E-cigarette Report Series I: Domestic Market — Positive Changes Are Building
report summary
A comprehensive regulatory framework has been basically established, and the industry has returned to orderly development.April 2022 in my countrye-cigarettesPolicies have been intensively introduced and industry regulatory frameworks have been established. Core content:1) Taste restrictions.It is prohibited to sell flavors that are inducing to minors, and the main theme of product flavor is limited to tobacco flavor.2) Full license management.Production, wholesale and retail companies must obtain licenses to carry out relevant commercial activities.3) Unified platform transactions and traceability of all links.Relevant business activities are incorporated into the national unified e-cigarette trading platform, and information traceability is implemented in the production, circulation and service links.4) The total amount of retail outlets is controlled, independent of cigarettes, and non-exclusive.Retail outlets dynamically adjust according to changes in market demand and market conditions, and are independent of cigarette retail outlets.
Terminal scale: fromyueshiAccording to the report, it is estimated that domestic retail sales in 2021 will be 33 billion yuan +, and the scale of 22Q4 will decline by 80%+.in 2021fog core technologythe cartridge505 million pieces were shipped. Based on the retail unit price of 33 yuan/piece, the retail scale of Yueke brand cigarette bombs reached 16.5 billion + yuan. With reference to its share of the new national standard product quota of 53%, it is assumed that Yueke cigarette bombs terminal share is 50%, corresponding to the domestic retail sales of e-cigarettes in 2021 will be 33 billion + yuan. In 2022Q4, Yueshi's revenue fell by 82% year-on-year, and the overall domestic retail scale fell even more. This was due to the greater change in brand shipping prices than the retail end, and the increase in Yueshi's brand share.
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Recent retail developments: Terminal repairs were eased in March.The blue hole questionnaire survey showed that the sales and profitability of the new national standard products in March 2023 showed a marginal improvement compared with November 22 (in October 2022, the first month of the official implementation of the new national standard, terminal goods were distributed, and sales data were expected to be high). In March 2023, the proportion of shop owners with national standard sales of less than 10,000 decreased by 13pct to 63% compared with November 2022, and the proportion of sales between 10,000 and 40,000/above 40,000 increased by 9pct/5pct to 29%/8% compared with November 2022. At the same time, the profit ratio increased by 2pct to 13%, and the loss ratio decreased by 14pct to 51%.
Change in the pattern: The brand's mental user base is driven, and the head share is more advantageous.Referring to Blue Hole's survey questionnaire on some shop owners, 1) Store sales show that the order ratio and positive sales feedback ratio of shop owners of Yuexie and head brands are significantly higher than that of the second and third tier brands. 2) The positive proportion of sales feedback for Yuexie brand is basically the same as the order proportion, while the proportion of the two indicators of other brands (positive sales feedback/shop owner orders) is generally lower than 50%, further verifying the trend of the brand pattern. 3) Shopkeepers generally feedback that brand awareness and user base are the core factor driving product sales. This is a manifestation of the achievements of various brands in promoting channel construction in marketing venues in the past. Consumer stickiness is still on the brand side, and the price impact is not obvious.
#p#Pagination Title #e#Now:Positive changes are accumulating, and the supply and demand structure is marginally improving.In the past, weak sales were the combined result of the suppression of three factors such as taste acceptance, competition, environment and price system. Currently, industry standardization is being further promoted.1) New flavors:The number of testing institutions has increased, new flavors have emerged, the taste has been rich, the experience has been optimized, and consumer feedback has been positive. At present, the nationwide promotion of the new batch of national standard products is limited. Following the launch of new products on China Tobacco platforms in various places, it is expected to benefit sales. The coolants on the white list of additives have not yet been used, and may be important catalysts of flavor in the future.2) New pattern:The special rectification has effectively cracked down on illegal operations in manufacturing and retail. The production of non-compliant products has basically stopped, consumers have returned, and market competition has returned to order.3) New price:The efficiency of the production side has been improved and the price structure of the industrial chain has been optimized. A new round of price system for Yueshi has been implemented, stimulating the release of consumer demand and restoring the profits of terminal stores.
