Innovation, pricing key to tobacco growth

RICHMOND, Va. - Raising prices and introducing new products, especially varieties of smokeless tobacco, remain key growth strategies for tobacco companies as smokers worldwide increasingly face tax hikes, smoking bans, health concerns and social stigma, research firm Euromonitor International said Tuesday.

Euromonitor estimates the tobacco industry’s 2010 retail revenue at $660 billion, almost the same as the previous year. Most of that came from selling more than 5.71 trillion cigarettes, analysts said.

Cigarette volumes are expected grow nearly 7 percent by 2015 with increases in emerging markets, including the Middle East, Africa and the Asia-Pacific region, where tobacco controls are relatively weak. Declines are expected in more developed countries with tighter tobacco controls, like the U.S., where Euromonitor expects volume fall 9 percent by 2015.

Meanwhile, the firm expects global cigarette prices to rise about 25 percent in that period, encouraging illicit trade, which accounted for about 10 percent of the cigarettes consumed in 2010.

“That’s the tobacco industry in a nutshell: tobacco control driving falling volumes, rising prices driving illicit (trade) and the quest for lower-risk options to give a billion customers a viable alternative to the cigarette,” analyst Zora Milenkovic said in a conference call.

Tobacco companies are looking to smokeless products and other nicotine delivery devices, including those with possible reduced health risks, for growth as the cigarette business gets tougher. Revenue from smokeless tobacco products rose 11 percent in 2010 but remains small compared with revenue from cigarettes.

“The inevitable future of the industry lies in novel, non-combustible nicotine-delivery mechanisms,” Milenkovic said. “The combustible cigarette is an iconic product. The more innovation we have, the more chance there is of one or two of these products becoming a viable replacement.”

This year, Philip Morris International Inc. purchased the rights to a technology that lets users inhale nicotine without smoking and British American Tobacco PLC created a subsidiary called Nicoventures focused on nicotine alternatives.

In 2009, the second-largest U.S. tobacco company, Reynolds American Inc., purchased Swedish company Niconovum, whose nicotine gum, pouches and spray are intended to help people stop smoking.

Reynolds American, based in Winston-Salem, N.C., and Richmond, Va.-based Altria Group Inc., owner of the nation’s largest tobacco company, Philip Morris USA, also have begun selling dissolvable tobacco products and snus - small pouches filled with tobacco that users stick between the cheek and gum.

In addition to raising prices and searching for cigarette alternatives, cigarette makers also have focused on innovation, such as extending cigarette lines, adding menthol capsules to cigarettes and changing packaging to maintain pricing power, analysts said.

For example, Philip Morris International, which sells Marlboro and other brands overseas, has increased its revenue by introducing new products under its key brands. The new products include Marlboro Red, marketed as having rich flavor; Marlboro Gold, about “exploring new dimensions in smoking”; and Marlboro Fresh, a line of menthols.

“New product development is becoming increasingly regarded as a vital element of maintaining consumer perceptions of international brands and dissuading cash-strapped smokers not to trade down cheaper brands, to give up, or to switch to illicit trade,” Milenkovic said.

By Michael Felberbaum

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