Changes in Cigarette Smoking Are in Decline. Is It Also an Opportunity for Growth?

General presentation of tobacco industry

History of tobacco

The tobacco industry has a long history. It began with Native Americans who smoked through a pipe for medical and religious purposes (From the First to the Last Ash: The History, Economics & Hazards of Tobacco, no date). This was before the arrival of European, which have heavily traded and popularized this resource during the industrial revolution. But the cigarette has not always been the most common type of consuming tobacco. During the 18th and 19th centuries, people used chewing tobacco, snuff, pipes and cigars. And the consumption of cigarette has grown rapidly since the beginning of the 20th century until the first scientific revelations during the mid-1900’s (Figure 1).

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Figure 1 Per capita consumption of different forms of tobacco in the US between 1880 and 1995 (U.S. Department of Agriculture, 1996. Tobacco Situation and Outlook Report)

These revelations deal with the close link between cigarette smoking and the lung cancer (Doll and Hill, 1950) and then with other cancers (The Reports of the Surgeon General, 1964). Since these revelations on the mid 1900’s, the trend in consumption of cigarette smoking has declined despite of all the efforts made by tobacco companies. For example, they have engaged a massive cigarette advertising war on the tar and nicotine levels in cigarettes, as well as repositioned their brands and made innovations.

Main changes in the past years and decades

So, in the 80’s, tobacco companies have launched new brands of cigarettes, such as improved filter low tar and ultra-low tar cigarette with purpose to fight against the fears of their consumers (From the First to the Last Ash: The History, Economics & Hazards of Tobacco, no date).

But governments tried to reduce trends and consumption of cigarettes. So, many laws have been voted and efforts made in order to reduce cigarette consumption and to restrict cigarette smoking in public places. Among that, we can note the prohibition of advertising for cigarettes, warnings labels on packs, prohibition of smoking in public spaces like restaurants or public buildings, taxes… (From the First to the Last Ash: The History, Economics & Hazards of Tobacco, no date)

In 2003, the World Health Organization (WHO) succeeded to join 168 countries to sign the Framework Convention on Tobacco Control in order to reduce the harmful effects of tobacco consumption (WHO Framework Convention on Tobacco Control, 2003).

Trends in decline

It is more and more difficult for Tobacco companies to sell and make a growth in sales because of all these laws in developed countries. So, tobacco companies have shifted to Asian countries to continue to make growth and profit. Figure 2 shows the declining growth of cigarette sales among years and the top five consumers of cigarettes smoked (where China, Japan, Indonesia and Russia count for more than 50% of cigarette smoked). According to Johnson et al. (2008), this trend is the same for all the products, and represents the Industry Life Cycle, which is in the maturity stage, where competition becomes harder with many competitors, standard products, low growth and where everyone reduces costs.

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Figure 2 Global Cigarette consumption (MyBroadband.com, 2012)

In fact, in developed countries like US, cigarette consumption is declining (Figure 3), which constitutes the final stage called the declining stage (Johnson et al., 2008) when sales begin to fall as well as profit.

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Figure 3 Adult per capita cigarette consumption and major smoking and health events, United States, 1900–1999 (Wipfli and Samet, 2009)

A solution, create a Blue Ocean

It will be harder to generate a profit over time. According to Kim and Mauborgne (2005), this market is a Red Ocean. It is really difficult to compete in, there is a high regulation, companies have to make cost-cuttings, and improve performances at all stages to win against their competitors. So, companies have to look at opportunities which are present in this market or industry and maximize them in order to create a Blue Ocean. A Blue Ocean is a market or industry space where there are no established rules, no or few competitors, and where costs are low while the value for consumers is high (Kim and Mauborgne, 2005).

An opportunity: the Electronic-Cigarette

We will now look at an actual opportunity in the tobacco industry in order to create a Blue Ocean. In this paper, I will focus on one major opportunity concerning the tobacco industry. This concerns a totally new type of cigarette, the Electronic-Cigarette.

Presentation of the Electronic-Cigarette

The last time there was a new product concerning cigarettes concerned the light cigarettes in 70’s (Sealy, 2014). But everything is changing nowadays thanks to technology. Today, companies are able to miniaturize batteries to fit them in small objects.

A new sort of “cigarette” called Electronic-Cigarette was born in 2004 in China and is now going to become a true alternative to the classic cigarette (Sealy, 2014). Figure 4 shows how an Electronic-Cigarette works and its components.

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Figure 4 How an Electronic-Cigarette works (E-lites.co.uk, 2014)

According to Sealy (2014), an Electronic-Cigarette (E-Cigarette) can also be called a Personal-Vaporizer (PV) or Electronic-Nicotine-Delivery-System (ENDS). This is a battery powered vaporizer which produce vapor instead of cigarette smoke but which still has the feel of tobacco smoking (Cheng, 2014). The point is the system delivers nicotine in vapor form “without the harmful carcinogens that come from burning tobacco” (Sealy, 2014).

Potential of E-Cigarettes

According to Sealy (2014), this system accounts for more or less 0.5% of the today global tobacco industry but can become a challenger of the classic cigarette in some years. The market of Electronic-Cigarette already represents $3 billion in annual revenue, disseminated roughly between Europe and US (Figure 5). We can also see that big tobacco companies dominate the market with more than 80% of market share.

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Figure 5 Annual revenue and market share for ENDS (Data Source: Sealy, 2014)

According to Sealy (2014), Bloomberg Industries states that the sales of Electronic-Cigarettes can surpass the sales of classic-cigarettes in less than a decade. On its side, British American Tobacco states that it could represents 40% of its revenue. All of that means the potential market can be extended to about $225 billion in annual sales, which is more than 75 times greater than today. So, the Electronic-Cigarette has an enormous growth potential considering that tobacco market is usually more conservative.