Illicit Trade – RRPs: The US

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Enforcement against illicit disposables: Feburary 2024

In order to restrict the sale of illicit products at retail, 4 US states that have passed and 20 US States are considering legislation requiring manufacturers to certify that their products are compliant with FDA requirements.

Initial data from Louisiana, a state with enacted legislation, show that the shipment volume (to retail) for illegal disposable products declined to almost zero within six months after the effective date and the shipment volume for certified products increased – yet, only by a fraction of the decline in illicit products. It is likely that most consumers shifted to online channels to continue buying their disposable vape of choice. Thereby, in terms of volume recovery from the illicit trade, the initial data (presented by Altria at the CAGNY Conference) offer only limited progress. Moreover, the impact on cigarette shipment volume remains unknown.

According to Altria: There are 9.5Mn disposable vape users in the US (i.e. up from 6Mn in 2022). The ~35% e-vapor category growth in 2023 is solely driven by illicit flavored disposable products – which is now over 50% of the category. Growth in illicit flavored disposable vapes made for 1.5% to 2.5% cigarette industry decline over the last 12 months.

According to BAT: There is currently ~£10Bn ($12.7Bn) revenue pool in the US e-vapor market, of which 60% is related to illicit disposable products.

New illegal vapes: December 2023

Thousands of new illegal e-cigarettes have been launched in the US over the past six months1: more than 11,500 unique vaping products are sold in the US stores as of November 2023, up 27% from 9,000 products in June 2023. Nearly all the new products are illegal disposable (flavored) e-cigarettes, according to the Circana (formerly IRI) sales data gathered from c-stores, gas stations and other retailers. Disposable vapes generated $3.2Bn retail sales in the first 11 months of 2023 (excluding the specialty stores ans online sales).

The rise in illegal e-cigarettes sold continues despite a record number of products being denied & detained. FDA refused entry to 374 shipments (consisting almost entirely of vaping products from China) in the first 11 months of 2023, more than triple the 118 shipments refused in 2022.

So far, FDA granted marketing orders to 23 tobacco-flavored vapes from three companies: BAT, Altria/NJOY and Japan Tobacco (for further details: “The US FDA: PMTA“). According to Circana, the combined sales of these 23 products are $174Mn in 2023 – or, in other words, just 2.4% of the total (tracked) market. FDA considers all other e-cigarettes (unless pending PMTA review) to be illegal. FDA aimed to complete all major outstanding PMTAs initially by the mid of 2023 and later by the end of 2023: the Agency recently stated that the process would stretch into 2024.

Joint Federal Operation: December 2023

The US Customs and Border Protection (CBP) seized 41 shipments containing ~1.4Mn units of unauthorized e-cigarette products2, including brands such as Elf Bar, EB Create, Lost Mary and RELX. The estimated retail value of the seized products totals more than $18Mn. The seizures were part of a three-day joint US FDA-CBP operation at a cargo examination site in Los Angeles International Airport.

The US FDA-CBP team worked for months to review shipping invoices and to identify potentially violative incoming shipments in preparation to the operation. In an attempt to evade duties and detection, many of these unauthorized e-cigarettes were intentionally mis-declared as various items such as toys or shoes and listed with incorrect values. Once the seized merchandise is forfeited to the Government, it will be disposed of in accordance with the law.

In a press release, FDA reiterated its commitment to stop the flow of illegal e-cigarettes into the US and reminded that Elf Bar is the most commonly used brand among youth according to the 2023 National Youth Tobacco Survey.

Mounting political pressure: December 2023

Members of the congressional committee on US-China relations sent a request to the Department of Justice (DoJ) and FDA, calling attention to the extreme proliferation of illicit vapes3 and demanding information on the actions taken to stop the recent influx of illicit vapes from China.

The bipartisan letter from 12 committee members requests the DoJ and FDA to work with the Customs and Border Protection to address the problem with all due speed. In addition, lawmakers specifically ask whether DoJ’s consumer protection branch has sufficient resources or expertise to litigate vapor-related referrals from the FDA.

This special congressional committee was established early this year with the goal of countering Chinese policies that can damage the US economy.

Altria – “flavored disposable e-cigarettes are eating into cigarette volumes”: October 2023

In Q3 2023 earnings release, Altria – for the first time – stated that there is more cross-category movement (from cigarettes to e-vapor) than previously assumed and the growth of illicit flavored disposable e-cigarettes contributed to cigarette volume declines in the range of 1.5% to 2.5% over the last 12 months. BAT has long been voicing concerns about the illicit e-cigarette sales; however, BAT’s concerns were focused around the unfair competition against the VUSE brand (- until the Interim Business Update in December 2023 when they stated that “illicit disposal vapes are having more and more impact on cigarettes as well”).

We understand Altria’s intention to signal that “enforcement against illicit e-cigarettes” will slow down the cigarette volume decline and could even lead to volume recovery to cigarettes (- the latter is unlikely). However, informed investors are likely to read this differently: “The Almighty Marlboro is losing adult smokers to Elf Bar!” Shocker! This is extremely damaging to the Marlboro’s brand equity (superior taste/flavor proposition) – the ultimate asset Altria owns.

After spending ~$16Bn, Altria has 2% share in the e-vapor category in traditional retail. It is unclear to what extent Altria can build up NJOY’s share; but, we know – for fact – that money-printing Marlboro brand has 42.3% share in US cigarette market. Even if the illicit e-cigarettes are removed from the market, the US FDA will eventually clear the PMTA review backlog and, over time, more scientifically-substantiated (tobacco flavored) e-cigarettes & heated tobacco products will be available to the US smokers. If “lower consumer stickiness to the Marlboro brand (flavor)” and “increased cross-category movements” are incorporated into Altria’s financial model, Altria’s market value will be fundamentally damaged.

