Description

Through Haypp, I want to introduce the club to a different way to get exposure to the rapid growth in Zyn, or Nicotine Pouch consumption. Swedish Match had a fanatical investor base before they got acquired by Philip Morris. Those investors have had to watch Zyn growth accelerate to almost 80%, but as part of the much larger PM, this growth now gets diluted.

Haypp has around a 65%-90% market share in the online retailing of Nicotine Pouches, and they do provide this pure-play exposure.

Incidentally, Haypp might also be one of the better ecommerce platforms I have come across. Depending on geography, their online market share ranges from 65% to 90%. They only need to spend 0.6% of revenue on marketing to protect this market share. Nicotine Pouche containers are also standard size which helps keep shipping and handling costs low. Product returns are low. And finally, the cost advantage versus convenience stores is enormous, providing ample opportunity to push price if growth were to ever slow down.

There are few ecommerce businesses able to combine rapid growth with FCF generation. The growth algorithm here is attractive. Sales are growing ~10% in the core markets Sweden and Norway. Meanwhile, growth in the UK and the US are running around 50% (down from 67% in 2023), with a long runway ahead of them. Online sales in Sweden make up 30% of the market, while the US is only at 2.5%. However, Haypp has demonstrated that this share has grown to 6% (Texas), 4% (NY) or 3.4% (Colorado) whenever they open a warehouse that allows them to guarantee 2-day delivery. So you get additional growth as online gains share from brick-and-mortar sales.

Meanwhile, margins expand as a function of scale. Shipping and handling can drop from 5% to 2% as Haypp moves from 3rd party warehouses to self-operated automated warehouses. Haypp targets 5-7% EBIT margins, of which 1-2% will be reinvested in growth categories (i.e., vaping). Their sales target of 5b SEK by 2025 seems out of reach, but even on a more conservative 4.2b SEK, Haypp trades at 9x 2025 EBIT before growth investments, or 10.5x after growth investments. Given strong margin performance in Q1 2024, I think they can outperform on the margin.

More importantly, the growth runway here seems massive. Other than the offline-to-online conversion and end market growth, there is a huge opportunity to push pricing. Depending on order size and taxes, a can of NP can cost $3.80 at a Haypp website, while it could cost $7-8 in the big cities. There is a lot of opportunity to push prices, although I don’t expect management to pull this lever as long as the volume growth opportunity remains as large. But if they do, pushing prices an extra 1-2% per year on a 13-14% GP margin business goes a long way to growing FCF.

The market

Haypp owns and operates a couple of websites that sell ‘reduced-harm products’. They predominantly sell Snus and Nicotine Pouches (NP), although they have also recently moved into vaping in select geographies. Snus is a legacy product which contains tobacco. It is slowly getting replaced by Nicotine Pouches which only contain Nicotine, without the tobacco. Zyn is the best-known brand in the US with a ~74% market share, but the selection of brands and flavors is enormous.

Haypp is a Swedish company, which is no coincidence given how ingrained Snus consumption has been in Swedish culture. In Sweden, Haypp has acquired an 85% market share through the simultaneous acquisition of the #2 and #3 players called Snusnetto and Nettotobak, and combining this with their original website Snus Bolaget.

The market share in Norway stands at 80%. Together, Sweden and Norway are the mature or core markets, which means that rapid growth in NP consumption gets offset by a decline in Snus sales. NP is higher margin than Snus: lower taxes on Snus means there is a bigger profit pool to divide over the value chain.

Snus has always been banned in the EU, although Sweden has received an exemption from this ban, probably because an uprising seems inevitable if Snus / NP do get banned from the country. NP are for now allowed in most EU countries, although the future here seems uncertain. Haypp has a presence in the DACH region, although they only have a 35% market share here.

The most relevant growth markets are the US and the UK, where market shares are resp. 85% (excluding Zyn.com) and 65%. Their most important websites are Nicokick.com and Northerner.com.

Business Quality

The industry dynamics hinge on the fact that online advertisement is not allowed for products that contain nicotine, either by law, or by corporate policy of the popular social media platforms. 99% of all traffic comes organically. Therefore you win a consumer through Search Engine Optimization. Google’s search algorithm tracks which websites have the highest conversion and the highest % of returning customers, and ranks those on top. The 1st Google result gets on average 28% of clicks. The 2nd 21%. The 3rd 16%. There are some loopholes where occasionally tobacco ads still get through, but social media platforms are working hard to immediately remove such ads. Haypp wins by carrying a broad assortment, by offering convenience (lead times and ease of checkout) and price. As long as they sustain this quality, Google will keep sending traffic their way.

Giving the growth in the segment, it is no surprise that all tobacco manufacturers are trying to launch their own NP products. Haypp helps them in 2 ways. First of all, you can pay them for better positioning on their website. In an industry where you can’t spend marketing dollars to grow a brand, this might be the next best option.

Haypp also has significant data points on each consumer. They sell this data to the manufacturers, which strengthens their relationship. While earnings are not broken out, it is probably also margin accretive. I am naturally skeptical towards companies claiming they own valuable data, but their data was specifically pointed out by a supplier as a game changer (“Big CPG companies can’t get enough of that shit”).

