September 10, 2018 04:01 AM GMT
`
`
`
`TobaccoTobacco
`
`Three Key Take-aways From Our
`JUUL City Scanner Analysis
`
`Our Nielsen city data analysis suggests JUUL's cigarette
`cannibalization rate remains low, but shows slowing cigarette
`volumes in JUUL's top mkts (NY, Seattle, Denver). JUUL's HSD-
`LDD share in several large cities supports our ests. of ~15%
`share in 2022 and ~100 bps/year headwind to cigarette
`volumes.
`
`JUUL's rapid growth is raising questions about its impact to cigarette volumes:
`JUUL sales are growing rapidly (+728% YoY L4W ended 8/11/18) and JUUL refills
`now hold 4.9% of cigarette equivalent volumes (vs. 50 bps in the prior year).
`JUUL's success is coinciding with decelerating cigarette industry volumes, which
`declined 4.0%/4.5% in 2017/1H18 after two years of unusually strong growth (-
`0.5%/-2.5% in 2015/16), raising concerns about JUUL's threat to the cigarette
`category.
`
`We have three key take-aways from our deep-dive into JUUL city scanner data:
`
`1) JUUL has overwhelmingly high market share in several major cities: JUUL
`sales over-index to major US cities, and it has overwhelmingly high market share
`in New York (12.9%), Seattle (10.2%), Houston (8.0%), Denver (7.9%), and
`Nashville (7.0%) despite only entering these markets in 2016/early 2017.
`Interestingly, JUUL has higher market share in cities where cigarette prices are
`higher, potentially benefiting from its cost advantage compared to cigarettes.
`
`2) JUUL's cigarette cannibalization rate still appears low: A number of JUUL's
`top markets (Nashville, Denver, New York, and Seattle) are experiencing
`decelerating cigarette volumes along with growing JUUL share. However, the rate
`of cigarette volume declines is not commensurate with the pace of JUUL share
`growth and there is also a positive correlation with cigarette volumes across
`many cities. In fact, when combining cigarette and JUUL volumes, total tobacco
`consumption grew 1.9% over the past year in top US cities (see Exhibit 22),
`suggesting JUUL may be adding new users to the category.
`
`3) JUUL has further room for distribution expansion: JUUL's ACV in convenience
`stores is below its 70% national average in about half of major cities.
`Convenience stores have a strong incentive to carry the product as it accounts
`for a majority of the channel's sales growth.
`
`What does this mean for the tobacco industry outlook? We believe that JUUL's
`rapid growth should continue, driven by increasing consumer acceptance and
`further distribution gains. While current cannibalization appears low, we believe
`it will likely increase as JUUL moves beyond early adopters and increasingly
`targets existing smokers through its marketing efforts. Net, we believe Nielsen
`
`MORGAN STANLEY & CO. LLC
`Pamela Kaufman, CFA
`EQUITY ANALYST
`Pamela.Kaufman@morganstanley.com
`Rose V Lauricella
`RESEARCH ASSOCIATE
`Rose.Lauricella@morganstanley.com
`
`Tobacco
`
`North America
`IndustryView
`
`+1 212 761-7151
`
`+1 212 761-8118
`
`In-Line
`
`Exhibit 1: JUUL has outsized market share of cigarette
`volumes in NY, Seattle, Houston, Denver, and Nashville
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 2: Correlation between cigarette volumes and
`JUUL market share in JUUL's Top 10 cities/regions
`(January 2017-Present
`Correlation Between JUUL YoY Market Share and Cigarette Volumes
`
`0.60
`
`0.40
`
`0.20
`
`0.00
`
`-0.20
`
`-0.40
`
`-0.60
`
`-0.80
`
`-1.00
`
`Correlation Between JUUL YoY Market Share and Cigarette Volumes
`
`JUUL Market Share
`
`14.0%
`
`12.0%
`
`10.0%
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`New York
`
`Seattle
`
`Houston
`
`Denver Pacific Other Nashville
`
`Boston
`
`New
`England
`Other
`
`St. Louis
`
`New
`Orleans
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Morgan Stanley does and seeks to do business with
`companies covered in Morgan Stanley Research. As a
`result, investors should be aware that the firm may have a
`conflict of interest that could affect the objectivity of
`Morgan Stanley Research. Investors should consider
`Morgan Stanley Research as only a single factor in making
`their investment decision.
`For analyst certification and other important disclosures,
`refer to the Disclosure Section, located at the end of this
`report.
`
`1
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`JLI Ex. 2037, Page 1 of 23
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`

