The grip of cigarettes on the American public is loosening at an alarming pace, as evidenced by a dramatic shift in consumer preferences towards alternative nicotine products. This decline, marked by a significant drop in cigarette sales and a growing market for smoke-free alternatives, poses a serious challenge to the long-standing dominance of major tobacco companies.
Data paints a clear picture of cigarettes' diminishing appeal. According to Marlboro maker Altria, cigarettes' share of the U.S. nicotine market plummeted from 80% in 2018 to 60% in 2023. This trend, if sustained, could see cigarettes fall below the 50% mark within the next three years.
Further echoing this decline, British American Tobacco (BAT) recently took a significant hit, writing down the value of its U.S. tobacco brands by a staggering $34.6 billion. This move acknowledges the deteriorating long-term prospects of cigarette sales since the company acquired Reynolds American in 2017.
Several factors contribute to this rapid decline. The COVID-19 pandemic played a peculiar role, initially causing a rise in cigarette consumption as people stayed home more. However, it appears this was a temporary trend, with recent sales falling below pre-pandemic levels.
While inflation and price hikes undoubtedly force some smokers to cut back, the explanation goes beyond just cost. Retailers across the country report a shift in consumer behavior, with smokers increasingly looking beyond cigarettes altogether.
The rise of appealing alternatives lies at the heart of this changing landscape. Smokeless products like oral nicotine pouches and disposable vapes, often imported from China, are rapidly gaining popularity.
This shift in consumer preference is further exacerbated by declining retail space for cigarettes, as stores prioritize popular alternatives.
Historically, tobacco companies have relied on relentless price increases to maintain profitability despite declining volumes. This strategy, however, appears to be losing its effectiveness. While Altria managed to grow its operating profit by 27% between 2018 and 2023 even with shrinking cigarette sales, this trend seems unsustainable.
Both BAT and Altria have seen their cigarette-based profits decline recently, highlighting the need for a strategic shift.
A tipping point might have been reached, as Philip Morris International CEO Jacek Olczak suggests. According to him, once noncombustible products reach around 7% market share, they begin to rapidly displace cigarettes, becoming more visible and readily available.
This is evident in Japan, where heated tobacco sticks, pioneered by Philip Morris, now hold a staggering 40% share of the tobacco market.
The future of major tobacco companies hinges on their ability to quickly establish themselves in the smoke-free market. While some, like Philip Morris with its 40% smoke-free revenue share, are ahead of the curve, others like Altria and BAT are playing catch-up.
The success of PMI's IQOS heated tobacco stick rollout in the U.S. in May, replacing Altria's distribution, could further intensify competition and pressure traditional cigarette sales. However, its success remains uncertain, as the U.S. market currently favors vaping over heated tobacco products.
The reign of cigarettes is undeniably waning as the American public embraces smoke-free alternatives. This rapid shift presents both a challenge and an opportunity for tobacco companies. Only those who successfully adapt and invest in the future of smoke-free products will be able to survive and thrive in this evolving landscape.
