GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018

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GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION
WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 Reinvigorating the core mission

           PLEASURE AND MENTAL
                WELLBEING

© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 Reinvigorating the core mission

                              PLEASURE AND
                               PLEASURE AND
                              MENTAL WELLBEING
                              MENTAL WELLBEING

© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 The 2017 global cigarettes market in figures

                                                     2.8% = value growth
                                 5,420 billion =         in cigarettes
                              cigarettes consumed
                                                        (2.1% ex-CN)

                               1.4% = decline in       US$699 billion =
                                  2017 v 2016           value of global
                                 (3.1% ex CN)          cigarettes market

                                 11% = illicit
                                                      US$2.58 = average
                              penetration of total
                                                       amount spent per
                               sales (excluding
                                                         pack of 20
                                    China)

                          19.7% = proportion of      89.4% = cigarettes as
                           adults in the world        share of total value
                                 smoke                       sales

© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 Trends in smoking incidence by region
                                                                                    40
                                                                                    30
        30                                                                          20
                                                   30                               10
        20
                                                                                     0
                                                   20
        10                                                                                2012    2017   2022
                                                   10                              66 million smokers in 2022
         0
               2012      2017        2022           0
                                                        2012     2017   2022                     30
         36 million smokers in 2022
                                                   83 million smokers in 2022                    20

                                                                30                               10

                                                                20                                0
                                                                                                      2012    2017     2022
                                                                10
                                                                                             558 million smokers in 2022
                                                                 0
                                                                     2012   2017   2022
  30
                                                               66 million smokers in 2022
  20                                                                                                     30

  10                                                                                                     20

   0                                                                                                     10
        2012      2017        2022
                                                                                                          0
   63 million smokers in 2022                                                                                   2012    2017   2022
                                                                                                         3 million smokers in 2022

                                 % smoking incidence            Per capita retail + illicit sticks per day
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

   Cigarette retail volume projections 2016–2031
                                Absolute World Volume Growth 2001-2016: +2%

Positive Realist Scenario: Fading status quo; Incrementally stricter excise and regulation; Relatively slow migration to RRP

 6000
 5000
 4000                                                                                                                              Absolute:
 3000                                                                                                                                -18
 2000
                                                                                                                                     -33
 1000
     0                                                                                                                               -21
         2016    2017    2018    2019   2020   2021    2022    2023   2024      2025   2026   2027   2028   2029   2030    2031

                                                      World excl China      China

Pessimistic Realist Scenario: Significant adoption of RRP in dev markets; Substantially enhanced reg and excise in CN

 6000
 5000
 4000
 3000
                                                                                                                                   Absolute:
 2000
                                                                                                                                     -31
                                                                                                                                     -45
 1000
     0                                                                                                                               -38
          2016    2017    2018   2019   2020   2021     2022   2023      2024   2025   2026   2027   2028   2029    2030    2031

  © Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 Top 20 cigarettes markets by volume 2017-2032
        2017                  2032
 1      China                 China          •   2016 top 20 = 9 Asia-Pac, 8 Europe, 2 Americas,
 2      Indonesia             Indonesia          1 MEA
 3      Russia                USA            •   2032 top 20 = 8 Asia-Pac, 6 Europe, 4 MEA, 2
 4      USA                   Egypt              Americas
 5      Japan                 Bangladesh
 6      Turkey                Turkey         •   Growth in absolute terms will come exclusively
 7      Egypt                 Russia             from countries in the AP and MEA regions.
 8      Bangladesh            Vietnam            Advancement in rankings elsewhere is only due
 9      India                 Germany            to moderated rates of decline
 10     Germany               Pakistan
 11     Vietnam               India          •   Pakistan will rise furthest (from 16th to 10th) while
 12     Italy                 Philippines        Japan will suffer steepest drop (5th to 20th)
 13     South Korea           Ukraine
 14     Ukraine               Spain
 15     Philippines           Algeria
 16     Pakistan              Mexico
 17     Brazil                Saudi Arabia
 18     Spain                 Morocco
 19     France                Italy
 20     Poland                Japan

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GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

  Changing attitudes driven by Generation Z
           Factors Described as Extremely                         “Not Smoking is Extremely Important to
            Important For Health Globally                         Health” % by Generation 2015 and 2016
                                                                     France                               China
                                                         80                               100
             Not smoking                                 60
                                                         40                                   50
                                                         20
          Eating fruit and                                                                     0
                                                          0
           vegetables                                               2015      2016                      2015       2016

                                                                     Germany                              Japan
Drinking plenty of water                                100                               100

                                                        50                                    50
          Limited alcohol
           consumption
                                                         0                                     0
                                                                   2015       2016                      2015       2016
        Regular exercise                                              Russia                                USA
                                                         100                                  100
            Taking dietary
             supplements                                  50                                   50

                                0      20     40   60         0                                    0
                                                                     2015      2016                       2015      2016
                         2011   2015   2016
                                                                    Average           Gen Z            Millenial      Gen X
 © Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

Behaviour reflecting expressed attitudes
The Times of London, 19th December 2014                            The Guardian, 10th December 2016

         New Scientist, 30th November 2016

•    Virtual space expands physical space contracts – smoking is related both to space and time

•    Sober but not opposed to substance use – excess is the issue

•    Control is cool – recklessness no longer valued as ‘highly’

•    The power of social media – ‘socially unacceptable’ behaviour can be shared swiftly

•    ‘Your grandfather’s cigarette’

© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION WT EUROPE 2018
NEW NICOTINE CONSUMER

     GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

     Detaching nicotine from the sins of its delivery platforms

      © Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 What shape will the endgame for combustible tobacco take?