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`data supports our view that JUUL can be a ~100 bps annual headwind to
`
`industry volumes over the next five years (See Is JUUL Hype Overblown?), which
`is predicated on JUUL's share of cigarette volumes approaching 15% by 2022
`(supported by its high share in NY/Seattle) and a relatively low cannibalization
`rate (40% by 2022 vs. ~20% today). We are closely monitoring evolving JUUL
`data and a clear risk to the company is if cigarette cannibalization remains low
`and regulatory pressures build.
`
`Where can we be wrong? Our analysis is based on Nielsen scanner data and
`excludes online sales and vape shops, potentially underestimating JUUL
`consumption. In addition, Nielsen may not have complete coverage of the
`convenience store channel, where a majority of JUUL sales occur.
`
`2
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`JLI Ex. 2037, Page 2 of 23
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`

`

` A
`
` Closer Look at JUUL Scanner Data by City
`
`JUUL's rapid growth is raising questions about its impact on decelerating US cigarette
`
`volumes. JUUL continues to grow at a rapid pace, with sales +728% YoY in the L4W
`ended 8/11/18, and is driving a meaningful acceleration in e-cig category sales growth
`from +48% in 2017 to +146% in 2018 YTD within measured channels (Exhibit 3). JUUL's
`growth has been facilitated by greater access to capital, distribution expansion into
`traditional retail channels, and expanded manufacturing capacity. As of 8/11/18, JUUL
`refills represented 4.9% share of cigarette equivalent volumes (Exhibit 6), compared to
`50 bps in 2017 and JUUL accounted for 3.9% of total dollar spend on cigarettes and e-
`cigs combined (Exhibit 5). JUUL's success is coinciding with decelerating US cigarette
`volumes, which declined -4.5% in 1H18 and -4% in 2017 following two years of unusually
`strong performance (-0.5%/-2.5% in 2015/16), raising concerns about JUUL's threat to the
`cigarette category.
`
`Exhibit 3: E-cig sales growth accelerated throughout 2017/18 due to
`JUUL's success
`
`Exhibit 4: JUUL holds 70% share of the e-cig category
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 5: JUUL accounts for 3.9% of total $ spend on cigarettes and
`e-cigs combined
`
`Exhibit 6: JUUL held 4.9% share of cigarette equivalent volumes as of
`8/11/18
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`3
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`JLI Ex. 2037, Page 3 of 23
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`

`

`4
`
`JUUL's success has come with relatively limited distribution, but its reach is expanding.
`Within measured channels, JUUL is sold at convenience stores and was available at
`77,000 convenience stores in August compared to only 29,000 at the end of 2017
`(Exhibit 7). For context, there are ~155,000 convenience stores in the US and JUUL is
`rapidly expanding distribution, adding, on average, ~6,000 convenience stores per
`month. Among conveniences stores, JUUL is sold at convenience stores representing
`~70% ACV, and is adding 4-5% ACV on average per month. This pace of distribution
`expansion suggests JUUL may be at full distribution within the convenience store
`channel by the end of this year (Exhibit 8), but our discussions with the company
`suggest that it believes its actual ACV is slightly over 50%. Notably, the company
`indicated that it expects to add several large accounts over the coming months and
`expects to expand distribution beyond the convenience store channel into drug and
`mass.
`
`Exhibit 7: JUUL is sold at ~77,000 convenience stores in the US
`
`JUUL - Number of Stores Selling (Convenience)
`
`Exhibit 8: JUUL could be at full distribution within the convenience
`store channel by the end of 2018
`
`JUUL - % ACV (Convenience)
`
`80
`
`70
`
`60
`
`50
`
`40
`
`30
`
`20
`
`10
`
`0
`
`08/11/18
`
`07/14/18
`
`06/16/18
`
`05/19/18
`
`04/21/18
`
`03/24/18
`
`02/24/18
`
`01/27/18
`
`12/30/17
`
`12/02/17
`
`11/04/17
`
`10/07/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`
`06/17/17
`
`05/20/17
`
`04/22/17
`
`03/25/17
`
`02/25/17
`
`01/28/17
`
`12/31/16
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`90,000
`
`80,000
`
`70,000
`
`60,000
`
`50,000
`
`40,000
`
`30,000
`
`20,000
`
`10,000
`
`0
`
`08/01/18
`
`07/01/18
`
`06/01/18
`
`05/01/18
`
`04/01/18
`
`03/01/18
`
`02/01/18
`
`01/01/18
`
`12/01/17
`
`11/01/17
`
`10/01/17
`
`09/01/17
`
`08/01/17
`
`07/01/17
`
`06/01/17
`
`05/01/17
`
`04/01/17
`
`03/01/17
`
`02/01/17
`
`01/01/17
`
`12/01/16
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Convenience stores have an incentive to sell JUUL as its sales per store are growing
`
`~140% YoY. JUUL sales per store are growing rapidly, up +136% in the L4W ended
`8/11/18, though they have moderated sequentially, +3% MoM to ~$2,600/store (Exhibit
`9). We believe convenience stores have a strong incentive to carry JUUL, which is driving
`a significant portion of the retail channel's growth. In the L12W, total convenience store
`sales grew +2.2% but would have grown +80 bps excluding JUUL, which is accounting for
`about two-thirds of total convenience store sales growth (despite not being in full
`distribution within this channel). Most recently, overall convenience channel sales grew
`+1.6% in the L4W, but sales would have been flat YoY sales when excluding the
`contribution from JUUL (Exhibit 10).
`
`JLI Ex. 2037, Page 4 of 23
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`

