British American Tobacco (NYSEMKT: BTI) may have what could perhaps best be described as the Reese's peanut butter cup of smoking. The tobacco giant's new iFuse electronic cigarette seeks to combine the best of two worlds: the more healthful benefits of vaping and the flavor of tobacco. Smoking doesn't just have to be chocolate or peanut butter, it could be a blend of both, and that could herald the future of the industry.
The incidence of smoking continues to decline, not just here in the U.S., but around the world. According to the Kaiser Family Foundation, the number of U.S. adults smoking has fallen to just 17.4%, down from over 24% a decade and a half ago. Across the pond, Euromonitor International says adults in the U.K. who smoke has dropped from 27.4% in 1999 to just under 19% today. England is also preparing to impose a plain-packaging law that will mandate all cigarettes come in the same boring packaging, regardless of who manufactures it.
Helping to accelerate that dropoff has been the rise of electronic cigarettes and personal vapor devices. These cig-alike and vaping systems are purported to be a safer alternative to tobacco because they heat a liquid rather than burn a leaf, so they create a vapor rather than smoke. Public Health England declared e-cigarettes were over 95% less harmful than tobacco cigarettes while the U.S. Centers for Disease Control found that very few non-smokers use e-cigs, and the smokers who do do so mostly to help them quit smoking combustible cigarettes.
While it was once thought that e-cig sales could overtake tobacco sales within the next 10 years, and they may still do so as the number of smokers falls, the growth of the e-cig industry is also slowing.
Euromonitor says it's cut its five-year growth forecast in half to just 57% annually, and it may cut its outlook even further. For the first time since their debut, e-cigs recorded their first drop in quarterly sales and volumes.
But British American Tobacco may have a solution to that in its new iFuse e-cig. The device is something of a hybrid in that it vaporizes a nicotine-infused liquid, like an e-cig, but it has the draw pass through a capsule containing tobacco to enhance its flavor. According to Reuters, BAT says the iFuse is "simpler to use, more compact, more convenient, neater, cleaner and probably attracts a lower excise position." The Financial Times quotes the tobacco company also comparing them favorably to vapor products on the basis of toxicological reports it has conducted.
Philip Morris International (NYSE: PM) has been working on a device with a similar concept, but a completely different mode of delivery. Where the iFuse heats liquid nicotine to produce vapor, Philip Morris's Marlboro Heatsticks heat tobacco to produce a flavored aerosol.
Both devices are neither fish nor fowl, but they could be a way to spark innovation in an industry that's feared will have unique developments snuffed out as the tobacco giants take over. But British American and Reynolds American (NYSE: RAI) have agreed to collaborate on their respective vapor products through 2022, and to bring to market new technologies in the field. BAT owns 42% of Reynolds resulting from when Reynolds bought the liabilities of Brown & Williamson a decade or so ago, when it combined its assets with R.J. Reynolds' to form today's Reynolds American. BAT bought additional shares in Reynolds for $4.7 billion this year to ensure it maintained the same ownership stake following its acquisition of Lorillard.
At the time of the merger, Reynolds sold the leading blu eCig to Imperial Tobacco so that it could concentrate development on its own Vuse electronic cigarette. While BAT suggests the iFuse may be a European product for the time being, its venture with Reynolds may end up seeing the hybrid device come to our shores.
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