The Nicotine Pouch Takeover $PM Phillip Morris Zyn And $TPB Turning Point Brands | TickerTrends.io

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Ticker: PM 0.00%↑

Sector: Tobacco

Share price: $125.18

Market Cap:  194.63B

Company Intro: 

ZYN is to nicotine pouches what Juul was to vaping—a first mover that could become the scapegoat for the entire category. With flavored Juul pods banned, competitors quickly filled the gap. Will the same pattern repeat if ZYN faces similar restrictions? 

ZYN is a leading brand of nicotine pouches that offers a smokeless, tobacco-free alternative to traditional nicotine products such as cigarettes, vapes, and chewing tobacco. Originally produced by Swedish Match, ZYN became part of Philip Morris International’s portfolio following a $16 billion acquisition in late 2022. The brand’s growing popularity is a key component of PMI’s shift toward smoke-free products, but ZYN faces significant regulatory challenges, particularly in the U.S., where nicotine products are closely monitored.

ZYN Popularity

In Q2 '24, ZYN volumes outside of the US grew in excess of 50%, and in the US, by 50.3%.

As a result of this, $PM is struggling to keep up with the demand. Emmanuel Babeau, $PM CFO had this to say on a recent earnings call:

“You can imagine when the business is growing 80%, and we are growing 80%. That is indeed creating some tensions on the supply chain without any doubt. I'm not sure that out of stock is still the proper word given where we are today. I think that maybe some time a reference is not going to be available. Not everything is going to be fully available in the range at a certain point in time, but look at what the Nielsen are telling us on Q1 and our volume, I mean, we seem to be growing fast, and it's difficult to see any kind of impact coming from restriction on availability.

As we said, we are working very hard to maximize our capacity in this fast-growing environment for ZYN. We are comfortable, of course, with our capacity to deliver around our 560 million can. That is not the limit that we are putting, of course, in terms of production capacity. But we are in this phase of adaptation to this strong growth and fast raising demand. I think so far, maybe with some tension but with limited impact on volumes.

ZYN’s US growth was despite a notable price increase in March. All the more impressive as the product still increased its share of category volume and value for the period while already priced higher than competing products. Further, industry data shows the total oral category growing at an accelerated rate in the US. While modern oral pouches are cannibalizing legacy oral tobacco and converting smokers, it is apparent that many non-users are beginning to explore the product.

However, I believe this is still in the early stages of its potential, with the majority of adult consumers still entirely unaware the product category exists. The product, categorically, is relatively affordable and is completely discrete, providing countless usage occasions throughout the day, every day. With US per-user consumption rates far under that of comparative Scandinavian figures, there is an added runway to compound upon rising adult consumer awareness.”

It is quite evident that the demand for nicotine pouches is not going to slow down anytime soon. Moreover, it appears that there is an extreme amount of pricing power that ZYN and $PM have. Even after a notable price increase in March, ZYN continued to grow its share in both volume and value. 

Moreover, industry data shows that the oral nicotine category is growing rapidly in the U.S., as modern oral pouches are converting smokers and attracting new users. However, the majority of adult consumers remain unaware of the product’s existence, leaving room for further growth as awareness increases.

It’s clear that the nicotine pouch category is on a fast upward trajectory, and will likely continue for the next 3-5 years. While some of the growth is from users switching from traditional tobacco products, the total market is expanding with new consumers trying nicotine pouches.

ZYN’s Role in Philip Morris’ Sales

ZYN represents a growing portion of Philip Morris International’s revenue as part of the company's transition toward smoke-free products. Smoke-free alternatives, including ZYN and heated tobacco products like IQOS, now make up approximately 18% of PM’s shipment volumes, as of 2023. at 135M units delivered in the heated tobacco and oral products segments.

The remainder of the company’s revenue still comes from traditional tobacco products, including cigarettes like Marlboro, which account for around 82% of shipment volumes at 613M units in 2023.

ZYN’s rising contribution to PM’s overall revenue underscores its importance in the company’s long-term goal of having 50% of revenue come from smoke-free products by 2025. However, ZYN’s future success depends heavily on its ability to navigate regulatory hurdles and prove its harm-reduction claims in a market that is increasingly focused on youth protection and public health. Meanwhile, Snus, Moist Snuff, and Other Oral volumes changed by -6.2%, +0.2%, and -17%, respectively. Nonetheless, the result was that total oral product volumes grew by more than 20%.