`

`Exhibit 10: JUUL is contributing to the majority of c-store channel
`sales growth
`
`Total Convenience Store Sales vs. Total Convenience ex. JUUL ($ YoY)
`
`4.0%
`
`3.5%
`
`3.0%
`
`2.5%
`
`2.0%
`
`1.5%
`
`1.0%
`
`0.5%
`
`0.0%
`
`-0.5%
`
`-1.0%
`
`-1.5%
`
`08/11/18
`
`07/14/18
`
`06/16/18
`
`05/19/18
`
`04/21/18
`
`03/24/18
`
`02/24/18
`
`01/27/18
`
`12/30/17
`
`12/02/17
`
`11/04/17
`
`10/07/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`
`06/17/17
`
`05/20/17
`
`04/22/17
`
`03/25/17
`
`02/25/17
`
`01/28/17
`
`Gap
`
`Convenience ($) YoY% Growth
`
`Convenience Ex-JUUL ($) YoY% Growth
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 9: JUUL sales/store growing ~140% YoY and ~3% MoM
`
`JUUL - Sales/Store
`
`30%
`25%
`20%
`15%
`10%
`5%
`0%
`-5%
`-10%
`-15%
`-20%
`
`08/11/18
`
`07/14/18
`
`06/16/18
`
`05/19/18
`
`04/21/18
`
`03/24/18
`
`02/24/18
`
`01/27/18
`
`M/M
`
`12/30/17
`
`12/02/17
`
`11/04/17
`
`10/07/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`
`JUUL - Sales/Store
`
`06/17/17
`
`05/20/17
`
`04/22/17
`
`03/25/17
`
`02/25/17
`
`01/28/17
`
`12/31/16
`
`$3,000
`
`$2,500
`
`$2,000
`
`$1,500
`
`$1,000
`
`$500
`
`$0
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`On the other hand, cigarette sales are meaningfully underperforming the overall
`
`convenience store channel. Historically, YoY spend on cigarettes has closely tracked
`YoY spend on all other categories within convenience stores. However, as evidenced by
`Exhibit 11, this relationship started to breakdown at end of 2017, coinciding with JUUL's
`increasing growth. Cigarette sales growth turned negative in January 2018 (-1.2% YTD)
`after growing consistently since 2014. Over the last several months, cigarette sales
`within convenience stores have been declining at an accelerating rate (-1.9% in August vs.
`-1.2% in July). The gap relative to sales growth for non-cigarette products has widened,
`suggesting that convenience store traffic is not the underlying driver for slowing
`cigarette sales growth.
`
`Exhibit 11: Cigarette sales growth turned negative in the convenience store channel in
`
`Cigarette vs. Total Convenience ex. Cigarerres $ YoY
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`-2.0%
`
`-4.0%
`
`-6.0%
`
`-8.0%
`
`08/11/18
`07/14/18
`06/16/18
`05/19/18
`04/21/18
`03/24/18
`02/24/18
`01/27/18
`12/30/17
`12/02/17
`11/04/17
`10/07/17
`09/09/17
`08/12/17
`07/15/17
`06/17/17
`05/20/17
`04/22/17
`03/25/17
`02/25/17
`01/28/17
`12/31/16
`12/03/16
`11/05/16
`10/08/16
`09/10/16
`08/13/16
`07/16/16
`06/18/16
`05/21/16
`04/23/16
`03/26/16
`02/27/16
`01/30/16
`01/02/16
`12/05/15
`11/07/15
`10/10/15
`09/12/15
`08/15/15
`07/18/15
`06/20/15
`05/23/15
`04/25/15
`03/28/15
`02/28/15
`01/31/15
`01/03/15
`12/06/14
`11/08/14
`10/11/14
`09/13/14
`
`Gap
`
`Convenience Ex-Cigarettes ($) YoY% Growth
`
`Cigs ($) Convenience YoY% Growth
`
`Source: Nielsen, Morgan Stanley Research, (data as of 08/11/18)
`
`JUUL's market share of cigarette volumes over-indexes to major metropolitan areas,
`
`with overwhelmingly high share in New York, Seattle, Houston and Denver. JUUL held
`4.9% of cigarette equivalent volumes in the L4W ended 8/11/18, but there are notable
`differences in its share across cities. JUUL has outsized market share of cigarette
`volumes in several markets, holding 12.9% market share in New York, followed by
`Seattle (10.2%), Houston (8.0%), Denver (7.9%), and Nashville (7.0%) despite only
`entering these markets in 2016/early 2017. JUUL's high market share in these cities is
`likely a function of the city demographics (i.e. affluence, age), time in the market, as well
`
`5
`
`JLI Ex. 2037, Page 5 of 23
`
`

