reynolds Tobacco products. Both businesses are owned by British American Tobacco Plc.
Reynolds Vapor produces most of its e-cigarette products at its 2-million-square-foot manufacturing plant in Tobaccoville, where the bulk of its local workforce of between 2,000 and 2,500 is employed. Reynolds has not provided a Forsyth workforce count in several years.
Noteworthy in the price hikes was the inclusion of Vuse Alto e-cigarette products. The two-pod packs went up by $1.70 per carton, while the four-pod pack rose by $3.40 per carton.
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Barclays analyst Jain Gaurav said in his report that Reynolds Vapor is planning to increase prices on Alto Duo and Quad by 25 cents per pod.
Reynolds previously raised on April 1 the single-pod Vuse Alto packs by $1.60 per carton, while the two-pod pack rose by $1.55 per carton and the four-pod packs by $6.30 per carton.
Because all of the major U.S. and global e-cigarette manufacturers have been challenged to gain and maintain market share — particularly as new Food and Drug Administration restrictions loom — increasing per-pod prices has been considered as potentially detrimental to getting smokers to switch over.
“We think these price increases imply that BAT’s fiscal 2022 U.S. e-cigarette retail pricing will be up 12% year over year, which will translate into a 40% increase for BAT’s U.S. e-cigarettes revenue per pod, or almost $1 per pod,” Gaurav wrote.
Gaurav said the e-cigarette price increases could transform BAT’s bottom line on the category from a $350 million loss in fiscal 2021 to a $200 million profit in fiscal 2022. Gaurav said the e-cigarette profit could reach $700 million by fiscal 2025.
“A large part of this will go straight to BAT’s bottom line. BAT’s cost per pod can also go down as it scales up its e-cigarette business,” Gaurav said.
BAT has set a goal of at least $6.79 billion in annual new-category revenue by 2025.
BAT said in its fiscal 2021 report in February that it had 18.3 million consumers of next-generation products worldwide as of Dec. 31, up 4.8 million from the end of 2020. The breakdown in terms of gains is 2.7 million vaping customers, 1.7 million heat-not-burn cigarettes and 400,000 in modern oral products.
Vuse vaults to No. 1
Over the past two months, Vuse has overtaken Juul as the top-selling e-cigarette, according to Nielsen’s monthly reports on convenience store sales.
Yet, vapor products represented just 6%, or $1.51 billion, of BAT’s overall U.S. sales at convenience stores in 2021, according to Nielsen.
By comparison, traditional cigarettes represent 84%, or $21 billion, of U.S. sales, with moist snuff and oral nicotine products representing 10%, or $2.62 billion.
A quarterly increase in the list price for nearly all of Reynolds Tobacco’s traditional cigarette brands has become commonplace in recent years.
The list price is what wholesalers pay manufacturers for their traditional cigarette products. The increase typically is passed on to customers at retail.
Reynolds’ list price went up for a third time in 2022 on May 31, following four hikes conducted in 2021.
Altogether, Reynolds has raised its list price by 88 cents over the past eight months for many of its top brands, as well as a combined $1.45 since January 2020.
Raising the list price so frequently can push smokers toward more discount options, particularly with regular unleaded gas prices at historic levels.
Whetting interest
Gaurav wrote that BAT being able to demonstrate sustainable profits from Vuse could sharpen investors’ interest in e-cigarettes altogether.
“Investors have so far been excited about the potential of heat-not-burn (traditional cigarettes) and modern oral products,” Gaurav said, particularly those from Swedish Match.
On May 11, Philip Morris International Inc. confirmed that an affiliate has made a $16 billion all-cash offer for Swedish Match AB in a potential industry-changing deal. The PMI affiliate, Philip Morris Holland Holdings B.V.1, is offering a 39.4% premium on Swedish Match’s share price at that time.
“Electronic cigarettes, on the other hand, have faced considerable investor skepticism, with Altria seeing significant write-down on its Juul investments,” Gaurav said.
In December 2018, Altria Group Inc. made an industry-shaking $12.8 billion investment into Juul Labs Inc. that is proving to be more of a bust than a boon.
By January 2020, Altria disclosed it has written down for a second time the value of its 35% investment in Juul. The value was listed at $4.2 billion as of Dec. 31, 2019.
Gaurav also noted that Imperial Brands Plc, which owns ITG Brands LLC of Greensboro, is “running into operational challenges with its blu eCigs rollout that led to repeated guidance cuts between 2018 and 2020.”
