Vaping rivals, quitters cloud Japan Tobacco's cigarette sales

[November 01, 2017] By Taiga Uranaka

TOKYO (Reuters) - Japan Tobacco Inc said it expected a steeper decline in cigarette sales at home than previously estimated, after earlier reporting disappointing results, as more smokers quit or defect to "heat-not-burn" tobacco products.

Despite commanding over 60 percent of the cigarette market at home, Japan Tobacco has been caught on the wrong side of the rising popularity of heat-not-burn (HNB) alternatives and has lagged in the category in its own backyard versus global rival Philip Morris International Inc.

Quick to see that the number of smokers was shrinking in an era of increasing health awareness, Philip Morris started selling its IQOS HNB product, a tobacco vaping device, in Japan in 2014 and expanded nationwide in April last year.

But Japan Tobacco rolled out its Ploom Tech battery-powered smokeless tobacco product in central Tokyo only in July this year after production delays.

The company is now facing a double whammy - it is trying to increase the number of stores that sell Ploom Tech in a bid to catch up in the HNB space, which also includes British American Tobacco PLC's (BAT) "glo" device, while battling a drop in domestic cigarette sales.

Japan Tobacco on Wednesday said it now expects to sell 92 billion cigarettes in Japan in 2017, down 13.4 percent from a year ago. That would be 1 billion less than what it had forecast in August and 4 billion below a projection at the start of year.

Cigarette sales have been hit as more smokers are quitting than the company had expected and there is also the negative impact of HNB products, Japan Tobacco's executive vice president, Hideki Miyazaki, told reporters.

"When there are media reports of tax, some people think it's time to quit," he said, referring to recent reports that Japan was considering raising its tobacco tax.

The former state-monopoly saw its domestic cigarette sales drop 11.8 percent from a year ago in terms of volume over January to September. In September, the drop was 13.6 percent.

This drove down the company's operating profit by 5 percent over the first nine months of the year to 469.7 billion yen ($4.12 billion), versus an estimate of 475.5 billion yen from five analysts polled by Thomson Reuters.

Its third-quarter profit, while higher than a year ago, also fell short of consensus.

On Ploom Tech, the company said it was selling the device at 500 stores in Tokyo as of Monday, 100 more than it initially planned. It started test-selling the product in New York and three other U.S. states in September.

"There is still an issue of production capacity but we are trying to manage that," Miyazaki said.

(Reporting by Taiga Uranaka; Editing by Himani Sarkar)

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