Big Tobacco Needs a Crutch to Kick Its Menthol Habit

Smokers may respond better to a menthol tobacco ban if they have clear alternatives. The same goes for tobacco companies.

The Food and Drug Administration wants to remove menthols from the US market. The agency said in a statement in late April that adding menthol to cigarettes can increase nicotine’s addictive potential and make it harder for you to quit.

Menthols are huge in the US, accounting for about a third of all cigarettes sold, compared with just 7% in the European Union in 2020, when the bloc banned them. It’s a particularly lucrative category for British American Tobacco,

BTI -0.27%

generates an estimated 30% of the group’s operating profits from US menthol cigarettes. Altria‘S

Menthol brands contribute about a fifth of its operating profit.

When Canada banned menthols in 2017, the annual average decline in cigarette smokers accelerated to double the previous three years later. But the total number of nicotine users, which includes smokeless products like e-cigarettes, fell only 0.4%, a Jefferies analysis found.

This suggests that a ban on menthol could accelerate the rate at which smokers switch to tobacco alternatives. Based on what happened when Canada and the EU banned menthol, Jefferies estimates that 45% of menthol smokers in the US could switch to smoking conventional cigarettes, 35% switch to alternatives smokeless like vape pens and about 5% could use the opportunity to quit completely. A certain portion may go to the black market.

This transformation could help the BAT meet its 2025 goal of earning £5 billion a year, or $6.16 billion at today’s exchange rates, from so-called risk-reducing products such as Electronic cigarettes. Currently, it is less than half way to achieving this goal, earning £2 billion, or 8% of revenue, by 2021 from vape brands and other new categories.

Marlboro’s American owner Altria also only earns a fraction of the overall sales from non-combustible products like the one above! Oral nicotine bags. Despite owning a 35% stake in e-cigarette brand Juul Labs, the vape and heated tobacco brands wholly owned by Altria represent only a small fraction of the US tobacco substitute market. This limited offer means Altria may have a harder time recouping profits from the ban than BAT, despite the latter having a larger menthol business.

However, it is unlikely that menthol smokers in the US will have a good smokeless alternative to their regular brand. The FDA is currently reviewing all brands of e-cigarettes to decide if they can continue on the market. To date, no menthol-flavored e-cigarettes have been approved. Without this option, menthol smokers may be tempted to exploit the illegal market or produce their own regular cigarettes.

This hopefully will all be clearer by the time the ban goes into effect. Analysts and tobacco companies don’t expect any new menthol rules to be enforced until at least 2026. The FDA must first hold public hearings, reflect respond to comments and respond to any legal challenges. To reiterate how long these changes could take, Morgan Stanley pointed out that the FDA’s rule on putting health warning images on cigarette packs first proposed in 2010 has yet to be implemented. .

When tobacco companies need the proceeds of lucrative combustible tobacco sales to fund innovation in their smokeless portfolios, they have an incentive to delay the ban until the market is ready. cigarettes and e-cigarettes are more developed.

However, they should not resist longer than necessary. Investors show a clear preference for companies that are moving away from traditional smoking companies. Shares in Philip Morris International,

company that sells Marlboro outside of the US and Swedish holster maker Match trade at around 17 times their expected earnings, a sizable premium for BAT and Altria, respectively 9. and 11 times. Philip Morris and Swiss Match generate 31% and 67% of the group’s revenue from smokeless products, respectively.

A US ban on menthol could spur the tobacco industry’s transformation, but only if tobacco companies are allowed to offer a smokeless alternative.

Write letter for Carol Ryan at

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