After smoking cigarettes for years, Takafumi Sadate began using the newest model of a safer alternative — an IQOS Iluma i heated-tobacco device — soon after its launch in Japan in March.
Differing from e-cigarette “vape” liquid models, the latest generation of tobacco giant Philip Morris International’s premium series warms up a tobacco stick inside — without burning it or creating smoke — to generate its nicotine-containing vapour.
Sadate enjoys his favourite berry-flavoured sticks for the device in “smoke-free” rooms in shopping malls, where standard cigarettes are not allowed. “I like it because it doesn’t use fire and it’s safe,” he said.
But while Japan is the world’s largest heated-tobacco market and the category has overtaken vapes globally, an EU ban on flavouring and delays in approving the devices in the US are crimping its growth potential for PMI and its rivals.
PMI’s IQOS products, introduced 10 years ago, now generate more revenue for it than Marlboro, the world’s largest cigarette brand. However, they face increased competition from orally consumed nicotine pouch products and are coming under the same regulatory pressure as vapes.
In July, PMI downgraded its outlook on heated-tobacco growth, even as it revised its annual profit forecast upwards, boosted by its Zyn nicotine pouch. The group says it now has a “multi-category approach” and no longer bets on a single product.
PMI now expects global sales volume growth in heated tobacco to be 13 per cent in the current year, down from its earlier forecast of 14-16 per cent. It revised down its annual shipment volume guidance from “more than 140bn sticks” to “around 140bn sticks”.
It blamed a greater than anticipated impact from a ban on flavoured heated tobacco in the EU. Since October 2023, to discourage their use, products have no longer been able to have any particular flavour that modifies “the smell or taste of the tobacco” or its “smoke intensity,” according to the new EU rules.
PMI’s downgrade is “one of the first times we’ve really seen the material effect of regulation on the category, depressing the growth forecast”, said Shane MacGuill, global lead of nicotine and cannabis at Euromonitor International.
MacGuill said that while flavour restrictions were “in the medium to longer term probably survivable” for the still-growing category, the revised forecast “demonstrates that these big bets that they’re placing in [reduced-risk] categories are at the mercy of regulators”.
Rae Maile, analyst at Panmure Gordon, warned that regulators risked hindering consumers switching from cigarettes to the safer health option of heated tobacco by imposing restrictions and a similar level of tax.
“The very people who should be encouraging all of these reduced-risk products are the very ones who are also setting hardest against them,” he said.
With a taste similar to conventional cigarettes due to being made from tobacco leaves, so-called heat-not-burn products have over the past decade become the largest alternative market to smoking. PMI says the product reduces health risks, with 95 per cent lower levels of harmful chemicals being emitted on average, excluding nicotine, compared with cigarettes.
The value of the global heated-tobacco retail market stood at $34.5bn in 2023, up 12 per cent from a year earlier, according to Euromonitor International. This is more than 60 per cent larger than vaping and nearly five times the market size of rapidly growing nicotine pouches, the market research company said. The category is expected to grow by 13 per cent this year to reach $38.9bn, fuelled by emerging markets.
PMI’s IQOS is the most widely available heated tobacco, with some 70 per cent of the global market, but other tobacco giants such as Japan Tobacco and British American Tobacco are taking on the market leader.
“We are at the investment stage,” JT chief executive Masamichi Terabatake told the Financial Times, adding that it was putting about ¥450bn ($3bn) into reduced-risk products in the three years to 2026. With its flagship Ploom brand, “we would be covering 80 per cent of the [world’s] main heated-tobacco markets by the end of 2025, and expanding to around 40 markets by the end of 2026”, he said. IQOS is in about 70 markets.
JT said last week that it would acquire Vector, the fourth-largest US tobacco company, for $2.4bn, saying the deal would “strengthen [its] financial position” to support its investment in heated tobacco sticks.
In Japan, where the sale of vapes containing nicotine has been banned, Terabatake expects the heat-not-burn category to exceed 40 per cent of the total tobacco market this year.
Globally, the product is expected to “grow faster than vapes”, which face even tougher “EU regulations, particularly with regard to disposable vapes, designed to ban [them] due to underage use and environmental issues”, he said.
BAT, whose Glo series is in 33 markets, is focusing on moving up to compete in the premium segment, having settled patent disputes with PMI in February related to heated tobacco and vapour products.
In the US, the challenges to growth are the dominance of vaping products, the increased popularity of nicotine pouches and the lack of clarity on when regulatory approvals can be gained.
PMI said in July that commercialisation of an older generation of IQOS in Texas — as a pilot to market the premium Iluma series at scale later on — had been delayed from the second quarter to the fourth quarter. It expects the US Food and Drug Administration to approve Iluma in the second half of 2025, having applied for authorisation last October.
“It’s going to be a staggered, almost fragmented start to the category in the US, and we expect the growth to be relatively modest for the first few years,” said Euromonitor’s MacGuill, adding that high disposable income and a large background of cigarette use in the US were likely to fuel the category.
But some of PMI’s competitors have a different perspective.
“There are slightly higher levels of inertia [in the US] because of the time it takes to go through the FDA,” said BAT’s chief strategy and growth officer Kingsley Wheaton, adding that delays would mean “disruption is less able to happen in the US”.
BAT submitted a still-unapproved application to the FDA to launch Glo in 2021, followed by another application last December to allow reduced-risk marketing.
There is also fierce competition between the different reduced-risk products. “If vapour or modern oral [nicotine pouches] take hold in the US, the space for heated tobacco is narrower,” said Wheaton, adding that the former two represented “bigger opportunities” for the company.
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