Vaping's 'Catfish Effect' May Spark Reform in China's Tobacco Categories

In the context of "tobacco sovereignty," how will Chinese tobacco layout its traditional tobacco and new tobacco businesses, and what regulatory measures will be taken for the currently booming e-cigarettes? Let's discuss this.

Before 2019, the tobacco layout was still dominated by traditional cigarettes, while encouraging tobacco companies to research new types of tobacco (mainly heated tobacco), but at the same time, regulatory measures prohibited the legal sale of heated tobacco in the domestic market. At that time, traditional cigarettes were everything for Chinese tobacco.

However, e-cigarettes grew wildly in an unexpected way, disrupting all rhythms. Under the ironclad regulation of Chinese tobacco, e-cigarettes, due to their characteristic of being "smoke but not smoke" (having the effects of tobacco products but not being exclusive tobacco products), surged in popularity. More seriously, the domestic e-cigarette market faced the entry and harvesting of international e-cigarette giants. All of this forced Chinese tobacco to rethink the future forms of tobacco products and the corresponding industrial layout, just as the national government rethought the future planning of the Guangdong-Hong Kong-Macao Greater Bay Area in light of the Hong Kong events.

So what is the overall planning for the future of Chinese tobacco? Let me share my personal views.

While adhering to traditional cigarettes, Chinese tobacco will encourage the development of domestically produced heated tobacco while restricting the rapid spread of domestic e-cigarettes. Ultimately, the entire market will present a structure of traditional cigarettes + heated tobacco + e-cigarettes.

Next, we will discuss the three product forms separately.

Development and brand upgrading of traditional cigarette categories

The emergence of e-cigarettes has put a lot of pressure and inspiration on traditional cigarettes:

The product design of e-cigarettes is entirely market-oriented, which sharply contrasts with the new product development model of many traditional cigarette brands—"leadership brainstorming."

The popularity of e-cigarettes is primarily due to convenience and harm reduction, which reminds traditional tobacco R&D not to equate new product development with cigarette pack design, but rather to break through at the core product level. Although it is challenging, I believe we cannot yet assert that the technology tree of traditional tobacco has reached its end.

What does it mean to create products for young people, and what does youthful packaging look like? E-cigarettes have taught traditional cigarettes a lesson.

Moreover, the current weaknesses of e-cigarettes, such as unstable flavors and strong chemical flavoring, remind traditional cigarettes that their insistence on advanced industrial manufacturing and strict flavor requirements is correct and worthwhile.
 
fb04dad0393fcb13c46ddf7d2be3070.jpg

A slogan from a tobacco leaf re-drying factory. The craftsmanship spirit of traditional tobacco still exists. (Photo by Ruihu)

So, what changes will occur in the field of traditional cigarettes?

In terms of category development, it will be market-oriented, further advancing segmented products targeting niche markets and demographics. Recently, a brand launched a women's cigarette, although it looks quite unattractive, I believe the awareness is there, and the ability will improve over time.

In terms of technological R&D, returning to "hard technology," which means exploring flavors and further researching harm reduction, is fundamental to extending the life of traditional cigarettes.

In terms of packaging, it is necessary to abandon various eye-catching "moon cake-style" designs (like piano-playing or password designs) and return to leading aesthetic designs. In terms of volume and strength, cigarette pack designs should not be lower than those of cosmetics or fast-moving consumer goods. The pursuit of design leadership, rather than falling into vulgarity, should be the guiding direction for the next step.

In terms of channels, attention should be paid to the demands of retailers and various pathways, enhancing profitability, and binding terminals and tobacco with benefits to prevent them from easily switching to e-cigarettes.

In terms of brand building, returning to brand construction from recent years' internet-based promotions (like QR code points) is essential. The core of brand building is not just packaging but also the exploration of categories and the creation of product content. Additionally, learning from the e-cigarette industry's experience, the brand center should be placed in Beijing. (Currently, although Shenzhen is the manufacturing center for e-cigarettes, almost all leading brands that have received funding have their brand and marketing departments in Beijing, which makes sense.)

