WHO's New Stance on Vaping Spells Trouble for Big Tobacco's Pivot to Alternatives

In a recent push for a global health intervention, the World Health Organization (WHO) has called upon governments around the world to enforce tobacco-like controls on vaping products. This move could significantly impact tobacco industry giants such as Philip Morris International and British American Tobacco (BAT), which are increasingly investing in alternative nicotine delivery systems as part of their business strategies.

The WHO’s recommendations come as many tobacco firms have already deeply invested in diversifying their offerings to include vapes and heated tobacco products. These efforts are an attempt to pivot away from the shrinking cigarette market and keep pace with the evolving demands of consumers.

Philip Morris, in particular, has taken a leadership role in the industry’s transition, investing over $10.5 billion in developing ‘smoke-free’ products, banking on products like heated tobacco, which purportedly release fewer toxins by not burning tobacco leaves. This foray has favored its market valuation significantly compared to its industry rivals.

However, WHO's latest advisory may jeopardize these corporate strategies. If vapes and related products are subjected to stringent regulations akin to those on traditional cigarettes, the tobacco companies’ new line of business could experience a tightened regulatory environment and increased scrutiny over health claims.

According to Sanlam’s Global High Quality Fund manager Pieter Fourie, this could particularly affect Philip Morris, which could lose its valuation advantage. Conversely, it appears that Imperial Brands' recent decision to refocus on its core tobacco operations, reducing emphasis on new nicotine delivery systems, might insulate it comparatively from the regulatory upheaval suggested by WHO.

These regulations, though not immediate, are pending discussions during a biennial conference for the 183 governments party to a global tobacco control treaty. Nevertheless, given the treaty's consensus-requiring nature and the diverse approaches of different countries – from the UK’s public health strategy that includes vapes to India’s outright ban – a swift regulatory change seems implausible.

However, analysts like Brett Cooper from Consumer Edge highlight the potential impact of WHO guidelines influencing countries at varying degrees and timelines. Even if not rapidly global, such guidance could still pose a detriment to the tobacco companies' lobbying efforts for more favorable regulations.

The regulatory dynamics are complex and extend beyond the boardrooms of tobacco firms. In markets like the U.S. and Australia, the surge in illicit products, especially flavored vapes, highlights the challenges governments face in policing new nicotine products. Illegal and unregulated products from countries like China are undermining enforcement efforts and flooding markets, indicating the persistent demand for nicotine-containing products.

Tobacco investors Chris Beckett from Quilter Cheviot and Steve Clayton from Hargeaves Lansdown note that tightening regulations, if effectively enforced, could inadvertently solidify the market position of the big tobacco companies. Such a scenario would mimic the existing landscape of the traditional cigarette market, with high entry barriers and profitability for incumbent players.

As regulations evolve, companies like BAT and Philip Morris must navigate the potentially treacherous waters that lie ahead. Their ability to anticipate and respond to these changes will be critical in determining their continued success or potential downfall in the era of alternative nicotine products.