`

`as the price of cigarettes in each market. JUUL has lower penetration in the South
`Atlantic region, which is also the highest cigarette volume market, holding 3.9% share of
`cigarette volumes in the region. Outside of the 25 major cities, JUUL has 4.5% share of
`cigarette volumes. However, JUUL share is growing rapidly across all of these markets
`(see Exhibit 12 & Exhibit 13).
`
`Exhibit 12: JUUL market share of cigarette volumes is the highest in NY, Seattle, Houston, Denver and Nashville
`
`Source: AlphaWise, Tableau, Morgan Stanley Research (data as of 08/11/18)
`
`6
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`JLI Ex. 2037, Page 6 of 23
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`

`

`Exhibit 13: JUUL market share is growing YoY
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`JUUL regional sales data indicates that it over-indexes to major cities and is heavily
`
`weighted to New York City. Based on Nielsen data, JUUL derives 51% of its volumes
`from 25 major cities, compared to 46% of cigarette volumes sold in these cities. New
`York represents an outsized portion of JUUL's total volumes (7.9% as of 8/11/18),
`followed by Philadelphia (3%) and Boston (3%) (Exhibit 14). JUUL refill volumes are
`overindexed relative to the cities' share of total US cigarette volumes in 10 cities, with
`the top 5 including New York (2.5x), Seattle (2.3x), Houston (1.8x), St. Louis (1.8x), and
`Denver (1.6x) (Exhibit 15). We found that the largest cigarette markets (as denoted by
`the dark colors on the map above) have the lowest JUUL penetration while smaller
`cigarette volume markets (lighter colors) have higher JUUL penetration
`
`Exhibit 14: City as a % of JUUL volumes
`
`Source: Nielsen XAOC + C, Morgan Stanley Research (data as of 08/11/18)
`
`7
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`JLI Ex. 2037, Page 7 of 23
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`

`

`Exhibit 15: JUUL volume mix by city relative to cigarettes
`
`Source: Nielsen XAOC + C, Morgan Stanley Research (data as of 08/11/18)
`
`Exhibit 16: Relatively weak relationship between % ACV and market
`share
`
`Interestingly, there is a relatively weak relationship between
`
`JUUL's ACV and market share across markets. In the US, JUUL
`holds 70% ACV of the convenience store channel, in addition to
`online distribution through its website. Its ACV within convenience
`stores is highest in New York, Philadelphia, Boston, and St. Louis
`(Exhibit 16) but we found a generally weak relationship between
`its ACV and market share within current markets. For example,
`JUUL has 8% share of cigarette volumes in Houston with only
`44% ACV and 10% share in Seattle with only 53% convenience
`store ACV. Across many US cities, JUUL ACV is still below its
`national average, suggesting it has room to continue to grow its
`distribution reach within these markets (Exhibit 17). Moreover, its
`dollar sales per point of ACV ranges across cities, with New York
`the highest at $1,400 in sales per % ACV per month, well above
`many other markets, suggesting that there is still significant
`opportunity to close the gap within existing stores.
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 17: ACV ranges by major city, with room to expand distribution and sales/distribution point
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`8
`
`JLI Ex. 2037, Page 8 of 23
`
`