Heated tobacco, the "lucky child" of palace intrigue

Without e-cigarettes, heated tobacco might have to stay in the cold palace for a few more years. But fortune has arrived. #p#分页标题#e#

The "political incorrectness" of e-cigarettes will face a series of regulatory crackdowns in the future. However, the rapid development of e-cigarettes has also validated the real demand and enormous potential for new types of tobacco in the market.

If Chinese tobacco continues to focus on the new tobacco market while stubbornly holding onto traditional cigarettes, it will not only hinder the innovation of traditional cigarettes but will also hand over the new tobacco market to black market transactions, further losing the influence of domestic tobacco products on Chinese cigarette consumers. I previously discussed in my social circle how rapidly iQOS has developed in China; those interested can look it up.

So, if Chinese tobacco wants to develop new types of cigarettes, choosing between heated tobacco and e-cigarettes, there is no doubt that heated tobacco will prevail.
 
The only issue with developing heated tobacco is patents. As long as Chinese tobacco is determined, the patent issue can be resolved, for example, by exchanging market access for patents or simply filing patent lawsuits; Philip Morris is unlikely to fall out with Chinese tobacco.

Based on the above reasons, the following conclusions can be drawn:

The pace of releasing heated tobacco in the domestic market will accelerate. The first products to hit the market will be heated tobacco pods and devices from domestic e-cigarette companies.

Once released, current private enterprises focusing on heated tobacco devices will gain development opportunities. After all, devices are not exclusive products, and Chinese tobacco will not monopolize them, just like lighters.

However, pods are exclusive products, and like traditional tobacco, they will not be sold online and will not allow private involvement.

E-cigarettes, a storm is coming

First, it is clear that comprehensive regulation of e-cigarettes requires resolving legal issues, which takes time and is not something any department, including Chinese tobacco, can fully control.

Before legal issues are resolved, the management of e-cigarettes will rely more on market means. For example:

Prohibiting domestic tobacco leaves from supplying nicotine to e-cigarettes. Tobacco leaves are exclusive products under the jurisdiction of Chinese tobacco, and this method can be used at any time.

Prohibiting Chinese tobacco's subordinate enterprises and service providers from cooperating with e-cigarette companies for e-liquid or nicotine supply (except for foreign markets). For tobacco service providers, it is a choice between cooperating with Chinese tobacco or e-cigarette companies.

By verbally announcing, all licensed tobacco retailers are prohibited from selling e-cigarettes, otherwise, it will affect their qualification to order traditional cigarettes. That is, they must choose between selling traditional cigarettes or e-cigarettes.

While prohibiting, Chinese tobacco companies will launch their own e-cigarette products, deploying them in the tobacco retail terminals they control, thus achieving dominance in the domestic e-cigarette market. The "own" here includes several meanings: own brand; self-produced e-liquid; and owning patents.

The point about "patents" should be emphasized; Chinese tobacco can produce e-cigarettes that surpass the current domestic and international levels.

Through regulatory suppression and the release of free products, Chinese tobacco will occupy the mainstream of the domestic e-cigarette market. Even if JUUL enters, it cannot compete with Chinese tobacco in terms of products or market channels.

The above analysis outlines Chinese tobacco's future layout for traditional cigarettes, heated tobacco, and e-cigarettes. More details can be gradually elaborated in future articles.

A salute to e-cigarettes

The emergence of e-cigarettes is like a catfish, breaking the silence of the Chinese tobacco market.

Traditional cigarettes should thank e-cigarettes. If it weren't for e-cigarettes, traditional cigarettes would still be indulging in the warm bed of the exclusive system; heated tobacco should thank e-cigarettes. If it weren't for e-cigarettes, heated tobacco would still be stuck in black market transactions; tobacco consumers should thank e-cigarettes. E-cigarettes have driven the progress of the tobacco industry, and more harm-reducing, experience-rich cigarette products will continue to emerge.

However, how should e-cigarette companies face the upcoming regulations, and what is their way out?