Altria Management achieved the headlines they wished for; every major news outlet reported that flavored disposable e-cigarettes are eating into cigarette volumes. Nevertheless, what they wished for could turn out to be not in their best interest in the long-run.

Altria’s sweeping litigation: October 2023

Altria’s NJOY filed litigation against 34 foreign and domestic manufacturers, distributors and online retailers of disposable e-vapor products that violate California’s flavor ban law and are unlawful under federal law (subject to FDA action)4. Altria states that these companies illegally compete against companies that comply with state and federal laws. The suit seeks a nation-wide injunction against the import, marketing and sale of these products and significant compensatory and punitive damages. The litigation, filed in the US District Court of California, is brought under four claims: unfair competition, false advertising, false advertising in violation of the Lanham Act and violation of the Prevent All Cigarette Trafficking Act of 2009. Named defendants in the suit manufacture and distribute disposable e-vapor products which include brands such as Breeze, Elf Bar, EB, EB Create, Esco Bar, Flum, Juice Box, Lava Plus, Loon, Lost Mary, Mr. Fog and Puff Bar.

Altria notes that the defendants has not received pre-market authorization from the FDA and, in many instances, have not even filed PMTA. Despite a ban on the sale of flavored tobacco products that went into effect in December 2022, flavored vapor products make up more than 97% of the California market according to a recent study commissioned by Altria.

Cannabis vaping benefiting from lack of “legality”: October 2023

Cannabis vaping is reported to reach the same market size as the nicotine vaping in the US5 – as the legal e-cigarette category face the US FDA restrictions and cannabis vapes benefit from the lack of federal-level legality & regulation. US e-cigarette market is (under-)estimated at US$6Bn (after 15 years of existence) whereas a recent report claims that cannabis vapes already generate $6.8Bn in sales – about a quarter of the entire US cannabis market. With only state-by-state cannabis legalization and no federal regulator involved, the growth trajectory for cannabis vapes looks better than nicotine vapes (- another “JUUL Moment” brewing). 64% of the cannabis sales in the US is still illicit – despite the illicit share being down from 86% in 2017.

Smoore (CCEL), Ispire and Advanced Vapor Devices are named as the main suppliers for cannabis vaping devices – a segment claimed to be worth $700Mn.

Inflow of unauthorized e-cigarettes: October 2023

The US authorities are struggling to restrain the inflow of unauthorized e-cigarettes, mainly through major shipping hubs like Los Angeles and Houston. Chinese disposable e-cigarette, Elf Bar, is defying the US import ban by deploying a simple tactic: name change6. In May, US FDA directed customs officials to seize incoming shipments of Elf Bar and EBDesign: Elf Bar quickly re-branded itself as EBCreate and changed the product owner from Shenzhen-based, iMiracle Technology, to Hong Kong-based, Nevera HK Limited. The AP reported in June that the number of unique e-cigarettes in the US has tripled to over 9,000 since 2020, a surge driven almost entirely by Chinese-manufactured disposables. Elf Bar generated US sales of over $270Mn last year, according to the Nielsen data (note: this is an under-estimation).

Recall: In Feb 2023, BAT submitted a citizen petition asking the US FDA to adopt a new enforcement policy against illegal vapes.


The World Health Organization (WHO) defines “illicit tobacco trade” as “any practice or conduct prohibited by law and which relates to production, shipment, receipt, possession, distribution, sale or purchase including any practice or conduct intended to facilitate such activity”.

The most common form of illicit tobacco trade for cigarettes are:

– Contraband: genuine cigarettes that have been bought in a low-tax country and which exceed legal border limits or are acquired without taxes for export purposes, to be then illegally re-sold in a market with higher prices

– Counterfeit: cigarettes manufactured without authorization of the rightful owners and with intent to deceive consumers and to avoid paying duty

However, the situation is different for the RRPs. Like the category itself, the illicit trade in RRPs (heated tobacco, e-cigarettes and modern oral tobacco) are also in a nascent stage.

– E-cigarettes: As the category is largely un-taxed (i.e. no excise tax), prices vary little from one market to another. Thereby, contraband is not a relevant issue. Moreover, as there are no strong brands or technologically superior products (- with underlying technology being shared by the manufacturers), counterfeit is not a relevant issue either. Illicit trade activities most commonly observed for the category include: e-cigarette sales in countries/channels where the category is banned and selling e-cigarettes that don’t comply with the legal specifications in terms of nicotine content and/or flavors. The current situation of illicit trade in modern oral tobacco is similar to that of e-cigarettes.

– Heated tobacco: This category can be seen as the extension of traditional tobacco for which both contraband and counterfeit could be relevant. However, the emergence of sizable consumer group and well-known brands are the two prerequisites for the illicit product. PMI’s TEREA/HEETS (used with IQOS) is probably reaching a tipping point in this regards. There are already some reported cases of contraband heated tobacco sticks. However, considering the technology involved in the IQOS product, PMI is better positioned to fight the illicit trade when compared to the conventional cigarettes.


  1. US seizes more illegal e-cigarettes, but thousands of new ones are launching – ABC News ↩︎
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  3. U.S. lawmakers are trying to ban Elf Bar and other e-cigarettes from China, again | Fortune ↩︎
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  5. FDA Vape Ban? Nicotine Devices Hit Trouble While Pot Vape Grows – Bloomberg ↩︎
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