I don't smoke but have long been anti-anti-nicotine. The no fun police are humorless scolds. I suspect they like drawing attention to their own purported virtues by highlighting the "sins" of others without any commensurate health benefits. Americans started to get really really fat right around the time we weaned ourselves off most nicotine. Smoking isn't great, but gums and lozenges are probably fine. There are worse things (including obesity). And it is okay if other people get a little pleasure out of life in their own preferred way.
A concerning issue is where will it end. If successful, such prohibitionists won't stop at nicotine. They will look to police alcohol, fast food, sugary drinks, magazines, social media, the list goes on. The opportunity to achieve true tobacco harm reduction is sitting right in front of them. Cynically, I do not believe many special interest groups want to 'win' their crusade, or they risk elimiting the reason they cite to source funding, and thus their rather fat paychecks.
I do not pretend that smoking is not harmful to one's health, but if we are to believe in personal liberty, we must allow adults to make their own decisions, including ones we may view negatively. That is the tradeoff.
I agree with the conclusion on total nicotine consumption volume increasing. I think where the thesis could break as a nicotine investor is that regulators become overzealous and consumption shifts towards illicit unregulated products. The other key risk to watch out for is regulatory barriers for NGPs are lax enough that you have tons of entrants flooding the space and pushing prices down. Essentially, we need regulators to take an intermediary stance that preserves the moats of incumbents but is not overly stringent so as to kill the market altogether.
I think regulators are incentivized to achieve this outcome given the potential tax revenues, but there’s not guarantee they won’t take irrational measures to curb nicotine consumption.
You are 100% correct on multiple points. We will undoubtedly see future half-baked regulatory actions that defy good sense.
Regarding barriers to NGPs, we have seen the negative impact on the regulated space when non-compliant actors swoop in. If regulatory hurdles are lowered, allowing greater competition across all channels, it will put additional pressure on the industry. However, precisely what that timeline looks like and how it will unfold are less certain. I will cover these points in future pieces.
This piece really made me think about the often-complex dynamics between industry evolution and well-intentioned but sometimes flawed policy. Your insights on Cobra Effects are so important, especially when we consider all the variables in play. Thank you for shedding light on these crucial nuancues, it's a valuable perspective.
Great piece thanks Devin. Always a thoughtful read. Given your study of prior prohibition events, how does it typically end? I can't help but think that the longer sensible regulation is delayed, the more illicit product we will see. I suspect that this means the NPV of future cashflows produced by large regulated incumbents only increases as effective regulation is pushed out because the barriers to engaging in consumption are falling.
Take Australia for example where illicit product is entering at a substantial discount to prices found in authorized channels. This is unfortunately (from a societal health perspective) leading to volume growth of traditional products at the expense of reduced risk products ... but the cynical interpretation is that it is adding further fuel for category wide volume growth.
As mentioned in another comment, I believe we will see negative, half-baked regulatory efforts. However, ultimately, governments will mostly be forced to concede to nicotine's role in the human experience. I expect many to learn from the numerous examples of how prohibitionist policies have created more problems than solutions. Likewise, countries like Sweden provide a clear blueprint for the societal benefits that can be achieved through sensible policies centered on tobacco harm reduction. This is not to say that there won't be significant turbulence along the way. There will be. But the majors have a long history of navigating the bumps in the road, all while increasing profits incrementally.
Your analysis of the regulatory landscape and harm reduction is spot on. BTI's positioning in the NGP space seems underappreciated by the market - they've been quietly building strong portfolios in heated tobacco and vaping. The Cobra Effect you described is playing out exactly as you predicted, with overly restrictive policies pushing consumers toward illicit products rather than safer alternatives. I'm particularly intresed in how the major players will navigate the evolving regulatory frameworks in different regions, especially as governments realize they can't prohibit their way to public health success. The cash generation from traditional products funding NGP innovation is a compelling dynamic.