Long-term:The penetration space driven by price comparison advantages and harm reduction is worth looking forward to.current domestice-cigarette productsThe price comparison advantage of consumption is not outstanding. The core reason is the low average retail price of cigarettes. The trend of high-end tobacco is clear. The unit price is expected to gradually move upwards. The cost-effectiveness of e-cigarette consumption is gradually prominent. The advantages of harm reduction are superimposed. From the current perspective, there is room for upward penetration. In quantitative terms, assuming that the conversion rate of e-cigarette users in the United States is 7%, even if the benchmark scale is at the peak of the domestic market in 2021 (penetration rate is about 3%), there is room for the penetration rate at the user level to more than double. According to our calculations, the current terminal scale in my country may have dropped to within 20% of 2021, which in turn releases enough space for the industry's long-term growth curve.
simoreInternational: Expansion of advantages and welcome the economic downturn.# p#pagination title #e#Weak terminal sales amplified the inventory pressure of national standard products after 22Q4 nationwide distribution, putting pressure on the company's 23Q1 domestic sales. In the future, as the suppression factors improve, sales are repaired, and the economy will pick up, and domestic sales performance is expected to improve quarter by quarter. At the same time, the brand landscape is accelerating its differentiation, and the trend of superimposed supplier concentration (improving production efficiency) is intensifying. As a global leading manufacturer, the company has outstanding R & D and production advantages. Cooperation with leading brands continues to strengthen, and is expected to fully benefit from upstream integration.
Risk warning:Competition in the industry has intensified, taste acceptance has fallen short of expectations, and the pace of new product promotion has fallen short of expectations.
01
Review: What is the impact of taste, channels, quotas, and taxes
#p#Pagination Title #e#（1)policyReview: A comprehensive regulatory framework has been basically established and the industry has returned to orderly development
A comprehensive regulatory framework has been basically established, and the industry has returned to orderly development.In mid-April 2022, my country's e-cigarette policies were intensively introduced. Since the official national standard was released on April 13, five major guidance documents including production, wholesale and retail licenses, product technical review and QR code traceability were issued simultaneously on April 15., covering various market participants and industry specifications. The core content has the following points:1) Taste ban.It is prohibited to sell flavors that are inducing to minors, and the main theme of product flavor is limited to tobacco flavor.2) Full license management.Production, wholesale and retail companies must obtain licenses to carry out relevant commercial activities.3) Unified platform transactions and traceability of all links.Business activities related to e-cigarettes are incorporated into the national unified e-cigarette trading platform, and information traceability is implemented in the production, circulation and service links.4) The total amount of retail outlets is controlled, independent of cigarettes, and non-exclusive.E-cigarette retail outlets make dynamic adjustments based on changes in market demand and market conditions, and implement layout plans independent of cigarette retail outlets.
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Supervision system: Licensed operation and unified platform transactions are the core normative framework.Regulation requires production, wholesale and retail companies to obtain licenses before they can conduct commercial activities. Starting from June 15, 2022, relevant production enterprises, wholesale enterprises and retail market entities that have obtained licenses related to tobacco monopoly will gradually conduct transactions on a unified national electronic trading platform, and use QR codes on the outer packaging to conduct information traceability in production, circulation and services, effectively eliminate industry chaos such as fleeing goods, and effectively reduce inventory risks.
(2) TasteArgument: Flavor constraints are still elastic, and competition returns to the origin of the product
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Taste constraints are still elastic, and competition returns to the origin of the product.The official version of the "Administrative Measures" emphasizes that it should not be inducement to minors and prohibits flavored e-cigarettes other than tobacco flavors. The national standard for "e-cigarettes"(draft for the second solicitation of comments) deletes 20 flavor additives while retaining lemon oil,mentholWait for additives (but the maximum dose used has been reduced).
In the future, electronic flavors will be based on tobacco flavor, supplemented by certain flavoring ingredients,This is consistent with the observation that there are mixed-flavor cigarette brands or series of products with tobacco flavor as the main tone on the market(Foreign cigarette brands include Seven Star, Marlboro, and Baohengeng, and China Tobacco's Guiyan brand launches tangerine peel and wine-flavored products).
The U.S. FDA limits the flavor of e-cigarettes to cigarettes and menthol, and the "Administrative Measures" reserve part of the flavor space, making it more flexible to use the flavor of cigarettes as the main flavor. We believe that shrinking the taste range will, on the one hand, make consumers pay more attention to basic product attributes such as taste restoration and smoking experience. On the other hand, it will increase the constraints on fragrance and raise the threshold of relevant technologies.
