Markets

Strong Demand For Smokeless Tobacco In Japan

Many tobacco companies have come to acknowledge the growing importance of having reduced-risk products in their portfolio to attain long-term success. In this regard, Philip Morris International ( PM ) launched its heat-not-burn technology device called iQOS in Nagoya, Japan in November 2014. Since then, the product has been rolled out nationally in the Asian country, as well as in over 20 locations, including Italy, and Switzerland. Japan can be considered as a key region for the company, as it is the only country where the national roll-out of the device has occurred. British American Tobacco (BAT), which started selling its own heat-not-burn device, called glo, in the northeastern city of Japan, Sendai, in December, has also witnessed an overwhelming response to its product, with demand exceeding the company's expectations. Glo is sold in about 600 convenience stores in the city, besides the glo flagship store . The long queues in front of the store every morning forced the company to shift from a first-come-first-serve basis to an online reservation system, with daily supply assigned by lottery.

See Our Complete Analysis For Philip Morris International

Will iQOS Have First Mover Advantage?

Heatsticks Market Share

iQOS has witnessed phenomenal growth in Japan, since it was first launched, with a steady climb of its market share. During FY 2015, the iQOS launch was expanded in Japan to reach 60% of the adult smoking population, and the national roll-out was completed in the beginning of the second quarter of FY 2016. The market share of HeatSticks has continued to expand, and carried on its strong sequential growth, reaching 4.9% in the fourth quarter. Furthermore, in January, the national market share touched an estimated 6.8%, and its off-take (select C-store sales volume as a percent of total sales volume for cigarettes and HeatSticks) share increased to 7.6%. The rate of in-switching to HeatSticks from the company's other brands declined as the year progressed, to an estimated 32% in late 2016.

Heatsticks Offtake Share

The company recently noted that it had doubled the stock of its iQOS devices in Japan, but the demand continues to outstrip the supply. iQOS' first-mover advantage in the region may prove to be beneficial to the company in the long run, especially if it is able to replicate the success seen in the country elsewhere in the world. However, in order to cut this advantage, BAT has resorted to using typical competitive tactics; glo entered the market at a cheaper price than iQOS - a starter kit sells for 8,000 yen ($77), about 20% cheaper than the rival iQOS device.

Fertile Testing Ground Of Japan

The main reason for the choice of Japan by BAT to be the first launch market can be considered to be the success garnered by Philip Morris in the region. The latter has reached an almost 5% market share, which is even more impressive when the limited sale, given the supply constraints, by the company are taken into consideration. Japanese consumers can be considered to be gadget-loving, and it will be the only country to have three heat-not-burn devices present in the market. BAT will play catch-up to Japan Tobacco's Ploom TECH device, besides Marlboro's iQOS.

When Japan Tobacco first started selling its Ploom TECH device, in March of 2016 in Fukuoka Prefecture, shipments were suspended in about a week, as the demand far outstripped the supply. The company stated in September that it would expand the sales of the device to several cities in Japan by the end of 2017, and boost the production capacity by ten times in 2017. In addition to the relatively wealthy consumers, Japan also has strict regulations with regard to liquids containing nicotine. This has stunted the progress of e-cigarettes in the region, making it an ideal testing ground for this technology.

iQOS vs. glo

Besides the aforementioned price difference, the two devices, despite being similar, do have some contrasting features. Like the iQOS system, the Neostik has to be inserted into the glo device, and turned on for it to start heating. However, unlike iQOS, which is a pen-shaped device, glo is more like a small box. While the former was made to be as small and slim as possible, the larger format of the latter can be attributed to the better battery life. For iQOS, a full charge is sufficient for just one heatstick, though it does come in a portable charging case, which can recharge on the go. According to BAT's claims, a fully charged glo holds enough power to vape over 30 Neostiks. One advantage of launching first in Japan for BAT, can be the direct head-to-head competition it will face with iQOS, wherein the gamble it has taken on the extended battery life can be proved to be a success or a failure. Another difference between the two devices is also the temperature at which it heats. iQOS heats at 350 degrees Celsius, while glo reaches 240 degrees Celsius. The lower temperature would mean fewer toxicants in the vapor; however, what effect it has on the consumer experience is yet unknown.

Have more questions on Philip Morris? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more

intuitively. For precise figures, please refer to our complete analysis for Philip Morris International .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

PM MO

Other Topics

Stocks US Markets Investing

Latest Markets Videos