`

`We found a positive correlation between JUUL market share and cigarette prices across
`Exhibit 18: Cigarette prices positively correlated to JUUL market
`share
`
`markets. JUUL has higher market share in markets with relatively
`high cigarette prices, such as New York ($9.26/pack average vs.
`$4.41 for a JUUL refill), potentially driven by its cost advantage
`compared to cigarettes. Given that the average price of a JUUL
`refill is $4.18 compared to $6.30 average price per pack of
`cigarettes, smokers have a strong incentive to switch to JUUL.
`Conversely, JUUL has lower market share in cities that have below
`average cigarette prices such as Atlanta, Raleigh/Durham, and
`Louisville. Similarly, JUUL has higher market share in cities where
`its discount relative to cigarette prices is highest.
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 19: Negative correlation between JUUL YoY share and
`cigarette volume momentum
`
`In aggregate, there is a negative relationship between JUUL's
`
`market share and cigarette volume momentum. Total cigarette
`US scanner data suggests that cigarette volumes were stable over
`the L12W and L52W, down 3.2% YoY. However, within the top US
`cities, cigarette volume declines moderated over this period from -
`3.8% L52W to -2.4% L12W. Within these markets, there is a -0.57
`correlation between JUUL's YoY market share and their cigarette
`volume momentum (L12W volumes minus L52W). In New York
`and Seattle, where JUUL is seeing the greatest share momentum,
`cigarette volumes have decelerated more meaningfully (See
`Exhibit 19).
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Our analysis points to a mixed correlation between JUUL market
`
`share and cigarette volumes across major cities. We ran
`correlations between the YoY change in cigarette volumes and
`the YoY change in JUUL market share between January 2017 and
`August 2018 to determine whether there is a relationship between JUUL growth and
`cigarette sales. The analysis points to a negative correlation in Nashville, Denver, Seattle,
`and New York, which have high JUUL market share, suggesting that the impact to
`cigarette volumes may become more meaningful in other markets if JUUL market share
`reaches a similar scale. Outside of the major US cities, JUUL also exhibited a negative
`correlation to cigarette volumes in the West South Central and South Atlantic regions.
`
`However, there were many cities where the correlation between JUUL share and
`cigarette volumes was positive. The positive correlation between JUUL share and
`cigarette volumes in some markets may be attributed to several factors, such as: i)
`potentially low cannibalization rates due to JUUL attracting new users; ii) a greater
`number of JUUL refills required to displace a pack of cigarettes; iii) still low absolute
`levels of market share; iv) the influence of other factors that may be impacting cigarette
`volumes (i.e. consumer confidence, unemployment); and v) a still limited number of data
`points as the correlation is only based on data starting in 2017. (Exhibit 20)
`
`9
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`JLI Ex. 2037, Page 9 of 23
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`

`

`Exhibit 20: Correlation between JUUL market share and cigarette volumes shows mixed impact across markets
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 21: Correlation between cigarette volumes and JUUL market share in JUUL's Top 10 cities/regions (January 2017-Present)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`JUUL volumes are largely incremental to category volumes across major cities. JUUL
`cannibalization of cigarette volumes still appears low, as its volumes are incremental to
`
`10
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`JLI Ex. 2037, Page 10 of 23
`
`

`

`the overall category. When combining JUUL refill volumes with cigarette packs sold, the
`YoY growth in total volumes is positive in 15 cities, suggesting JUUL is expanding the
`category in many markets (as cigarette volumes would likely decline otherwise). This
`could be because JUUL is appealing to non smokers, because JUUL may be additive to
`smokers' cigarette consumption, or if smokers who are switching to JUUL consume more
`pods relative to the number of packs they smoked.
`
`Exhibit 22: JUUL is incremental to category volumes across major cities
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`We still estimate a relatively low impact from JUUL on cigarette volumes. We
`previously estimated that ~22% of JUUL's sales growth has come at the expense of
`cigarette volumes with the remainder stemming from new users in the category and
`potentially a greater number of pods necessary to displace cigarette consumption (i.e.
`one refill is not equivalent to one pack of cigarettes). Within JUUL's top markets,
`cigarette volume declines are worsening along with increasing JUUL growth in New York
`(-4.1% L12W vs. -1.0% L52W), Seattle (-7.2% L12W vs. -1.8% L52W), Philadelphia (-1.8%
`L12W vs. flat L52W). We believe JUUL cannibalization rate on cigarette volumes is still
`low as the deceleration in cigarette volumes across markets is not commensurate with
`the rate of JUUL share gains. In particular, the ~3% deceleration in cigarette volumes in
`New York compares to ~13% JUUL market share. In Seattle, cannibalization may be
`higher considering an ~5.5% deceleration in volumes compared to ~10% JUUL market
`share. However, cigarette volumes declines moderated across a number of markets
`despite increasing JUUL market share. This could suggest that either JUUL is drawing in
`new users, that it is being used as a complement to cigarette consumption by existing
`smokers when they can not smoke cigarettes, or other factors contributing to improving
`cigarette volumes in those markets (i.e. lower unemployment and other macro drivers).
`
`Please see city specific charts in the Appendix
`
`11
`
`JLI Ex. 2037, Page 11 of 23
`
`