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(3) ChannelsPlanning: Scale shrinkage will drive the concentration of the middle and upper reaches
fromLooking at the issuance of retail and production licenses, there is a high degree of certainty about the increase in concentration.As of March 13, statistics have announced a total of 54706 retail outlet licenses ("one store, one license "), which is still far from the 190,000 e-cigarette retail formats announced by the industry committee in 2021. Judging from the announced production-side licenses, as of December 27, 2022, 612 companies have obtained production licenses. Considering subsequent incremental licenses, it is expected that the final number will still be higher than the 1500 production and brand companies announced by the industry association in 2021. There is a gap between companies.#p#Pagination Title #e#
(4) QuotaDetermination: Supply is abundant, and the main contradiction is demand-side matching
Under the current system, the production side approves the scale or observes the interpretation of supply in the domestic market.At present, my country's entire e-cigarette industry chain has been included in the scope of relevant regulatory planning. According to the "Guiding Opinions on the Layout and Licensing Management of E-Cigarette Retail Points" previously issued by the State Tobacco Monopoly Administration, the total number of e-cigarette retail points is based on "market demand, market capacity ande-cigarette enterprisesFactors such as costs, reasonable profits of retail outlets, and economic and social development levels are comprehensively considered and dynamically adjusted according to changes in market conditions. However, it is difficult to generate an intuitive understanding of the changes in the overall market size simply from the total number of retail outlets.The scale of the upstream supply side or an important indicator to observe the interpretation of the domestic market,#p#paginated title #e#Especially when relevant departments adhere to the approved production scale under total volume management and supply and demand management.
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The approval amount for cigarettes and bombs is higher than the three-year average and is 65% of actual shipments in 2021.In the past three years, Wuxin Technology's tobacco rod equipment shipments were 4.3 million, 10.2 million and 19.5 million respectively, with an average of 11.33 million in three years.The approved amount of 15.05 million pieces is approximately 77.18% of shipments in 2021; Cigarette bombs shipped in the past three years were 74 million, 213 million and 506 million respectively, with an average of 264 million in three years.The approved amount of 328.7 million pieces is 65% of shipments in 2021。Judging from the actual approval results, the approved scale is higher than the three-year average sales volume from 19 to 21.
(5) TaxationImpact: The impact after raising prices in the industrial chain is limited
The first stage: the implementation of the new national standard until the implementation of consumption tax and price increases.At this stage, the prices of the industrial chain are basically the same as before the implementation of the new national standard. The main change is that domestic brands such as Yueshi directly supply China Tobacco Platform (the price system is basically the same, replacing the past dealer link), and brand dealers have transformed into service providers that promote, purchase and promote licensed retail stores in the region.
The second stage: the consumption tax was implemented in November 2022, the price of the industrial chain was adjusted, and the national standard price was reduced in mid-to-late April 2023.At this stage, the brand chose to raise prices in response to the impact of the 36% production-end consumption tax. The pricing of retail stores is often based on the "smooth price adjustment" model of China Tobacco's wholesale price. The price is basically transferred to the end consumers, and the gross profit per unit product is relatively stable. According to our calculations, taking Yuexie Mirage as an example, the additional tax on the increase of e-cigarette consumption tax (production and wholesale)+ urban construction education surcharge is 34 yuan for 3 tablets, which is 1/3 of the original retail price (including tax) of 99 yuan. Consumers are the main payers of tax, and the impact on profits per unit product in other links is limited(With reference to Yueshi, through price adjustment, supply chain efficiency improvement, and product portfolio optimization, the apparent gross profit margin of 22Q4 was +3.4pct year-on-year)。Among them, since the payer of the production consumption tax is the brand that has obtained the production license, and the cooperation method of brand manufacturing is mostly joint venture foundries. Therefore, considering the long-term healthy ecology of the production chain, the shipping price at the manufacturing end has also been adjusted.
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The third stage: National standard price cuts in mid-to-late April to stimulate terminal demand.The price adjustment implemented in November 2022 was a "stress test" on market demand while maintaining profitability as much as possible. However, the final sales performance of the first batch of new national standard products was not ideal (analysis later). At the same time, the strategy of diversified suppliers further optimized the optimise cost structure and freed up room for price adjustment. Therefore, in the past 23 years, the brand chose to lower the wholesale price to stimulate terminal demand. Yueshi's new price system was implemented in April 2023, and other brands may follow suit.Under the market-oriented price system set by China Tobacco, retailers can determine the terminal selling price. The adjustment of wholesale prices gives the terminal more space for price strategy: the retail price is adjusted in a favorable price manner to catalyze consumer repurchase demand, and if the retail price is not adjusted, product Profits are expected to improve.。
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02
Outlook: What are the real terminal sales level and short-term and long-term catalysis?
