Japan Tobacco caught dozing in promising ‘heat-not-burn’ market


Smoker Takumi Itou is an example of how much Japan Tobacco Inc. needs to catch up, as international rivals gain ground in the battle to offer the next generation of smoking alternatives.

Itou has been using a ¥9,980 ($89) IQOS device made by Philip Morris International Inc. that heats rather than burns tobacco. He’ll have more choices Thursday, when Japan Tobacco begins selling a rival ¥4,000 product called Ploom Tech in Tokyo. However, Itou said he’s not interested after trying one that a friend owns.

“It doesn’t feel like tobacco at all,” he said. Instead, the 38-year-old musician is considering switching to British American Tobacco PLC’s ¥8,000 glo, which he said tastes better.

By next week, all three smokeless devices will be sold in Tokyo, vying to dominate the race for next-generation tobacco products. Japan Tobacco risks trailing further behind global competitors after it said it expects supply shortages in its launch due to manufacturing constraints. Customers can only make reservations online, and won’t be able to purchase its device directly at the two flagship stores opening this week.

“Clearly they were caught napping and probably underestimated the potential for the heat-not-burn category in Japan,” said Eamonn Ferry, an analyst at Exane BNP Paribas in London.

Japan is a critical market for heated tobacco, the biggest growth opportunity in decades for developed markets amid falling smoking rates. With sales of the devices forecast to mushroom to $15.4 billion globally in 2021, tobacco companies are rushing to get as many of the new tobacco gadgets out as possible to build brand allegiance.

Ploom Tech’s tobacco capsules require new manufacturing lines, which have created a bottleneck in supply, said Suguru Fujiwara, head of emerging products marketing, in an interview last week. Japan Tobacco is also waiting to hear users’ opinions before making concrete plans about further expansion, though it aims to be available nationwide by early 2018. “We want to first hear customers’ feedback and decide the next step,” he said.

As the Tokyo-based company plans to set up 100 locations for consumers to pick-up the devices ordered online, British American Tobacco is set Monday to sell its competing glo device in more than 8,000 convenience stores around Tokyo and at its two flagship shops. BAT will also start selling in Osaka and Miyagi prefectures.

Globally, Philip Morris has taken the lead, already selling IQOS in more than 25 markets. The Marlboro maker aims to produce the equivalent of 50 billion cigarette sticks by year end. Japan Tobacco expects to manufacture about a tenth of that, and plans to test its product in an overseas market within a year.

Heat-not-burn devices, which heat tobacco without combustion to deliver nicotine to the user, have gained traction due to their similarity to traditional cigarettes and the potential to cause fewer health risks. Growth in their sales is expected to reduce the market for traditional cigarettes by $7.7 billion in five years, according to market research group Euromonitor International.

Who wins the race is vital considering smokers are ditching traditional cigarettes for the heated devices, pressuring Japan Tobacco’s dominant 31 percent share of the combustible cigarette market in its home country in 2016.

Shares of Japan Tobacco have dropped 1.7 percent in the past year, while British American Tobacco stock has gained 14 percent and Philip Morris has increased 21 percent.

Japan Tobacco said it took 120,000 pre-orders online in the first week of June for nationwide delivery. That website is now taking orders on a lottery basis. The device has already been available for purchase in a test market in Fukuoka.

Meanwhile, Philip Morris said it had sold 3 million IQOS devices in Japan as of last December. The company said April 20 that IQOS nabbed about a 12 percent share of Tokyo’s cigarette market.

“The early success of IQOS and then glo has certainly raised expectations for the proportion of the market that these products can capture,” said Jonathan Fell, director of investment manager Ash Park Capital which owns shares in Philip Morris, BAT and Japan Tobacco. “Japan Tobacco is such a major cigarette player in Japan, so it’s particularly vital for them that they’re able to capture a decent share of the market with their new product.”

Ploom Tech, which Japan Tobacco developed after acquiring patents from a San Francisco-based startup, is a hybrid between a heated tobacco product and vaporizer. The thin pen-like device heats a liquid vapor that runs through a tobacco capsule to pass nicotine to the user. Japan Tobacco has emphasized that Ploom Tech’s biggest merit is its lack of odor, which may attract Japanese consumers inclined to show consideration to others in public spaces. IQOS still emits an odor, though less than cigarettes.

Heated tobacco makers want to capture users keen to switch between devices. Philip Morris has already released a second iteration of its device called IQOS 2.4 in Japan, and sees users switching to a new device every year, said spokesman Ran Koike.

“There seems to run somewhere between a 6- to 8-month time frame when consumers are looking at upgrading their devices,” said Peter Simmons, vice president of marketing for British American Tobacco Japan. “We’re hoping and targeting to provide consumers with more choice the next time they choose to purchase.”

In Tokyo, Hidefumi Yasuhara is an ideal target. The 49-year-old insurance executive carries two IQOS devices with him so he can smoke them alternatively without waiting for one to charge. Yasuhara said he’s intrigued to try either a glo or Ploom Tech device.

“I like the uniqueness of a new product,” he said.

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