         Fading status quo                        Coercive                         Incentivised

• Regulation or excise continues        • Becoming a policy framework       • Along with consumer
  to increase, but not radically in                                           preference, maintenance of
  most markets                          • Potentially involves                shareholder value has the
                                             • Reducing nic content           potential to slow migration to
• Smoking prevalence and                     • Sinking lid production cap     reduced risk products
  denormalisation gradually                  • Birth year bans
  declines as some consumers                 • State ownership of           • Governments could intervene
  exit, others slowly migrate to               tobacco companies              positively (through excise and
  reduced risk products occurs               • Price control/profit caps      regulation) to incentivise and
                                                                              accelerate this shift
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

Changing characteristics of the new nicotine consumer

          Habitual                                      Considered

          Branding                                       Design

    Seeking lowest                                  Open to overall
        price                                           value

         Analogue                                         Digital

         Format                                         Format
      consolidation                                 fragmentation

         Identity                                        Identity
       determinant                                      dependent
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 Evolution of consumption – nicotine v tobacco vapour
                                     Vapour Category Value by Region 2017-2022 (US$ billion)

                Western Europe                           USA                                   Rest of World
    14                                        14                                  14

    12                                        12                                  12

    10                                        10                                  10

      8                                        8                                   8

      6                                        6                                   6

      4                                        4                                   4

      2                                        2                                   2

      0                                        0                                   0
               2017           2022                    2017       2022                     2017           2022

   • By 2022 balance in two regions remains in favour of liquid nicotine products

   • Suggests a balanced portfolio approach is appropriate but heated tobacco much more dynamic.

   • Regulatory impact on category evolution projected to become significant (US FDA v EU TPD)

   • Strengths v weaknesses of each type of product
         • Conversion from trial of HT appears higher
         • Nicotine vapour is potentially more malleable
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

         Liquid consumption set to shift back to closed systems
                          Retail Value Sales of Closed and Open Vapour Systems 2012- 2022
         18
         16
         14
                                                                 70%                                     55%
US$ bn

         12
         10
          8
          6
          4                                                                                              45%
          2
          0
              2012            2013   2014     2015     2016      2017    2018       2019   2020   2021   2022
                                                 Closed System      Open System

                                            • Key markets but projected to expand

                                            • Regulatory concerns

                                            • Ease of product use for mainstream
                                              consumer

                                            • Involvement of tobacco and large
                                              independent organisations
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

    What Japan can tell us about HT growth elsewhere

  • Predisposed to novelty/innovation

  • Relatively low competition from other
    alternative products

  • High cultural affinity with tobacco use and
    strong identity relationships at the
    individual smoker level

  • Ability to communicate with consumer
    relatively freely

  • Favourable tax treatment

  • High levels of disposable income

  • Countries which exhibit some or all of
    these characteristics can be expected
    to receive heated tobacco more or less
    well
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

Heated tobacco volume estimates in near term
                                        Heated Tobacco Volume (stick) 2016-2021 Estimated

                 200                                                                                       11
                                                                                                            4

                                                                                                           45

                 150
billion sticks

                 100                                                                                       81

                  50                                                                                       20

                                                                                                           16

                                                                                                           26
                   0
                          2016              2017             2018            2019           2020           2021
                       Western Europe      NA      Eastern Europe   Asia-P   China   Latin America   MEA

© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 Significant next gen innovations emerging
         Heated Tobacco                     Nicotine Liquid   Alternative Platforms

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GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

                         Cannabis presents an opportunity throughout the value chain
                                                                                            US Cannabis Use & Smoking Prevalence 2007-2019*

                          c. 200m                                             25

                                                                              20

                                  global                                      15

                                                                              10
                                 cannabis                                      5

                                consumers                                      0
                                                                                      2007       2009       2011      2013   2015      2017   2019

                                                                                                           Cannabis          Tobacco

                                 % of WSH State Cannabis Sales by Product**
                   100
% of total sales

                    80
                    60
                    40
                    20
                     0
                          Dec.14      Mar.15      June.15   Sep.15   Dec.15        Mar.16    Jun.16

                                   Flowers             Vapor Pens             Concentrates
                    © Euromonitor International
                                           *Sources: SAMHSA & Euromonitor              **Source: Headset
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 The growth – especially in vapourisation – is on now …

                                                   US Open System Share of Sales
                                            1200

                                            1000

                                            800

                                            600

                                                                                        Cannabis
                                            400
                                                                                       Vapourisation

                                            200

                                              0
                                                         2017                   2022
                                                           Devices   E-liquid
© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