ZYN as the "Juul" of Nicotine Pouches

ZYN's position in the nicotine pouch market is similar to Juul’s early dominance in vaping. Juul gained massive market share with its flavored pods but became the target of regulatory action due to its association with youth nicotine addiction. ZYN, as an early leader in the nicotine pouch category, could face similar challenges. With its wide range of flavors and rapid growth, ZYN risks becoming the focal point of regulatory crackdowns if flavored nicotine pouches are linked to increased youth usage.

Just as Juul was forced to remove flavored pods from the market, ZYN could face a similar scenario if regulators determine that its products contribute to nicotine addiction among young people. This could open the door for competitors to introduce alternative products in the event of a regulatory clampdown.

Regulatory Environment

ZYN's regulatory hurdles stem from the FDA's oversight of nicotine products and growing public health concerns about addiction. Although ZYN is tobacco-free, the FDA regulates it under the Family Smoking Prevention and Tobacco Control Act, which covers all nicotine delivery systems. ZYN must meet strict premarket tobacco application (PMTA) requirements, demonstrating that its products are “appropriate for the protection of public health.”

1. FDA Scrutiny & PMTA Process: ZYN is required to prove that its nicotine pouches offer a net public health benefit, reducing smoking rates without encouraging nicotine use among non-smokers or minors. Philip Morris’ ownership intensifies this scrutiny due to the company's historical involvement with traditional tobacco products. Regulators are particularly cautious of PMI’s moves into alternative nicotine delivery systems, given their regulatory battles in the past.

2. Youth Access & Addiction Concerns: ZYN, like Juul before it, offers flavored products such as mint and citrus, which some public health advocates argue could attract younger, non-smoking users. Juul faced significant regulatory backlash for its flavored products, which were eventually banned due to concerns over youth nicotine addiction. ZYN could face similar challenges if its flavored offerings are blamed for rising nicotine use among young people, potentially positioning it as a regulatory "scapegoat" for the nicotine pouch industry.

3. Global Regulatory Challenges: Outside the U.S., ZYN faces a range of regulatory responses. Some European countries enforce strict nicotine level limits, while others may ban nicotine pouches entirely. The diverse regulatory landscape adds complexity to ZYN’s global expansion, though Philip Morris' international reach may help the company navigate these challenges.

4. State-Level Regulations: Beyond federal oversight, ZYN must also comply with individual state regulations. Several U.S. states have enacted or are considering bans on flavored nicotine products to curb their appeal to youth. If such restrictions are applied to nicotine pouches, ZYN’s flavored offerings may be limited, opening opportunities for competitors to capture market share, much like how the vaping industry evolved after Juul’s flavored pods were banned.

Legal and Advocacy Battles

In response to these challenges, Philip Morris has continued Swedish Match’s advocacy efforts, promoting ZYN as a safer alternative to smoking. However, public health groups remain skeptical, raising concerns that nicotine pouches, despite being tobacco-free, may still lead to addiction, especially among non-smokers. Any missteps in navigating this complex regulatory environment could see ZYN facing heightened scrutiny, much like Juul did in the vaping industry.

Future Outlook

Despite the regulatory challenges, ZYN remains a dominant product in the rapidly growing smokeless nicotine market. Its future success will depend on how well it can navigate the evolving regulatory landscape, particularly concerning youth access and addiction concerns. If ZYN can demonstrate its harm-reduction potential, it may continue to expand rapidly. However, it faces the risk of becoming the regulatory scapegoat for the nicotine pouch market, much like Juul was for vaping.

As Philip Morris International continues to shift its focus toward smoke-free products, ZYN plays a crucial role in the company’s strategy. The brand’s success will depend on whether it can avoid regulatory pitfalls and continue its growth without being derailed by the scrutiny that often follows high-profile nicotine products.

We think with PM’s core business of cigarettes still flat to down, there is more significant downside risk if risks were to materialize in their heated tobacco products segment. 

There is the risk of prolonged waiting for the thesis to materialize or nothing happening at all. Instead, we believe investors should pivot their focus their attention on a rising, lesser-known competitor in the nicotine pouch market. As regulators concentrate their efforts on the high-profile brand ZYN, this under-the-radar player in the nicotine space may benefit from the shifting landscape, offering a more compelling opportunity for growth.

Here’s an overview of the stock:

Ticker: TPB 0.00%↑
Sector: Tobacco
Share Price: $39.20 USD
Market Cap: 694.39M