Increase In Heat-Not-Burn Tobacco Taxes In Japan To Hamper Growth
Many tobacco companies have come to acknowledge the growing importance of having reduced-risk products in their portfolio to attain long-term success. In this regard, Philip Morris International (NYSE:PM) launched its heat-not-burn technology device called iQOS in Nagoya Japan in November 2014. Since then, the product has been rolled out nationally in the Asian country, as well as in over 30 other locations, including Italy and Switzerland. Japan can be considered as a key region for the company, as it is the only country where the national roll-out of the device has occurred. British American Tobacco (BAT), which started selling its own heat-not-burn device, called glo, in the northeastern city of Sendai in December 2016, has also witnessed an overwhelming response to its product, with demand exceeding the company’s expectations.
Japan was considered to be a fertile testing ground for these devices as Japanese consumers can be considered to be gadget-loving. Moreover, in addition to the relatively wealthy consumers, Japan also has strict regulations with regard to liquids containing nicotine. This has stunted the progress of e-cigarettes in the region, making it an ideal testing ground for this technology. However, there are reports indicating that the Japanese Ministry of Finance plans to raise the taxes on heat-not-burn tobacco products to 80% of those levied on traditional cigarettes. This factor may hamper the impressive growth rates such products have witnessed in the country, as it erodes the tax advantage these devices enjoy.
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In an earlier article, we have highlighted the tremendous growth trajectory of Philip Morris’ iQOS in Japan, where the company is the leading player and has managed to garner over 13% of the market share. Given the substantial sales of Heatsticks in the region, the tax rise may place the company at a relative disadvantage. While currently, the taxes are levied based on the weight, it is uncertain if this metric will be used in the future, or whether a tax imposed will be based per unit or on the nicotine content. A change to one not based on weight will be particularly harmful to PM’s competitor Japan Tobacco’s Ploom Tech device since the lightness of its units has currently given it a massive advantage.
On the flip side, Philip Morris can also stand to gain the most among the current players as its iQOS device has the highest tax burden currently, estimated to be 49%, versus 36% for British American Tobacco’s glo, and a measly 15% for Japan Tobacco’s Ploom Tech. If the tax rate is raised to 80% of that levied on traditional cigarettes, it would imply a rate of a little over 50%, which is similar to what is already imposed on iQOS. Meanwhile, this would turn out to be quite a blow to its competitors.
We have a $119 price estimate for Philip Morris, which is higher than the current market price.
See Our Complete Analysis For Philip Morris International
Have more questions on Philip Morris? See the links below:
- Why Is Korea Easier To Conquer For iQOS Than Europe?
- Philip Morris: Focusing On A Smoke-Free Future
- Philip Morris Falls On A Weak Third Quarter
- iQOS- A Product Of Innovation Or Necessity For Philip Morris?
Notes:
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Philip Morris International.