`

`Exhibit 23: JUUL share coinciding with accelerated cigarette volume declines in Seattle, New York, Philadelphia, and Nashville, but cigarette volumes
`improving across other markets
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Our 22% cannibalization rate estimate was based on 1Q18 data, but the moderation in
`
`reported 2Q18 industry volumes declines makes it more difficult to measure 2Q18
`
`cannibalization. In order to gauge how much of JUUL's growth is coming at the expense
`of cigarette volumes, we decomposed the drivers behind MO's -5.5% industry volume
`decline estimate in 1Q18. We assume a baseline decline of 3.4% reflecting 2% secular
`declines and a 1.4% impact from pricing (4.7% pricing at -30% elasticity), assumed a 100
`bps headwind from California and higher gas prices were a ~66 bps headwind based on
`our regression analysis. This suggests JUUL could have accounted for up to 40 bps of
`the decline. Multiplying 1Q17 cigarette volumes by JUUL's 40 bps impact suggests up to
`~10 MM packs could have been displaced by JUUL in 1Q18. In 1Q18, JUUL sold ~45 MM
`refills, and dividing the packs displaced by total JUUL volumes equates to ~22% of JUUL
`sales coming a the expense of cigarettes (i.e. its "cannibalization rate"). In 2Q18, MO
`indicated that industry cigarette volume declines moderated to -3.5% (while BAT
`suggested they were -5.5% in 1H18), a sequential improvement despite a continued rise in
`gas prices in 2Q18 (+16% YoY vs. +11% in 1Q18), and strong reported cigarette net pricing
`(MO +5.8% in 2Q18). These factors leave little room for a potential headwind from JUUL.
`
`Nielsen market share data supports our view that JUUL can be a ~100 bps annual
`
`headwind to industry volumes over the next five years. In particular, JUUL's market
`share in New York (12.9%) and Seattle (10%), despite only being in these markets since
`2016/early 2017 supports our forecast that JUUL's national share of cigarette volumes
`can approach 15% by 2022. We expect this growth to be driven by increasing distribution,
`awareness, and sales/store. We estimate JUUL will end 2018 with ~7.0% market share
`(vs. 4.9% today) of cigarette volumes in measured channels as its share is growing by
`~50 bps per month, which would mean that it gained 6.0% share this year. Our 15%
`market share forecast assumes a significant deceleration to 2% annual share gains
`starting in 2019, which we view as reasonable. However, we still assume that JUUL's
`cannibalization rate stays relative low, increasing to 26.5% in 2019, and eventually to
`40% by 2022, meaning that we assume 60% of its 2022 volumes will not have an impact
`
`12
`
`JLI Ex. 2037, Page 12 of 23
`
`

`

`cigarette volumes. This results in an incremental ~115 bps headwind to annual cigarette
`volume declines starting in 2018 with the greatest impact in 2019 as JUUL gains critical
`mass.
`
`However, we believe it is prudent to look at a range of market share and cigarette
`cannibalization rate scenarios to quantify the impact that it can have on cigarette
`volumes. In Exhibit 21, we show a broader framework for potential market share and
`cannibalization scenarios.
`
`Exhibit 24: In a Base Case, we assume JUUL is an incremental 100 bps headwind to cigarette volumes over the next five years
`
`Source: Company data, Morgan Stanley Research
`
`13
`
`JLI Ex. 2037, Page 13 of 23
`
`

`

`Exhibit 25: Annual cigarette volume declines assuming JUUL share of cigarette volumes and
`cannibalization rates
`
`Source: Company data, Morgan Stanley Research
`
`14
`
`JLI Ex. 2037, Page 14 of 23
`
`