 So, substance and platform agnosticism is the future

© Euromonitor International
GLOBAL TOBACCO: CONTINUITY AND DISRUPTION

Reflected in an increasingly diverse range of competitive activity

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THANK YOU

 Thank you … questions
 Dankie, falemnderit, ‫شكرا‬, Շնորհակալություն, sağ olun, Eskerrik asko, Дзякуй, ত োমোকে ধন্যবোদ, благодаря,
 gràcies, 谢谢, 謝謝, hvala, děkuji, Tak, dank u, Thank you, Dankon, aitäh, salamat, kiitos, merci, Grazas,
 დიდი მადლობა, Danke, σας ευχαριστώ, આભાર, Mèsi poutèt ou, ‫תודה‬, शुक्रिया, köszönöm, Þakka þér, terima
 kasih, Go raibh maith agat, grazie, ありがとう, ಧನ್ಯವಾದಗಳು, 감사합니다, gratias, paldies, ačiū, ви
 благодариме, terima kasih, Grazzi, Takk, ‫با تشکر از شما‬, dziękuję, obrigado, mulţumesc, спасибо, хвала,
 ďakujem, Hvala, Gracias, Asant Дзякуй, ত োমোকে ধন্যবোদ Дзякуй, ত োমোকে ధన్యవాదాలు, ขอบคุณ, teşekkür
 ederim, Спасибо, ‫آپ کا شکریہ‬, cảm ơn bạn, Diolch yn fawr, ‫אַ דאנק‬, Dankie, falemnderit, ‫شكرا‬,
 Շնորհակալություն, sağ olun, Eskerrik asko, Дзякуй, ত োমোকে ধন্যবোদ, благодаря, gràcies, 谢谢, 謝謝, hvala,
 děkuji, Tak, dank u, Thank you, Dankon, aitäh, salamat, kiitos, merci, Grazas, დიდი მადლობა, Danke, σας
 ευχαριστώ, આભાર, Mèsi poutèt ou, ‫תודה‬, शुक्रिया, köszönöm, Þakka þér, terima kasih, Go raibh maith agat,
 grazie, ありがとう, ಧನ್ಯವಾದಗಳು, 감사합니다, gratias, paldies,                 Shane
                                                                         ačiū, MacGuill
                                                                                ви благодариме, terima kasih,
 Grazzi, Takk, ‫با تشکر از شما‬, dziękuję, obrigado, mulţumesc,
                                                        Headспасибо,   хвала,Research
                                                              of Tobacco       ďakujem, Hvala, Gracias, Asante,
 Tack, நன்றி, ధన్యవాదాలు, ขอบคุณ, teşekkür          ederim, Спасибо, ‫آپ کا شکریہ‬, cảm ơn bạn, Diolch yn fawr, ַַ‫א‬
                                              Shane.MacGuill@euromonitor.com
 ‫דאנק‬, Dankie, falemnderit, ‫شكرا‬, Շնորհակալություն, sağ olun, Eskerrik asko, Дзякуй, ত োমোকে ধন্যবোদ,
                                                                   @ShaneMacGuill
 благодаря, gràcies, 谢谢, 謝謝, hvala, děkuji, Tak, dank u, Thank you, Dankon, aitäh, salamat, kiitos, merci,
 Grazas, დიდი მადლობა, Danke, σας ευχαριστώ, આભાર, Mèsi poutèt ou, ‫תודה‬, शुक्रिया, köszönöm, Þakka
 þér, terima kasih, Go raibh maith agat, grazie, ありがとう, ಧನ್ಯವಾದಗಳು, शुक्रिया, köszönöm, Þakka þér,
 terima kasih, Diolch yn fawr, Dankie falemnderit, ‫شكرا‬, Շնորհակալություն, sağ olun, Eskerrik asko, Дзякуй,
 ত োমোকে ধন্যবোদ, благодаря, gràcies, 谢谢, 謝謝, hvala, děkuji, Tak, dank u, Thank you, Dankon, aitäh,
 salamat, kiitos, merci, Grazas, დიდი მადლობა, Danke, σας ευχαριστώ, આભાર, Mèsi poutèt ou, ‫תודה‬,
 शुक्रिया, köszönöm, Þakka þér, terima kasih, Go raibh maith agat, grazie, ありがとう, ಧನ್ಯವಾದಗಳು,
 감사합니다, gratias, paldies, ačiū, ви благодариме, terima kasih, Grazzi, Takk, ‫با تشکر از شما‬, dziękuję,
 obrigado, mulţumesc, спасибо, хвала, ďakujem, Hvala, Gracias, Asant Дзякуй, ত োমোকে ধন্যবোদ Дзякуй,
 ত োমোকে ధన్యవాదాలు, ขอบคุณ, teşekkür ederim, Спасибо, ‫آپ کا شکریہ‬, cảm ơn bạn, Diolch yn fawr, ‫אַ ַדאנק‬,
 Dankie, falemnderit, ‫شكرا‬, Շնորհակալություն, sağ olun, Eskerrik asko, Дзякуй, ত োমোকে ধন্যবোদ, благодаря,
 gràcies, 谢谢, 謝謝, hvala, děkuji, Tak, dank u, Go raibh maith agat
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