The battle for American smokers is heating up

One reason volumes are down is because smoking patterns are returning to normal after the pandemic, when people trapped indoors used to light up more often. But inflation, rising interest rates and high gasoline prices have also encouraged smokers to switch to discount brands or cut back altogether to save money.

Big publicly traded tobacco companies have continued to raise prices, so budget independent brands are nibbling at their market share. Altria said the price difference between a pack of Marlboro cigarettes and the cheaper alternative had widened to 41% by the end of last year, up from 38% in the second quarter.

Cigarette stocks need to get as much cash out of their traditional tobacco businesses as possible to pay for investments in new smokeless products, where most of the industry’s growth resides. BAT spent more than £2bn, equivalent to $2.4bn, on its non-fuel brands last year and says they generated 15% of total revenue, although they aren’t expected to be profitable until next year . Altria, which lags further behind, says smokeless products such as pouches for oral use and e-cigarettes now account for 26 percent of the total U.S. tobacco market.

The entry of a wealthy new competitor makes falling US cigarette volumes an even bigger headache. Last year, Philip Morris International paid $16 billion for Swedish Match, a major player in oral nicotine pouches. Since PMI has no traditional cigarette business in America, it need not worry about declining sales of combustible fumes as it encourages more consumers to switch to alternatives.

Another wildcard is Juul Labs, formerly the leading vape brand in the U.S. After Altria ended its non-compete agreement with the company last September, Juul is free to sell itself and has held talks with PMI and Japan Tobacco, among others, on a potential sale or partnership. While the brand itself is tainted with controversy over its marketing practices in the past, its technology and intellectual property could be attractive to a new owner who wants to grow rapidly in the e-cigarette industry.

The fight for market share in products like vaporizers and heated tobacco sticks could leave shareholders with less money. Shares of BAT fell about 5% in London morning trading after it did not announce a new share buyback program as hoped. The company wants to reduce its debt, but also needs to spend on new products. BAT is preparing for a faster push towards smoke-free categories and created a new executive role to oversee the move away from cigarettes.

The US cigarette market is one of the most lucrative in the world. With three major tobacco companies now bringing it out, it’s about to become one of the most competitive too.

Email Carol Ryan at [email protected]