`

`
`
`Appendix
`
`Exhibit 26: New York Cigarette Volume Growth and JUUL Market
`Share
`
`Exhibit 27: New York JUUL+ Cigs Volume YoY Growth
`
`New York - JUUL + Cigarette EQ YoY vs. Cigarette EQ YoY
`
`08/11/18
`
`07/14/18
`06/16/18
`
`05/19/18
`04/21/18
`
`03/24/18
`02/24/18
`
`01/27/18
`
`12/30/17
`12/02/17
`
`11/04/17
`10/07/17
`
`09/09/17
`08/12/17
`
`07/15/17
`06/17/17
`
`05/20/17
`04/22/17
`
`03/25/17
`
`02/25/17
`01/28/17
`
`JU U L + C iga re tte E Q Y oY
`
`8 .0 %
`
`6 .0 %
`
`4 .0 %
`
`2 .0 %
`
`0 .0 %
`
`(2 .0 % )
`
`(4 .0 % )
`(6.0%)
`(8.0%)
`
`14.0%
`
`12.0%
`
`10.0%
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`New York - YoY Cigarette EQ growth
`4.0%
`
`2 .0 %
`
`0 .0 %
`
`(2 .0 % )
`
`(4.0%)
`
`(6.0%)
`
`(8.0%)
`
`(1 0 .0 % )
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`15
`
`C igare tte E Q Yo Y
`
`JU U L M arke t S h a re (R ig ht A xis)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`C igarette E Q Y o Y
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 28: Seattle Cigarette Volume Growth and JUUL Market Share
`
`Exhibit 29: Seattle JUUL+ Cigs Volume YoY Growth
`
`Seattle - YoY Cigarette EQ growth
`6.0%
`4.0%
`2.0%
`
`0 .0 %
`
`(2 .0 % )
`
`(4 .0 % )
`(6.0%)
`(8.0%)
`(10.0%)
`
`Seattle - Total JUUL + Cigs EQ YoY vs. Cigarette EQ YoY
`
`12.0%
`
`10.0%
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`1 5 .0 %
`
`1 0 .0 %
`
`5.0%
`
`0.0%
`
`(5.0%)
`
`(10.0%)
`
`08/11/18
`
`07/14/18
`
`06/16/18
`
`05/19/18
`04/21/18
`03/24/18
`02/24/18
`01/27/18
`12/30/17
`12/02/17
`11/04/17
`10/07/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`
`06/17/17
`
`05/20/17
`04/22/17
`03/25/17
`02/25/17
`01/28/17
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`C ig arette E Q Y oY
`
`JU U L M arket S ha re
`
`C igarette E Q Y o Y
`
`T ota l JU U L + C ig s EQ Y oY
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`JLI Ex. 2037, Page 15 of 23
`
`

`

`Exhibit 30: Houston Cigarette Volume Growth and JUUL Market
`Share
`
`Exhibit 31: Houston JUUL+ Cigs Volume YoY Growth
`
`Houston - Total JUUL + Cigs EQ YoY vs. Cigarette EQ YoY
`
`08/11/18
`07/14/18
`06/16/18
`
`05/19/18
`04/21/18
`
`03/24/18
`02/24/18
`
`01/27/18
`12/30/17
`
`12/02/17
`11/04/17
`10/07/17
`
`09/09/17
`08/12/17
`
`07/15/17
`06/17/17
`
`05/20/17
`04/22/17
`03/25/17
`
`02/25/17
`01/28/17
`
`C igarette E Q Yo Y
`
`T otal JU U L + C ig s E Q Y oY
`
`12.0%
`
`9.0%
`
`6 .0 %
`
`3 .0 %
`
`0 .0 %
`
`(3.0%)
`
`(6.0%)
`
`(9.0%)
`
`10.0%
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`Houston - YoY Cigarette EQ growth
`6.0%
`
`3.0%
`
`0.0%
`
`(3 .0 % )
`
`(6 .0 % )
`
`(9.0%)
`
`(12.0%)
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`C igare tte E Q Y oY
`
`JU U L M arket S ha re
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18)
`
`Exhibit 32: Denver Cigarette Volume Growth and JUUL Market Share
`
`Exhibit 33: Denver JUUL+ Cigs Volume YoY Growth
`
`Denver - YoY Cigarette EQ growth
`2.0%
`
`0.0%
`
`(2.0%)
`
`(4 .0 % )
`
`(6 .0 % )
`
`(8.0%)
`
`(10.0%)
`
`Denver - Total JUUL + Cigs EQ YoY vs. Cigarette EQ YoY
`
`10.0%
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`2 .0 %
`
`0.0%
`
`(2.0%)
`
`(4 .0 % )
`
`(6 .0 % )
`
`(8 .0 % )
`
`(10.0%)
`
`08/11/18
`
`07/14/18
`
`06/16/18
`
`05/20/17
`
`16
`
`05/19/18
`
`04/21/18
`03/24/18
`02/24/18
`01/27/18
`12/30/17
`12/02/17
`11/04/17
`10/07/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`
`06/17/17
`
`04/22/17
`03/25/17
`02/25/17
`01/28/17
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`C ig arette E Q Y oY
`
`JU U L M arket S ha re
`
`C igare tte E Q Y oY
`
`T ota l JU U L + C ig s EQ Y oY
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Exhibit 34: Nashville Cigarette Volume Growth and JUUL Market
`Share
`
`Exhibit 35: Nashville JUUL+ Cigs Volume YoY Growth
`
`Nashville - Total JUUL + Cigs EQ YoY vs. Cigarette EQ YoY
`
`08/11/18
`07/14/18
`
`06/16/18
`05/19/18
`
`04/21/18
`03/24/18
`
`02/24/18
`01/27/18
`12/30/17
`12/02/17
`11/04/17
`
`10/07/17
`09/09/17
`
`08/12/17
`07/15/17
`
`06/17/17
`05/20/17
`04/22/17
`
`03/25/17
`02/25/17
`
`01/28/17
`
`C igarette E Q Y o Y
`
`T otal JU U L + C ig s E Q Y o Y
`
`8.0%
`
`6.0%
`
`2.0%
`
`0 .0 %
`
`(2 .0 % )
`
`4.0%
`
`(4 .0 % )
`
`(6.0%)
`
`(8.0%)
`
`2.0%
`
`0.0%
`
`Nashville - YoY Cigarette EQ growth
`2.0%
`
`0 .0 %
`
`(2 .0% )
`
`(4 .0% )
`
`(6.0%)
`
`(8.0%)
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`C iga rette E Q Y oY
`
`JU U L M arket S h are (R igh t A xis)
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`JLI Ex. 2037, Page 16 of 23
`
`

