Elon Musk disrupts the automotive industry; multiple CPG companies are trying to disrupt the meat industry; Steve Jobs's life-changing iPhone and Howard Schultz’s transformation of the Coffee industry. Can we add Setti Coscarella's name to the list as he is trying to change the way the world looks at the tobacco industry? According to LinkedIn, Mr. Coscarella was the Lead Strategist, Reduced Risk Products of Philip Morris International from November 2017 to July 2020. He joined as the CEO of Taat in August 2020.
Last week, Altria (MO) provided an update on strategy and its 10-year vision at CAGNY. The CEO discussed Altria's "Moving Beyond Smoking" program as it focuses on environmental, social, and governance initiatives to create long-term shareholder value through sustainability. For MO, the focus is on non-combustible tobacco products. "Beyond Tobacco" is also a phrase used by Phillip Morris International (PM) in its February analyst meeting to describe smokers in the "evolving ritual" category looking for "taste exploration" and a way to grow its market for smokers. The phrase "Beyond Tobacco" is a trademark of Taat Lifestyle and Wellness Ltd (TOBAF). The Company has filed trademark applications filed in more than a quarter of the world's countries. The dream is for TAAT's products to provide a potentially safer (lower cost) substitute for cigarettes and E-cigarettes. That appears to be what the big five tobacco companies are after too.
DISRUPT THE GLOBAL TOBACCO MARKET
Five global corporations dominate the tobacco industry; Philip Morris International, Altria Group, British American Tobacco, Imperial, and Japan Tobacco, accounting for over $350 billion in market capitalization. While cigarette usage has declined dramatically over the last several decades, the fact remains that there are still 5.3 trillion cigarettes sold annually. The global tobacco market size was valued at $932.1 billion in 2020 and is expected to expand at a compound annual growth rate (CAGR) of 1.8% from 2021 to 2028. Any industry growth has been driven by launching new products, including various flavored tobacco products such as clove cigarettes, menthol cigars, and better for you "vape" products. These better-for-you products have seen an increase in the number of adults who had tried electronic cigarettes and other better-for-you products. The tobacco industry has been creating new products to keep up with millennials and generation Z’s changing demands. For instance, in May 2019, Philip Morris launched IQOS. This electronic device heats paper-wrapped tobacco-filled sticks and, as a result, generates nicotine-containing aerosol. The product has been cast as an alternative to cigarettes and fits into its "Beyond Tobacco" category. The launch of non-hazardous products is expected to remain an eminent factor for the industry's key players over the next few years.
The COVID-19 pandemic has had a substantial negative impact on the tobacco industry owing to the nature of the disease and accelerated the need for better-for-products. It is a deadly viral infectious disease that attacks the lungs and severely impacts breathing. People with significant tobacco consumption or any tobacco addiction have been recognized as the most vulnerable people of the illness, including Severe Acute Respiratory Syndrome (SARS), Middle East Respiratory Syndrome Coronavirus (MERS-CoV), cardiovascular diseases, and other pulmonary diseases. Therefore, any smokeless and smoke products are receiving negative attention due to their associated health risks. The need for change continues to grow.
E-cigarettes have been marketed as a safer alternative to regular cigarettes. However, the fact is that vaping products contain nicotine, which is very addictive. E-cigarettes have been linked to increased blood pressure, heart disease, gum infection, lung disease, and brain development. And yet, according to a recent Gallop Poll, 20% of people age 18-29 vape, compared to 9% in the 30-49 age bracket. According to the World Health Organization, 41 million people used e-cigarettes in 2018, and it is projected that this number will grow to an estimated 55 million by next year.
