Background

A cigarette smoker may rationalise their choice to switch to using a heated tobacco product (HTP) from combusted cigarettes for many different reasons. They may think HTPs are less risky than the combusted product, or like the way it smells, or they may be trying to save money. Determining whether each rationale holds up to scrutiny with data can help inform consumer behaviour and the response of governments to that behaviour.

In the Philip Morris International (PMI) 2016 Annual Report entitled ‘This Changes Everything’ the company asserted, ‘With regard to the [HTP] fiscal environment, [heated tobacco] are either taxed in all launch markets under a dedicated new excise category or as other tobacco products, depending on national legislation. Long-term, we believe that [HTPs] should constitute a new, separate fiscal category, taxed in line with their risk-reduction profile.’1 To a large extent, PMI and other tobacco companies have gotten their way, with many if not most, countries deciding to levy lower rates of excise tax on HTPs than combusted cigarettes by classifying them in a lower-tax product category.2–4 HTPs require users to purchase an expensive tobacco heating device upfront. So, it must be asked whether switching to a tax-advantaged HTP which requires the use of an expensive heating device to be purchased up front can save the consumer money over time. This dynamic begs the question: Are the HTPs, which so often receive excise tax breaks, less expensive to use than combusted cigarettes? No prior research has examined whether HTPs present a value proposition for smokers looking to switch to the purportedly lower-risk novel products. Here I examine whether HTPs are cheaper to use than combusted cigarettes.

Methods

To calculate the cost of using HTPs relative to combusted cigarettes, I modify the payback period calculation measuring the relative prices of cigarettes and electronic cigarettes introduced in a previous study.5 The payback period is the number of days a pack-a-day smoker would have to exclusively use HTPs to recoup the cost of buying the heating device. The difference in price between equivalent amounts of cobranded cigarettes and heated tobacco was divided by the price for an HTP device to obtain the payback period, measured in days. Smokers switching to HTPs in clinical trials appear to consume similar numbers of HTP sticks versus combusted cigarettes in a day, making a heated stick-to-stick comparison appropriate here.6 The payback period was determined to never be reached if it was longer than 365 days, the expected lifetime of the device,2 or if combusted cigarettes cost less than cobranded heated tobacco. The payback period is a useful metric because it captures the opportunity-cost of switching to a novel product. If the payback period is short, then the economic incentive to switch from combusted cigarettes is that much stronger. If the payback period is long, then the economic incentive to switch diminishes and even vanishes, leaving the impetus to switch to rely on purported health benefits or ancillary motives for using HTPs (technophilia, smell, novelty, etc).7 What absolute measures of the payback period constitute short and long remain to be determined and should be the subject of future research.

I used 2014–2017 pricing data from Euromonitor International and currency conversion rates into International Dollars at purchasing power parity (PPP) from the World Development Indicators to perform these calculations in Microsoft Excel.8 9 Euromonitor International collects retail prices from supermarkets, kiosks, specialty stores, convenience stores and internet retailers in dozens of different product categories in 100 countries including tobacco, for market research purposes. I obtained the prices for four transnational tobacco company’s HTP devices and heated tobacco sticks, and cobranded cigarettes. Tobacco industry branding strategy for HTPs has mostly focused on cobranding established cigarette brands on HTPs in notable contrast to their separate branding strategy on industry-owned e-cigarette brands. For Japan Tobacco International (JTI), I used the Ploom device and cobranded Mevius, Camel, Winston and Benson & Hedges heated tobacco pods and cigarettes. For PMI, I used the price of IQOS, cobranded Marlboro and Parliament HEETS and cigarettes. For British American Tobacco (BAT), I used the price of the glo device and cobranded Kent and Dunhill heated neopods and cigarettes. For Korea Tobacco and Ginseng (KTG), I used the price of the Lil device, the Fiit tobacco pods and KTG’s market-leading Esse cigarette brand. KTG is the only company to not cobrand their HTP product with a combusted cigarette brand.

Results

Average prices in international dollars (PPP) for three products from 34 countries over 4 years (n=278) are displayed with a global average payback period in table 1. Prices for PMI and BAT heating devices rose over time, while the price of JTI’s remained flat. PMI’s heated tobacco became more expensive from 2015 to 2016, BAT’s became less expensive from 2016 to 2017 and JTI’s price remained flat. Cigarette prices for all companies remained between flat or rising over the study period.

From 25 countries with adequate data (n=46), the payback period to purchase HTP devices was less than 1 year in 17 cases. JTI’s HTP device payback period was greater than a year in three of three cases as was the case for the single case of KTG’s HTP device. The payback period for BAT’s device was less than 1 year in one case of six. PMI’s HTP device’s payback period was less than 1 year in 0 of 1 case in 2015, 2 of 11 cases in 2016 and 14 of 24 cases in 2017. The average payback period for HTP devices with less than a 1-year payback period was 46 days in 2016 (n=2, SD=11) and 186 days in 2017 (n=15, SD=101).

Online supplementary file shows that like earlier findings on e-cigarettes,5 the UK has the shortest payback periods for HTP devices at 35 days in 2016 and 32 days in 2017 for PMI’s device. This seems to be a function of high cigarette prices. In Japan,4 where the HTP presence is largest, devices have indefinitely long payback periods potentially placing an upper bound on growth in a market with inexpensive cigarettes.

Discussion

I compared prices of HTPs to combusted cigarettes using data from Euromonitor International and found that high initial purchase costs make HTPs more expensive to use than combusted cigarettes in most countries. Tobacco companies have sought and received lower excise taxes for HTPs compared with conventional cigarettes that would theoretically have made the products cheaper to buy and possibly to use than cigarettes. This cross-country study mostly found otherwise. HTP devices are rarely cheaper to use than cigarettes because users are required to purchase an expensive device upfront at a cost that will be difficult to recoup because the price differential between heated tobacco and combusted cigarettes, despite the tax advantages, is relatively small.

The reasons for these price patterns may be rooted in a corporate strategy that maximises shareholder value, not in the industry’s recent self-professed responsibility to protect the well-being of consumers. Tobacco industry consultants have noted this same pattern with an eye on profits, “At present, [PMI’s Heets] are being taxed at a 20%–30% lower rate than combustible cigarettes. We believe this could add significantly to profitability for PMI as the product tends to sell at the same retail price as the combustible products.”10 Because these tax breaks are not yielding lower retail prices, we can assume that the tax ‘savings’ are being reinvested into elevated research, development and production costs, and/or that HTPs have larger profit margins. Alternatively, these tax breaks may be producing profit signals to the companies selling these products that their interest lies in selling more of the purportedly reduced-risk product and may shift corporate strategy accordingly without the need to produce a price signal to consumers.11

But, if tobacco companies wish to invoke a recent popular logic of some in the tobacco control field12 in pleading for differentially lower taxes on a potentially reduced-risk product, then they should be translating reduced taxes into reduced prices and eventually into short payback periods as a signal of reduced harm to the consumer. If governments listen to this ‘reduced risk should reduce taxes’ narrative on HTPs without ensuring this translates into sufficiently reduced relative product prices, they hazard countenancing the reduced risk claims of tobacco companies while industry profit margins are padded, no price signal for the consumer emerges and potential tax revenue is forfeited to tobacco company shareholders. From the perspective of a government, there is little to gain from this bargain if current pricing patterns hold and HTPs are not found to be less hazardous to health than combusted cigarettes. To that end, in addition to continuing to examine rigorously the short-term, medium-term and long-term health effects of HTPs, continued surveillance of these pricing patterns and impacts on market trends remains an essential component of evolving tobacco regulatory systems.