`

`Exhibit 36: Boston Cigarette Volume Growth and JUUL Market Share
`
`Exhibit 37: Boston JUUL+ Cigs Volume YoY Growth
`
`Boston - YoY Cigarette EQ growth
`9.0%
`
`6.0%
`
`3.0%
`
`0 .0 %
`
`(3 .0 % )
`
`(6.0%)
`
`(9.0%)
`
`(12.0%)
`
`Boston - Total JUUL + Cigs EQ YoY vs. Cigarette EQ YoY
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`6.0%
`
`3.0%
`
`0 .0 %
`
`(3 .0 % )
`
`(6.0%)
`
`(9.0%)
`
`0.0%
`
`(12.0%)
`
`08/11/18
`07/14/18
`06/16/18
`05/19/18
`04/21/18
`03/24/18
`02/24/18
`01/27/18
`12/30/17
`
`12/02/17
`
`11/04/17
`
`10/07/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`06/17/17
`05/20/17
`04/22/17
`03/25/17
`02/25/17
`01/28/17
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`C igare tte E Q Y oY
`
`JU U L M arket S ha re
`
`C igare tte E Q Y oY
`
`T ota l JU U L + C ig s E Q Y oY
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Exhibit 38: St. Louis Cigarette Volume Growth and JUUL Market
`Share
`
`Exhibit 39: St. Louis JUUL+ Cigs Volume YoY Growth
`
`St. Louis - Total JUUL + Cigs EQ YoY vs. Cigarette EQ YoY
`
`08/11/18
`
`07/14/18
`
`10/07/17
`
`St. Louis - YoY Cigarette EQ growth
`9.0%
`
`6.0%
`
`3.0%
`
`0 .0 %
`
`(3 .0 % )
`
`(6.0%)
`
`(9.0%)
`
`(12.0%)
`
`9 .0 %
`
`6 .0 %
`
`3 .0 %
`
`0.0%
`
`(3.0%)
`
`(6.0%)
`
`(9 .0 % )
`
`(1 2 .0 % )
`
`12.0%
`
`10.0%
`
`8.0%
`
`6.0%
`
`4.0%
`
`2.0%
`
`0.0%
`
`17
`
`06/16/18
`05/19/18
`04/21/18
`03/24/18
`02/24/18
`01/27/18
`12/30/17
`12/02/17
`11/04/17
`
`09/09/17
`
`08/12/17
`
`07/15/17
`
`06/17/17
`
`05/20/17
`04/22/17
`03/25/17
`02/25/17
`01/28/17
`
`C igare tte E Q Y oY
`
`T ota l JU U L + C ig s E Q Y o Y
`
`07/14/18
`
`05/19/18
`
`03/24/18
`
`01/27/18
`
`12/02/17
`
`10/07/17
`
`08/12/17
`
`06/17/17
`
`04/22/17
`
`02/25/17
`
`12/31/16
`
`11/05/16
`
`09/10/16
`
`07/16/16
`
`05/21/16
`
`03/26/16
`
`01/30/16
`
`C igare tte E Q Y oY
`
`JU U L M arket S ha re
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Source: Nielsen XAOC + C, Morgan Stanley Research, (data as of 08/11/18
`
`Exhibit 40: New Orleans Mobile Cigarette Volume Growth and JUUL
`Market Share
`
`Exhibit 41: New Orleans Mobile JUUL+ Cigs Volume YoY Growth
`
`New Orleans Mobile - Total JUUL + Cigs EQ YoY vs. Cigarette