Flavor Capsules Holding Steady in Global Cigarettes

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By Shane MacGuill, head of tobacco at Euromonitor International

Despite living under a cloud of regulatory threats - both explicit, in the case of flavor bans and implicit in the form of a drift to darker markets which makes innovation harder to communicate – flavor capsule cigarettes continued to make inroads in global markets. Volume in 2015 stood at some 64 billion sticks (more than four times global volume in 2011) with a penetration (excluding China) of about 2.5% worldwide. Performance in 2016 was expected to show some growth again from this level.

Varied uptake

Penetration was very high in some markets (particularly Latin America which boasts all 5 of the top 5 markets for percentage share of capsule consumption) and substantial in larger markets such as Japan, UK, and South Korea (8%, 8%, and 6%, respectively) but much lower to negligible penetration in very large markets such as Russia, Indonesia, and China mean that at a global level the category is still niche. All international manufacturers and many small brand owners now employ capsule in their brand variants. Both PMI and BAT are notable presences in the segment using capsules across virtually all their main portfolio and global drive brands.

Euromonitor does not directly research value for the segment. On a pro-rata basis to equivalent volume, it would amount to US$8.4 billion. However, given the geographic and banding mix of penetration (sizeable volumes in high pack price regions and a skew to premium positioning in all markets) the true TIRSP value of the segment is likely more like US$15 billion or perhaps even higher.

Combination capsules lead innovation

There has been a relatively predictable increase in combination capsules in the form of products like Pall Mall Double Click in Europe and Kool Escape in Japan amongst several others. Indeed, Japan is the largest capsule market by volume, by some way and much of the innovation in the segment continues to flow from there. Flavors are also becoming more exotic with grape, berry and even whisky (Winston variant, Japan) appearing in Asian, Latin American, and European (particularly Central and East European) markets. We have seen international manufacturers using kretek more as a flavoring in markets beyond Indonesia (Marlboro Kretek Mint and Marlboro Clove mix for example) so it is believed that capsule kreteks are a live, viable possibility.

Concern about regulation appears to have held up launches and demand in some countries (e.g. Brazil) but there is not yet a discernible impact from the TPD2 in Europe. This may be attributable to manufacturers wanting to ensure that presence meets the required threshold under the regulation. In general, capsule products have proven so popular with consumers (anecdotally the industry even credits capsule products for attracting smokers back from the illicit trade in some, particularly Latin American, markets) that one expects that manufacturers will utilise these product variants to the limit of the timelines of regulation.

Opportunities remain

On balance, the segment still holds out substantial opportunity for the industry. It has proven appeal for consumers and appears to add clear value to smokers in some markets. It is also a feature which addresses to some extent the flavor competition which combustible cigarettes face from use of e-cigarettes. Capsules also make cigarette brands harder to counterfeit and give the legal segment a competitive advantage against illicit whites.

There are also very large markets with low penetration which are unlikely to introduce flavor regulation in the short to medium term where there is clear scope for the use of capsules to expand. We are just beginning to see the emergence of capsule products in China with locally tailored flavored profiles such as green tea. While this development will not assist the international big four, it could be significant for the cigarettes value chain - if the segment achieves only a fraction of share of the Chinese market it would be bigger than the entire global volume currently.