“BAT’s e-cigarette business becoming profitable will thus mark a pivotal turning point in the industry.”
Gaurav said that BAT “will use the incremental e-cigarette revenue increases to fund its heat-not-burn rollout (of glo) across Europe and elsewhere in the world.”
“BAT’s heat-not-burn volumes are still only 22% of Philip Morris International’s volumes, BAT hasn’t launched a new glo device in now almost 2½ years vs. Philip Morris International launching a new device about every 18 months.
“This suggests to us that pricing discounts will remain the key tool through which BAT gains heat-not-burn volumes.”
FDA’s pivotal role
Both Gaurav and industry analyst David Sweanor pointed out the FDA’s current regulatory push will play a key role in Vuse’s future profitability.
President Joe Biden signed into law in March U.S. House Resolution 2471, a $1.5 trillion federal funding bill that contained language placing the use of synthetic nicotine under the FDA’s authority. That aspect of the law went into effect April 14.
The FDA requested the regulatory language because of concerns that electronic-cigarette manufacturers were switching to synthetic-nicotine products “in an attempt to evade FDA regulation (that) revealed a critical need to clarify FDA’s authority over these products.
“With the e-cigarette premarket tobacco application, and now the synthetic nicotine e-cigarette process running at the FDA, there is significant pressure on smaller competitors,” Gaurav said.
Sweanor said BAT’s ability to shift from losing money on e-cigarettes to sustainable profitability would be monumental “because vaping is a new and competitive market, and (traditional) cigarette companies act much like a cartel.”
“But the FDA is now limiting the competition Reynolds faces ... hence the pricing power Reynolds now has on vaping.”
Sweanor expressed concern that raising e-cigarette prices could result in dissuading smokers from moving from traditional cigarettes. He is an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.
“That will further protect the cigarette business, which is a public health tragedy made possible by dysfunctional FDA regulation and counterproductive efforts by anti-tobacco groups to dissuade people who smoke from switching to less hazardous alternatives,” Sweanor said.
As fewer U.S. adults smoke traditional cigarettes, BAT and Altria are shifting more sales toward smokeless tobacco products, such as electronic and heat-not-burn traditional cigarettes, moist snuff and snus.
Yet, traditional cigarette manufacturers are benefiting from anti-tobacco advocates’ efforts targeting electronic cigarettes, particularly use by those under age 21, Sweanor said.
In February 2020, the FDA limited closed-pod flavors to menthol and tobacco. The FDA raised the legal smoking age from 18 to 21 in December 2019
A coalition of 18 conservative advocacy groups, led by Americans for Prosperity, have been urging FDA commissioner Dr. Robert Califf to hit the brakes on severely tightening federal regulations for synthetic nicotine products.
Meanwhile, anti-tobacco advocacy groups have expressed optimism that Califf will support additional tobacco and nicotine restrictions on menthol traditional cigarettes and synthetic nicotine products.
Specifically, the federal Food, Drug and Cosmetic Act (FD&C) now “includes specific language that makes clear the FDA can soon regulate tobacco products containing nicotine from any source, which includes synthetic nicotine,” the FDA said in a news release.
Currently, synthetic nicotine products can be sold in candy and fruit flavors not available to FDA-regulated tobacco and nicotine products.
Puff Bar has been a major distributor of flavored synthetic nicotine products, drawing the focus of anti-tobacco advocates as a favored option of high school students. It is facing a similar level of scrutiny as top-selling e-cigarette Juul has in recent years.
In 2020, the FDA ordered Puff Bar to remove its flavored disposable e-cigarettes from the market because of their appeal to kids. In 2021, Puff Bar reentered the market as a synthetic nicotine product with kid-friendly flavors, such as Banana Ice and Cool Mint.
Gaurav said in April that a ripple effect of the new law is that “all synthetic nicotine e-cigarettes, roughly 20% of the market, would likely go off market.”
Amanda Wheeler, president of the American Vapor Manufacturers Association, said giving the FDA authority over synthetic nicotine would serve to slow down the shift of adult smokers toward vaping options.
“It’s already lunatic that FDA is prohibiting adult American smokers from switching to vaping, but this legislation is so absurd that it will extend FDA’s reach to products that have no actual, physical connection to tobacco whatsoever,” Wheeler said.
“It is worth considering the market implications of cigarettes being an extraordinarily and ever-increasingly profitable business, while regulations ban or otherwise disadvantage low-risk alternatives.”