1. Short-termMobile sales: Terminal scale drops by 80%, retail margins are repaired, brand differentiation is accelerated
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2021: Estimated domestic retail sales of 33 billion yuan +.In 2021, Wuxin Technology (Yuexie's parent company) will pop up 505.5 million cigarettes. Based on the retail unit price of 33 yuan/cigarette, it is estimated that the retail sales of Yuexie's brand cigarette bombs will reach 16.5 billion + yuan. Taking into account the production and sales of smoking equipment, other brands and general distribution of cigarette bombs, assuming that the retail terminal share of Yuexie cigarettes is 50%, corresponding to 33 billion + yuan in e-cigarette terminal retail sales in 2021.
22Q4: Domestic retail sales are expected to fall by 80%+ year-on-year.22Q4 is the first quarter of the implementation of the new national standard. During the same period, Yueshi's revenue fell by 82% year-on-year. It is expected that the overall retail scale of domestic sales will be adjusted even more: 1) 22Q4 Yueshi's apparent revenue is realized by supplying goods to China Tobacco's platform. Revenue, after the implementation of the consumption tax, the brand-side shipping price will increase more than retail sales. 2) Benefiting from the brand's influence and user base, the terminal sales of related products will be smoother, and retailers will be more willing to purchase and sell. It is expected that the Yueshi brand's sales share in the new national standard products will increase. 3) In order to restore the real new national standard terminal, the sales of old national standard fruit-flavored products and various illegally produced "milk tea and coke cups" were not considered.
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Based on statistical data, it is estimated that the Yuexie brand's share of the new national standard product quota is 53%. The above-mentioned annual production scale approval of the brand mainly refers to historical data, so the approved share can roughly reflect the brand's historical share level. Therefore, we estimate that the retail terminal share of Yuexie cigarettes in 21 years is 50%. Referring to the results of Blue Hole's business survey on some licensed e-cigarette shop owners, judging from the current sales of terminal stores, the order ratio and positive sales feedback ratio of owners of Yueshe and the head brand are significantly higher than that of the second and third echelon brands (the head brand is basically on shelves among China Tobacco brands in all provinces, so the ordering environment is relatively fair).
From another perspective, excluding the impact of orders, Blue Hole research shows that the positive proportion of sales feedback for Yuexie brand is basically the same as the order proportion (the shares of the two indicators are 93% and 99% respectively), while the proportion of the two indicators of other brands (positive sales feedback/shop owner orders) is generally lower than 50%, which further reflects the advantage of product terminal circulation efficiency and the trend of increasing brand share.
Store owners currently generally report that brand awareness and user base are the core factor driving product sales. This is a manifestation of the achievements of various brands in promoting channel construction in marketing venues in the past. Consumer stickiness is still on the brand side, and the price impact is not obvious.#p#Pagination Title #e#
1. Taste iteration: Start the new product cycle, accelerate channel profits and improve consumer conversion
At the beginning of the implementation of the new national standard, domestic e-cigarette product testing agencies only released the National Tobacco Quality Supervision and Inspection Center (Zhengzhou Bureau) and Shanghai New Tobacco Testing Technology Co., Ltd.(Shanghai Bureau). The Shanghai Bureau was affected by the epidemic, so the Zhengzhou Bureau was responsible for the main review work., it has higher requirements for product formulation. The first batch of new products launched in retail channels are severely homogenized, the flavors are relatively stimulating, and consumer feedback is flat.Or the main reason for the contraction in the number of channels with weak terminal sales。
As the industry model is gradually clarified, the number of testing institutions in various places has increased to 27, and the restrictions on the scope of application of additives have been relaxed (still based on 101 additives, but the scope of application is wider). Among the recent new national standard flavors, although they still maintain the main theme of tobacco flavor, the taste presents more diverse flavor levels (It is mainly reflected in the fact that cigarettes have lighter taste, higher aroma and sweetness, and there are currently no over-reviewed products with added cooling agents.), which is significantly improved compared with the first batch of reviewed products.
Due to the differences in the pace of new replenishment on China Tobacco's platform products in various regions, it is expected that the new products with better feedback will be currently reported (Yuexie-Yingying Green Fan, Qianmu-Colorful Summer,#p#paginated title #e#snowplusNew Star-Lengshan)The actual distribution of goods nationwide is limited, and the promotion of terminal sales has not yet been fully reflected.Subsequent large-scale promotion of products is expected to accelerate the transformation and retention of consumers, thereby promoting the recovery of profits in retail channels, stimulating the motivation to open stores at terminals, and forming a positive cycle of brand research and development and expansion of channel distribution.
