There is a significant role for nicotine pouches in tobacco harm reduction in Emerging Markets, particularly in countries where oral tobacco use is prevalent.
In theory, regulators should look more favourably on the category, but this has not proven to be the case. In part, the industry needs to take a more proactive approach and engage with regulators and local stakeholders, where appropriate, before launching new products.Nicotine pouches don't require consumers to buy often prohibitively expensive devices. Still, relatively high current production costs make it challenging to earn the returns needed to facilitate meaningful investment in many developing countries. Over time, this could be addressed by a combination of appropriate excise-tax regimes and reduced input costs.
Emerging Markets face all of the same challenges as developed countries when it comes to tobacco harm reduction. In the main, these stem from the WHO's abstinence-based approach, supported by well-funded lobbyists and adopted by a large proportion of health authorities around the world. More often than not, this is exacerbated by sensationalist press coverage of questionable scientific research on the health effects of potentially reduced-risk products. In developing countries, the high relative cost of reduced-risk products, often unpredictable regulatory responses and domestic vested interests, present further obstacles.
Cost - A Major Hurdle to Harm Reduction in Emerging MarketsOne of the most significant barriers to harm reduction in developing countries is the cost of reduced-risk products compared to cigarettes. Figure 1 shows 2018 prices for the most popular cigarette brand in each country in US$. These range from over US$16 in New Zealand to below US$0.4 in Pakistan, Paraguay and Syria.
Figure 1: Global comparison of 2018 cigarette prices
In figure 2, we highlight pricing in several developing countries and compare them to developed markets. In emerging markets, prices are typically below US$3 per pack, whereas in developed markets they tend to be above US$6 per pack, with the UK, for example, above US$12.
Figure 2: Selected 2018 cigarette price comparisons
To illustrate the relative cost of switching from smoking cigarettes to vaping, we use South Africa and the United Kingdom as examples and compare two pod-based vaping products, both owned by British American Tobacco.
In South Africa, the implied device-only price for the Twisp Cue Starter Pack is R350 (£17), equivalent to the cost of more than nine packs of cigarettes. The Vype ePod Starter Kit, when not on promotion in the UK, has an implied device-only price of £17, which amounts to less than two packs of cigarettes (Figure 3).
Figure 3: Smoking v. Vaping cost comparison in South Africa and the UKSource: Idwala Research from e-commerce websites
Not only are device costs prohibitive for most smokers in South Africa, but the ongoing cost of vaping compared with smoking does not provide them with an incentive to switch either. In the UK, the per-pod price amounts to £2.40 (Figure 3), which is around a quarter of a pack of cigarettes, whereas in South Africa it is £1.96; nearly 20% more expensive than a pack of cigarettes.
Heated Tobacco Products
Heated Tobacco Products (HTP) consumables are generally priced relative to cigarettes and, using IQOS as a proxy, prices vary from in line with Marlboro to as low as 45% in the case of the UK. Marlboro's price would still represent a considerable premium to the most popular price category in most developing countries, though.
Device costs, however, represent a significant hurdle to widespread adoption of HTP in developing countries.
Figure 4: IQOS 2.4 Plus device cost relative to 20 Marlboro cigarettes Source: Philip Morris International
Using South Africa and the UK as examples again, the cost of an IQOS 2.4 Plus device amounts to some 21.1x the price of a pack Marlboro in South Africa, whereas in the UK it is only 4.3x.
To date, the introduction of nicotine pouches has mostly been limited to developed countries, with the US, Sweden and Norway the most significant by some margin. In the US, pricing is set relative to moist snuff, and in Scandinavia, snus is the benchmark. In both instances, the price per can is at a considerable discount to a pack of cigarettes. In the US, for example, national prices average at just over US$5 per can, compared with over US$7 per pack for cigarettes.
In developing countries, the low price of cigarettes and even cheaper local oral tobacco products, also represent a challenge to the nicotine pouch category, albeit less so than for vaping and heated tobacco products owing to the absence of prohibitive device costs. However, to make meaningful inroads into emerging markets at acceptable commercial returns, production costs will need to be reduced from their current US$0.50-0.60 per can.
Velo (from BAT) was launched in Pakistan in December 2019 at Rs.180 per can of 20 (US$1.12) (in line with mid-price international cigarette brands, albeit well above R.s80 for value brands), but now sells at Rs.100 (US$0.62) - only marginally, if at all, above its cost of production. Chewing tobacco sells at only Rs.10 for a small packet.
BAT launched Lyft in Russia in May 2019 at around RUB 350 (US$4.75), more than double the price of Marlboro cigarettes at RUB 160 (US$2.20) per pack. In July 2020, the Russian government banned all oral tobacco and nicotine consumer products, including nicotine pouches.
Lyft was also introduced into Kenya in December 2019 and was selling at KSh 20 per pouch, equivalent to US$3.60 per can of 20, which was 50% more expensive than premium brand cigarettes at US$2.40 per pack. The product was declared illegal by the Ministry of Health in October 2020.
Whereas nicotine pouches appear to be viewed favourably by, for example, US regulators, the bans in Russia and Kenya highlight some of the regulatory challenges for tobacco harm reduction in developing countries. These are not isolated incidences; heated tobacco products are banned in most Latin America, and nicotine vaping products were banned in China (online sales) and India in 2020. These bans often seek to protect either tax or domestic industry revenues in response to foreign entrants.
JUUL's attempted independent entry into China and India was an important catalyst for the vaping product bans in both countries. These bans underscore the importance of engaging with local stakeholders and regulators to avoid eliciting regulatory responses that ultimately limit tobacco harm reduction and related commercial opportunities.
BAT could arguably have sought an agreed regulatory framework and excise tax structure before launch in Kenya and Russia. We understand that BAT is currently working with the authorities to establish a regulatory framework for the category.