By Taiga Uranaka
TOKYO (Reuters) - Japan Tobacco Inc (T:2914) said on Tuesday it plans to launch a new "heat-not-burn" (HNB) product in Japan as early as the end of this year, as it tries to catch Philip Morris International (N:PM) in a growing cigarette-alternative category.
Japan Tobacco is under pressure to keep its dominance in the domestic market where its sales of conventional cigarettes fell to the lowest since the former state monopoly was reorganised to the current company in 1985. Japan Tobacco is still one-third government-owned.
It said it would spend more than 100 billion yen (655.45 million pounds) over the next three years on development and production of what it calls "reduced-risk products (RRP)," or cigarette alternatives that do not use combustion to deliver nicotine.
"For Japan Tobacco's continuous growth, we must win in the RRP category," Chief Executive Officer Masamichi Terabatake said at an earnings briefing.
Japan has become a fertile market for HNB products as the country's regulations effectively ban e-cigarettes that use nicotine-laced liquid. Tobacco makers have been struggling to ship enough products to meet demand as a growing number of smokers switch to these smokeless tobacco offerings.
Mizuho Securities analyst Hiroshi Saji estimated HNB products will account for 29 percent of Japan's tobacco market this year, up from 16 percent in 2017. He estimated Philip Morris to keep its lead in the HNB market with a 76.2 percent share, with the rest evenly held by Japan Tobacco and British American Tobacco PLC (L:BATS)
Japan Tobacco, which commands over 60 percent of the domestic cigarette market, lags behind Philip Morris, which launched its IQOS device in Japan in 2014 and expanded nationwide in April 2016.
Japan Tobacco introduced its Ploom Tech smokeless tobacco product in central Tokyo in June last year after production delays and is now trying to catch up with IQOS and BAT's glo.
Japan Tobacco said it now plans to expand sales of Ploom Tech nationwide in September and aims this year to sell 200 million packages of tobacco capsules for Ploom Tech, which is a pen-like battery-powered device.
Japan Tobacco said it expects its domestic cigarette sales volume to decline by more than 16 percent in 2018, after falling 12.5 percent to 92.9 billion cigarettes in 2017, its lowest on record.
The tobacco makers have said HNB products release fewer harmful chemicals than conventional cigarette since they do not combust, but their long-term health impact has not been verified.
Japan Tobacco said operating profit fell 5.4 percent to 561.1 billion yen in 2017, as a sharp fall in domestic cigarette sales outweighed solid growth in its overseas tobacco business, which was partly boosted by a cost-cutting drive.
For 2018, the company forecast flat profit growth at 561 billion yen, below an average estimate of 605 billion yen in a poll of 17 analysts, with the increase in HNB product sales not yet enough to offset a weak domestic cigarette business.
The company said it expects HNB products to account for about 15 percent of its domestic tobacco business's core revenue, which is forecast to fall 3 percent to 573 billion yen in 2018.