Is Philip Morris (PM) Rebranding Addiction with ZYN?

This is an excerpt from my weekly newsletter for the American consumer that provides insights into the business of corporate America. Here is a link to this week’s edition — https://themcelweereport.substack.com/p/6272024-weekly-update-the-mcelwee

In April, multinational tobacco company Philip Morris International (PM) reported better than expected results and grew its total revenue by nearly 10% to $8.8 billion. The company attributed its positive performance to the “best-in-class economics of ZYN.”

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During a series of investor presentations in September 2023, Philip Morris showcased its growing success and projections for ZYN, the most marketed oral nicotine pouch in the U.S.

Overall, Philip Morris’ ambition is to “replace every cigarette for all adults who would otherwise continue to smoke with science-based smoke-free products, as soon as possible.”

However, is the hugely attractive economics of ZYN a greater priority?

In 2022, this “best-in-class” economics led ZYN in the U.S. to have six times the financial returns of international cigarettes. Additionally, ZYN’s gross margin is nearly 80%. As of 2023, ZYN had an approximately 40% discount compared to the average price for cigarettes due to fewer imposed excise taxes.

Philip Morris describes ZYN as a $2 billion retail value brand in the U.S. within five years of national launch. As of 2022, the oral smoke-free share of the global nicotine industry was only 2%.

Labeling the U.S. nicotine pouch category “in its infancy”, the company estimates delivering “in the range of 800 million to 1 billion cans of nicotine pouches in 2026.”

As shown in the graph below, this is exceptional growth.

In the first quarter of 2024 alone, the shipment of ZYN nicotine pouches in the U.S. increased 80% to 131.6 million cans (+58.4 million cans) from the first quarter of 2023. In terms of revenue, Philip Morris’ Americas smoke-free revenue grew a staggering 53% (from $302 million to $462 million) — the largest percentage increase in all product categories.

Philip Morris estimates that, in the U.S., the average number of cans per legal age nicotine user is 11 cans, grossly trailing other more mature markets.

In 2016, Swedish Match acquired the patent for ZYN. In the same year, Swedish Match introduced ZYN to the U.S. by market distribution in the Western United States. With less stringent marketing regulations compared to the tobacco market, ZYN has better ability to market and its efforts have included a pop-up store in the design of an modern, upscale coffee shop in Lincoln Park, Chicago. By 2019, ZYN was nationally launched in the U.S.

ZYN Consumers Factsheet

• Average age of a ZYN consumer is 39 years old.
• A third of consumers are women.
• Average household income of $89 thousand.
• Average weekly consumption per ZYN user is “a little bit over three cans.”

Oral nicotine pouches are placed in upper lips and contain crystalized nicotine and artificial flavor additives such as mint and wintergreen.

In 2023, Philip Morris completed its acquisition of Swedish Match for approximately $16 billion. Today, ZYN pouches are manufactured in Owensboro, Kentucky, and the company has invested a significant amount to increase its manufacturing capacity.

With the product’s launch in the western region of the U.S., ZYN volume as a percentage of industry cigarette volume grew from 1.2% in the fourth quarter of 2018 to 13.8% in the second quarter of 2023.

In 2023, the Western U.S. consumed an annual average of 18 nicotine pouch cans per legal age nicotine user, far above the Southern and Midwest regions (11 cans). With a two and a half year earlier launch date, it is expected that other regions of the U.S. will follow spiking usage seen in the West.

As the graph below shows, it is likely that this addictive product will continue to flourish in the U.S. market.

In context of all this data, is nicotine addiction simply being reincarnated because of a perceived lower-risk delivery method?

In an September 2023 Investor Day presentation, Philip Morris provided the following primary use of ZYN consumers before ZYN:

• Traditional Oral: 36%
• Cigarettes: 20%
• Vape: 25%
• Other Primary Uses before ZYN Include Cigars, Snus, OTP, Other Nicotine Pouch Brands: Unknown

A missing data point is how many people did not have a history of nicotine usage prior to ZYN.

As stated in the company’s 2023 Integrated Report, nicotine-contain products that do not involve combustion are addictive and not risk-free. The addictive nature of nicotine has clearly translated to higher usage of ZYN pouches as the company has indicated that consumers with longer usage consume more.

And, for the overall smoke free business, the company states that it is “volume growth prioritized over pricing.”

In a March 2023 study, the BMC Chemistry found “low levels of ammonia, chromium, formaldehyde, and nickel,” which are four harmful and potentially harmful compounds (HPHCs).

In March 2020, Philip Morris submitted a premarket tobacco application (PMTA) for ZYN and, although the FDA has not completed its review of the application, the company’s latest financial filing indicates that the “FDA has not taken enforcement action to prevent these ZYN products from being marketed or indicated that it intends to do so.”

Philip Morris developed ZYN Ultra, a moist version of ZYN, but was unable to file by the required September 2020 FDA deadline.