#p#Pagination Title #e#(3) Long-termOutlook: Scale growth lies in price ratio advantages and the ability to reduce harm
Comparison caliber: Essential need is nicotine, unit nicotine content or a better comparison benchmark.At present, there are various calculations on the actual consumption level of overseas and domestic e-cigarette products in the market, but the data definitions and calibers are different, and the reference significance is relatively limited. In order to relatively fairly compare the actual relative consumption prices of e-cigarette products in various regions (unit cigarette cartridge relative to single pack of cigarettes), the nicotine (nicotine) content per unit cigarette cartridge is uniformly adopted.
according toJUUL Test data provided by Labs on its official website in April 2018 showed that the nicotine intake level of 0.7ml 5% concentration (59mg/ml) cigarette cartridges is equivalent to a single pack of traditional cigarettes, which is used to convert the actual nicotine content of each cigarette cartridge and compare it with other regional e-cigarette product disclosure data and local average price comparisons.
The analysis results show that if JUUL Labs data is used as a benchmark, the actual consumer price of mainstream e-cigarette products in the United States and the United Kingdom (regardless of equipment) is lower than that of traditional cigarettes. The consumption level of JUUL and VUSE Alto in the United States is 56%/34% for local cigarettes. VUSE in the United Kingdom is 44%, and the Yuexie Mirage in China is 246%, mainly due to the low average selling price of cigarettes in my country.
In 2019, the State Tobacco Monopoly Administration proposed the "136/345" development goal for the first time.That is, through efforts in the next 4-5 years, the "136" brand scale will be formed in mid-to-high-end cigarettes (one annual sales scale exceeding 3.5 million boxes, three exceeding 2 million boxes, and six exceeding 1 million boxes) and "345" brand benefits (wholesale sales in three years exceed 150 billion yuan, four exceeding 100 billion yuan, and five exceeding 60 billion yuan).
2012-2022 In 2010, my country's cigarette sales and the profits of the tobacco industry significantly confirmed the trend of high-end cigarettes:Starting from 2020, the profit per unit of cigarettes has begun to rise significantly.
According to estimates by Zheng Rong, a professor at the University of International Business and Economics, to achieve the 2030 tobacco control goal, my country's cigarette price needs to reach 59 yuan per pack (an increase of 43 yuan compared with the average price in 2020,At this time, the average consumption of e-cigarettes is 67% of the average price of cigarettes, and the relative cost-effective advantage has been greatly improved.）。
At present, there is no clear and continuous official statement on the number of real e-cigarette users in my country. For reference, the survey data of China Center for Disease Control and Prevention as of the end of May 2021 shows that the number of people aged 15 and above in my country uses e-cigarettes is about 10 million. The "China Smoking Health Hazard Report 2020" shows that the number of smokers in my country is 300 million +.Corresponding user level penetration rate is approximately 3%。# p#pagination title #e#
Another set of data with strong comparability: According to survey data released by Altria (test period: January 2019 to October 2021),U.S. adult smokers-7% conversion rate for smoke-free products。This set of data is of great reference significance. In the Altria smoke-free product matrix, the e-cigarette series is the JUUL brand that only sells menthol and tobacco flavors, which is similar to the actual domestic commercial environment.
If other flavor products and disposable e-cigarettes are considered, as well as users transformed by non-traditional smokers, the penetration rate of e-cigarette users will increase significantly. The data that can be referred to is NHIS 2021 in the United States, which shows that adult cigarette users account for 12.6%, and e-cigarette users account for 4.7%. At this time, the relative penetration rate of e-cigarette users reaches 37.3%.
Referring to the conversion rate of e-cigarette users in the United States of 7%, even if the benchmark scale is at its peak in the domestic market in 2021 (penetration rate is about 3%), there is room to more than double the penetration rate at the user level. Considering that the current terminal scale in my country may have dropped to within 20% of 2021, this will free up space for the industry's long-term growth curve.
03
Simmore International: Expansion of advantages and welcome economic reversal
The leading advantage is expected to accelerate expansion.Weak terminal sales amplified the inventory pressure of national standard products after the national distribution of goods in 22Q4, putting pressure on the company's domestic sales revenue in 2023Q1. In the future, as the suppression factors improve, sales will be repaired and the economy will rebound, and domestic sales performance is expected to improve quarter by quarter. At the same time, the brand landscape is accelerating its differentiation, and the trend of superimposed supplier concentration (improving production efficiency) is intensifying. As a leading global manufacturer, the company has outstanding R & D and production advantages. Cooperation with leading brands continues to strengthen, and is expected to fully benefit from upstream integration.
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04
Risk Warning
