TUMULTUOUS TIMES AHEAD: 2017 TEEN TRENDS

Source: Cowen

December 20th

THE COWEN INSIGHT

2017 Monitoring the Future data from the U. of Michigan points to continued disruption ahead as teen behavior shifts dramatically (grades 8, 10 and 12). The addition of detailed vapor data showed strong preferences for vaping across nicotine, zero-nicotine and cannabis, reflecting the potential for vapor to be disruptive to multiple verticals across our coverage universe.

Cigarette Slide Continues

Cigarette incidence among high school teens has fallen dramatically over the last 2 decades, which slide continued in 2017 (with 30-day incidence down 80 bps, to 9.7% for 12th graders). While we lost data this year on underlying cigarette demographics (e.g., race and gender), we gained data on vapor (as discussed below). This decline should be welcome news to regulators, but also serves as evidence of how dramatically consumer behavior can change, as cigarette incidence has fallen below vapor incidence since at least 2014. That said, there does not yet seem to be a negative impact on combustible cigarette volumes, which makes sense as these younger consumers have lower per capita consumption (e.g., no one starts as a pack a day smoker). As such, brand preference among young adult smokers still matters. On this front, the most recent data (2015) would show that both MO and BATS (both Outperform rated) are well positioned (as premium brands are most popular among 18-25 year olds), though these metrics favor BATS, given the outsized popularity seen for Newport, Camel and Natural American Spirit. Conversely, IMB (also Outperform) is least exposed given their portfolio skews value, and thus older.

Smokeless Tobacco Faring Better

While MST volume growth has decelerated, the category continues to notably outperform combustible cigarettes, which trend we would expect to continue. With teens viewing MST as less risky, incidence rates are faring better, though still on the decline (down 170 bps, to 4.9% for 30-day use among 12th graders). Higher per capita incidence is stronger in MST than in cigarettes, where 2.0% of 12th graders report dipping daily, while only 1.7% of 12th grade smokers report smoking 1/2 a pack or more per day. This dynamic favors category leaders MO and BATS, as well as Outperform rated TPB (which has no exposure to cigarettes).

Vapor Comes Back with a Vengeance

While data on overall vapor behavior is still limited, there was a notable YoY increase in 30-day vapor consumption (+410 bps, to 16.6%). New to the 2017 survey was a breakout between vapor types: nicotine, zero-nicotine flavors and cannabis. Among 12th graders, nicotine vapor is the most popular, driven by much lower levels of perceived risk around the product (27% for vapor vs. 74.9% for cigarettes). This is broadly consistent with the steady acceleration that we have seen in dollar sales growth for the e-cigarette category in Nielsen-tracked channels over the last 18 months (led by private company JUUL).

Cannabis Substitution Continues

Consistent with the our Ahead of the Curve Report on cannabis and alcohol substitution (here), the trend evident among 18-25 year olds over the last ~10 years continues to also be evident among high school teens (not surprising as “the experimenter of today is the committed consumer of tomorrow”). Cannabis trial continues to lead all nicotine formats, with lower rates of risk perception that alcohol (in particular as it relates to high per capita consumption). This trend was perhaps most evident in the number of 12th graders that reported being drunk, which has fallen 15 pts since 1997. This reinforces our cautious stance on TAP, which plays in mainstream beer, though we think it’s broadly neutral for the rest of our alcohol coverage which tends to be premium priced and more niche.

Vaping Flavored Air?

While we appreciated anecdotally that vaping zero-nicotine e-liquids was popular (based on some of our prior consumer survey work), we did not appreciate just how in demand these products were among teens. Indeed, among 8th and 10th graders, vaping zero-nic was by far the most popular form of vaping (relative to nicotine and cannabis, as well as smoking and dipping). To be sure, this could just be an alternative to what would have been a tobacco occasion. That said, we wonder whether this also reflects the shift among teens away from carbonated soft drinks (which declines have been apparent in government survey data, here). We would posit that it is worth considering that younger consumers could be opting for zero-calorie “flavored air” as a CSD substitute, while they also transition their hydration patterns to better for you, lower-cal options simultaneously (e.g., water, still or sparkling).