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Where there is smokeless, there is fire. Tobacco companies want to shift away from cigarettes. Some products, such as Chinese-made flavoured vapes, have taken heat from regulators because of perceived health risks. There will be more.
The controversy has spilled over into smokeless, flavoured nicotine pouches. US sales of the most popular brand Zyn, made by Swedish Match, have soared. The sudden growth has caught the attention of US politicians and regulators.
This week the attorney-general of the District of Columbia subpoenaed Swedish Match North America, an affiliate of Philip Morris International (PMI), seeking data on Zyn sales. Washington DC prohibits the sale of flavoured nicotine products. PMI, which acquired Swedish Match in November 2022 specifically for its strong smokeless products business, accepts that some sales took place in the district. It has suspended its own online sales of Zyn.
Swedish Match has sold smokeless tobacco pouches for decades in Scandinavia. The newer Zyn nicotine pouches were introduced in the US only 10 years ago. Sold in round tins, its sales volumes have quadrupled in the three years to May. That should translate into $2.1bn of revenues to PMI this year, up about 45 per cent year on year.
Even with PMI’s expected $37bn of group net sales this year that kind of boost helps. It should add about 0.4 percentage points of group volume growth, thinks Simon Hales at Citigroup. And Zyn volumes should keep rising through 2026, up another 30 per cent after this year, using Visible Alpha consensus estimates. After that, rival products, such as British American Tobacco’s Velo and Altria’s On!, should temper further growth.
PMI needs smokeless products such as Zyn to replace its mainstay — the cash-generative, if declining business, of selling cigarettes. The company trades at a big valuation premium, on a forward price earnings basis, to peers like Altria and British American Tobacco. Though Zyn’s recent tear has done little to extend that lead: PMI’s shares are up about 6 per cent year to date. But that not only trails the US market but is in line with US rival Altria which lacks such a hot product.
There may be a difference in the minds of politicians, and very likely the public, between nicotine pouches and imported vaping devices. And the muted share price reaction to Zyn’s fortunes, both good and bad, suggests its potential has yet to capture the market’s imagination. But the extension of regulatory scrutiny to products like Zyn will prove a headache for PMI’s bosses and their ambitious targets for a “smoke-free” future.