I don't smoke but have long been anti-anti-nicotine. The no fun police are humorless scolds. I suspect they like drawing attention to their own purported virtues by highlighting the "sins" of others without any commensurate health benefits. Americans started to get really really fat right around the time we weaned ourselves off most nicotine. Smoking isn't great, but gums and lozenges are probably fine. There are worse things (including obesity). And it is okay if other people get a little pleasure out of life in their own preferred way.
A concerning issue is where will it end. If successful, such prohibitionists won't stop at nicotine. They will look to police alcohol, fast food, sugary drinks, magazines, social media, the list goes on. The opportunity to achieve true tobacco harm reduction is sitting right in front of them. Cynically, I do not believe many special interest groups want to 'win' their crusade, or they risk elimiting the reason they cite to source funding, and thus their rather fat paychecks.
I do not pretend that smoking is not harmful to one's health, but if we are to believe in personal liberty, we must allow adults to make their own decisions, including ones we may view negatively. That is the tradeoff.
I agree with the conclusion on total nicotine consumption volume increasing. I think where the thesis could break as a nicotine investor is that regulators become overzealous and consumption shifts towards illicit unregulated products. The other key risk to watch out for is regulatory barriers for NGPs are lax enough that you have tons of entrants flooding the space and pushing prices down. Essentially, we need regulators to take an intermediary stance that preserves the moats of incumbents but is not overly stringent so as to kill the market altogether.
I think regulators are incentivized to achieve this outcome given the potential tax revenues, but there’s not guarantee they won’t take irrational measures to curb nicotine consumption.
You are 100% correct on multiple points. We will undoubtedly see future half-baked regulatory actions that defy good sense.
Regarding barriers to NGPs, we have seen the negative impact on the regulated space when non-compliant actors swoop in. If regulatory hurdles are lowered, allowing greater competition across all channels, it will put additional pressure on the industry. However, precisely what that timeline looks like and how it will unfold are less certain. I will cover these points in future pieces.
Thanks for your comment, Ken.
This piece really made me think about the often-complex dynamics between industry evolution and well-intentioned but sometimes flawed policy. Your insights on Cobra Effects are so important, especially when we consider all the variables in play. Thank you for shedding light on these crucial nuancues, it's a valuable perspective.
Devin, interesting article
Still waiting for our TPB review??
thx
I have done quite a bit of work on the company, including holding lengthy meetings with several of its serious shareholders. I have no forgotten!
Excellent, as always
Thanks, RB! Looking forward to the next time we get to have a chat in person.
Great piece thanks Devin. Always a thoughtful read. Given your study of prior prohibition events, how does it typically end? I can't help but think that the longer sensible regulation is delayed, the more illicit product we will see. I suspect that this means the NPV of future cashflows produced by large regulated incumbents only increases as effective regulation is pushed out because the barriers to engaging in consumption are falling.
Take Australia for example where illicit product is entering at a substantial discount to prices found in authorized channels. This is unfortunately (from a societal health perspective) leading to volume growth of traditional products at the expense of reduced risk products ... but the cynical interpretation is that it is adding further fuel for category wide volume growth.
As mentioned in another comment, I believe we will see negative, half-baked regulatory efforts. However, ultimately, governments will mostly be forced to concede to nicotine's role in the human experience. I expect many to learn from the numerous examples of how prohibitionist policies have created more problems than solutions. Likewise, countries like Sweden provide a clear blueprint for the societal benefits that can be achieved through sensible policies centered on tobacco harm reduction. This is not to say that there won't be significant turbulence along the way. There will be. But the majors have a long history of navigating the bumps in the road, all while increasing profits incrementally.
Your analysis of the regulatory landscape and harm reduction is spot on. BTI's positioning in the NGP space seems underappreciated by the market - they've been quietly building strong portfolios in heated tobacco and vaping. The Cobra Effect you described is playing out exactly as you predicted, with overly restrictive policies pushing consumers toward illicit products rather than safer alternatives. I'm particularly intresed in how the major players will navigate the evolving regulatory frameworks in different regions, especially as governments realize they can't prohibit their way to public health success. The cash generation from traditional products funding NGP innovation is a compelling dynamic.