BEYOND TOBACCO
Is there a big market for "BEYOND TOBACCO?" According to the CEO, "Beyond Tobacco™ is our proprietary formulation of base cigarette material ("BCM"), which looks, smells, tastes, smokes, and even sounds like Tobacco, despite containing zero Tobacco and zero Nicotine. TAAT has a 14-step process for producing Beyond Tobacco™ in its Las Vegas, NV facility, where we convert American-grown biomass into the BCM that characterizes the TAAT™ product. Based on current production line capacity, it can produce up to 2,400 lb / 1,088 kg of Beyond Tobacco™ per day, which is enough to manufacture approximately 6000 ten-pack cartons of TAAT™." How successful can a tobacco product be if it provided the user with the natural feel but without Nicotine and Tobacco? What if such an outcome would be available at the same or possibly lower price than both cigarettes and E-cigarettes, but without the adverse side effects of either? Currently, the Beyond Tobacco product may be available at a lower cost than combustible cigarettes because the product will not be burdened with traditional cigarettes' level taxes. Beyond Tobacco, it will be marketed as an alternative to cigarettes and E-cigarettes without Nicotine and Tobacco's adverse side effects but is positioned as a "tobacco" category product. As such, it is being sold only in stores that are licensed retailers of tobacco cigarettes.
Currently, the strategy is to focus on building market share in the state of Ohio. According to the Company, there is a high smoking incidence rate in Ohio, which is about 50% higher than the national average (20.5% of adults in Ohio versus 13.7% nationally in the United States). Furthermore, Ohio borders five states with a combined population of more than 35 million people, enabling the Company to expand organically in that region. Based on the learnings we pick up from doing business in Ohio, the intention to apply what learnings in new markets in the United States and potentially internationally. The critical retail strategy aligns where its products can be bought with the shopping patterns of legal-aged smokers.
On August 24, the Company announced that it had added Tim Corkum as its Chief Revenue Officer. At Philip Morris, Mr. Corkum held various sales, trade marketing, corporate affairs, and business development positions. He was a Director of Philip Morris's Reduced Risk Products category with its Caribbean affiliates and in the Dominican Republic, and then transitioned to the Canadian market in 2018.
PRODUCTION
On February 10, 2021, the Company announced that its flagship product TAAT™ is being manufactured at a rate of more than 57,000 ten-pack cartons per month (over 690,000 cartons per year), which reflects a 233% increase from a production rate of 12 pallets per month to 40 pallets per month as of this week. This increase was prompted by the sustained demand for TAAT™ in Ohio and anticipated demand from smokers aged 21+ in other U.S. states who will be able to directly purchase TAAT™ online from the Company when its e-commerce portal launches this quarter. Recent improvements to the Company's processing facility in Las Vegas, Nevada, have enabled TAAT™ to produce a greater volume of Beyond Tobacco™, the product's base material, developed in-house using a 14-step process including a patent-pending refinement technique. Additionally, the Company has coordinated with its contract manufacturer, who also produces cigarettes for regional and global tobacco brands, to allocate additional production bandwidth to making and maintaining the current output with the ability to scale further upward as needed.
CHECKS TO BE PERFORMED
As with any early-stage company, the failure to execute the plan must be a focus. While the product is both Nicotine and Tobacco-free, it is not smoke-free. The possibility that other health-related issues may be raised that could negatively affect the growth momentum of Beyond Tobacco cannot be ruled out. Notably, the FDA might have a say on how the Company can sell this product. The Company has a patent pending for the Beyond Tobacco cigarette's material process, with the operative word being "pending." There is no reason why the patent will not be awarded, but the issue must remain on the ledger's risk side until it is. We have also not tried the product or have seen it. Lastly, we have not confirmed the company production capacity for both manufacturing and the key material.
HOW BIG IS BIG?
Altria had invested $12.8 billion to purchase a 35% stake in Juul in December 2018, valuing Juul at $38 billion. In January of 2020, it has written down the value of its stake to $4.5 billion. Currently, TOBAF is trading at a full-diluted market value of $386 million. Everything has to fall into line without any significant adverse developments for the Company to approach JUUL's cult status. We have an experienced tobacco sales & marketing team from Philip Morris guiding the Company in its initial and most significant effort to introduce the product to its market. While health-related issues cannot be ruled out entirely, they are likely not to be as severe as those of conventional or E-cigarettes. Taat absolutely must be categorized as a disruptor in its attempt to gain traction in both the cigarette and e-cigarette market.