Haypp has built their market share by aggressively rolling up the various websites before their IPO in 2021.

Recent Events

HAYPP is up about 40% for the year but has recently given up some gains. To understand the recent stock price moves, please note the following.

• During Q4 results they announced margin expansion in early 2024 due to higher volume discounts as per January 1st.
• Barclays updated their model based on this report, with a TP of 150 SEK (modelling 11 SEK EPS by 2026). The other analysts (SEB and Carnegie) maintained price targets of 70 SEK.
• HAYPP finally received some social media coverage with a good report (https://invariant.substack.com/p/haypp-group-nicotine-pouch-trend) followed by a podcast by everyone’s favorite podcast host (https://www.yetanothervalueblog.com/p/devin-lasarres-thesis-on-haypp-group).
• During Q1, these higher margins materialized. However, HAYPP disappointed somewhat on the topline as Snus sales in Sweden / Norway declined faster than expected. Management admitted they might have pushed pricing a bit too aggressively here. This lower growth rate puts the company’s 2025 sales target of 5b SEK at risk, as this would require sales to accelerate in 2024/25.
• Starting in Q2, consumers started complaining about a Zyn shortage. Convenience stores are often sold out and Haypp initially limited customers to 10 Zyn containers per 30 days. This has since been increased to 25. While you could probably argue the impact both ways, this could very well be positive because 1) non-Zyn brands are probably higher margin to Haypp, and Haypp would definitely benefit from a more diversified supplier base, 2) I have seen people move from purchases in convenience stores to buying at nicokick.com and 3) won’t this push consumers to buy 25 containers at a time, ‘just-in-case’, thereby lowering shipping and handling fees?
• On June 17th, PM mentioned they would temporarily suspend all sales at Zyn.com due to a subpoena received in DC. PM might have not complied with the flavor ban in DC. Given the reputational risk and the fact that D2C sales are only a fraction of PM’s total sales, they opted to withdraw from D2C sales for the time being.
  • This of course highlights the regulatory risk of the business. Has Haypp complied with all applicable regulation? I think there are many bad actors in this industry, including overseas sales that make their way into the country. Haypp ranks on the other side of that spectrum. Of course you can never be sure, but you can build some confidence from Haypp’s spotless regulatory track record. For example, they have had 0 complaints on mandatory (depending on the state) age verification.
  • Arguing this positively, Haypp’s US market share could jump from 65% to ~85% overnight as they take share from Zyn.com. This effect might be temporary, but maybe some customers stick to Haypp’s lower prices even when Zyn.com returns to the market. This also illustrates how D2C sales are not core to manufacturers. It might in fact be a liability. Also consider that e-cigarette maker Juul agreed to pay a $462m fine for aggressive marketing to minors. I expect manufacturers to be increasingly cautious with D2C sales going forward.

Finally, it is important to understand why Haypp underperformed in 2021/22, following the IPO. This was mainly due to subdued sales growth in 2022. When covid lockdowns were lifted, Norwegians and Swedes started traveling again. Apart from using Snus, another Scandinavian tradition is to go on booze cruises to stock up on tax-free alcohol in international waters. Snus / NP sales on such cruises were taking away from online sales.

Regulation

You can talk for hours on what the future regulatory environment looks like. My industry contact summarized it as: “There will always be new regulation, and it’s always a negative”. Haypp management would push back on this. Small regulation such as a flavor ban could help an incumbent such as Haypp. No product is ever completely without flavor, and by understanding consumer preferences, they could push customers to the product they would most likely enjoy the most, despite that product not being marketed as a particular flavor. And of course without a ban on advertisement, Haypp would not be as dominant as they are today.

But what really matters is a ban in any geography, on either NP sales, or online sales. It is no coincidence that Haypp starts every presentation by emphasizing the health benefits (relative to smoking) of the products they sell. This is easily backed up by data as Sweden and Norway have the lowest smoker rates and lung cancer rates.

If you want to get in the nitty-gritty of all regulation, I’d recommend this podcast (or engage in the comment section): https://www.youtube.com/watch?v=2mCZcgPG3Uo

Management

Management predominantly started their careers at BAT, and they are regarded highly by the industry contacts I’ve spoken to.

There have been minor inside sales by management. Insiders own just under 50% of all shares, as Haypp has repeatedly issued shares (pre-IPO) to acquire their competitors. The CEO owns ~3.6% of all shares outstanding. At the same time, he doesn’t hide the fact that he and other insiders might seek to diversify over time. Given the regulatory tail risk in this business, I can’t blame him.

Misc

Haypp trades on the Nasdaq First North Growth Market, which is the Swedish small cap market. This effectively limits the investor base to Swedish investors and to funds using IBKR. Just this week another Swedish small cap called Enad Global (EG7 SS) uplisted to Nasdaq Stockholm. Let’s see what that does for EG7’s trading multiple. I know that Haypp management is open to considering an uplisting if that were to make sense.

Catalyst

Haypp growing margins from 0% last year, to 4-6% in 2025, while continuing to grow the top-line.

Haypp set 2025 targets in late 2023. They should probably provide new targets for 2026 or 2027 in the not-too-distant future.

This name is largely undiscovered. I believe most of the old SWMA investor base would be very interested in Haypp if only they knew the company.