Haypp Group AB: A Fly-Wheel Business Surfing the Nicotine Pouch Tidal Wave, Positioned to Thrive Amidst Intense Competition

Haypp Group AB is a Swedish microcap that offers a potential multi-bagger investment as an online retailer of reduced-risk products.

Introduction

I’d like to introduce this write-up of Haypp with a quote from Charlie Munger that I think perfectly describes Haypp’s positioning within the burgeoning societal and economic phenomenon of nicotine pouches and reduced risk products:

“Then there’s another model from microeconomics which I find very interesting. When technology moves as fast as it does in a civilization like ours, you get a phenomenon which I call competitive destruction. You know, you have the finest buggy whip factory and all of a sudden in comes this little horseless carriage. And before too many years go by, your buggy whip business is dead. You either get into a different business or you’re dead—you’re destroyed. It happens again and again and again.

And when these new businesses come in, there are huge advantages for the early birds. And when you’re an early bird, there’s a model that I call “surfing”—when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in shallows…”

Charlie’s mental model of “surfing” perfectly describes Haypp in relation to nicotine pouches; Haypp is an early bird surfing the wave of technological innovation in nicotine consumption in the form of nicotine pouches and RRPs. Haypp also has an enormous secular tailwind at its back in the form of governmental, societal and consumer support for the adoption of nicotine pouches and RRPs in place of cigarettes.

Furthermore, Haypp has strategically positioned itself to capitalise on the nicotine pouch trend by creating a business with highly attractive economic characteristics, strong competitive advantages, and competent managers with relevant industry experience at the helm of the company.

You might wonder, “aren’t major tobacco companies also riding this wave?” Indeed, they are. However, this highlights a crucial distinction between Haypp and the major tobacco companies in terms of their ability to benefit from the nicotine pouch trend. Haypp’s unique business model positions it to thrive rather than suffer from the impending surge in competition within the nicotine pouch market. The competitive landscape is likely to intensify due to a fundamental economic principle: high returns on invested capital attracts competition, eventually eroding those returns. This principle is particularly relevant to nicotine pouches, given their largely undifferentiated nature and attractive unit economics.

Charlie’s quote also aptly describes the degree of innovation that has occurred as a result of the development of nicotine pouches. The comparison of motor vehicles to buggy whips and the degree of superiority implied by the comparison equally applies to nicotine pouches and cigarettes. While cigarettes are unlikely to disappear as quickly as buggy whips, nicotine pouches have revolutionized nicotine consumption, just as motor vehicles revolutionized transportation.

Extending the wave metaphor, the nicotine pouch trend is likely to be both massive and enduring for two key reasons:

1. Firstly, nicotine pouches have the opportunity to replace a significant portion of cigarette sales and potentially attract new nicotine users. However, this growth may be tempered by governmental policies that support current smokers switching to reduced-risk products (RRPs) while simultaneously aiming to prevent non-smokers from adopting nicotine use.

2. Secondly, just as the motor vehicle innovated the everlasting human need for transportation, the nicotine pouch innovates and fulfils the everlasting human desire for nicotine consumption. Barring a sudden and unforeseen change in human brain chemistry, demand for nicotine is likely to persist.

Haypp offers a potential multi-bagger investment based on four key factors:

1. The nicotine pouch market is likely to see intense competition among producers due to the products' undifferentiated nature and attractive unit economics.

2. Increasing competition will actually benefit Haypp by reinforcing its competitive advantages.

3. Haypp is a vastly stronger competitor than its main rivals (convenience and grocery stores) due to its favorable economic characteristics and robust competitive advantages.

4. The total addressable market for nicotine pouches is enormous and approximately equal to the annual cigarette unit sales within Haypp’s markets.

Given these factors, Haypp is well positioned to capture a significant portion of the nicotine pouch TAM within its markets and thereby generate cash flows that justify a future valuation that is many times greater than its current market capitalisation.

To support this thesis, this writeup will cover the following key topics: firstly, it will explore the nicotine pouch phenomenon, including a brief product description of nicotine pouches, reasons why people use nicotine pouches and nicotine more generally, the advantages of nicotine pouches compared to cigarettes, the current popularity of nicotine pouches in the United States, market trends in the US and Sweden (the most mature market), nicotine pouch unit economics and economic characteristics, and an estimation of the size and value of the total addressable market; secondly, the economic characteristics and competitive advantages of Haypp’s business model; thirdly, an assessment of Haypp’s management; fourthly, valuation and whether Haypp’s current valuation provides a margin of safety; and finally, a summary of the risks posed by an investment in Haypp’s business.

As always, this write-up is not financial advice or a recommendation to make a financial investment in Haypp Group AB. The purpose of this write-up is to act as a starting point for your own research. Care has been taken to ensure that the facts presented here are accurate. However, you must conduct your own research to verify the information presented here. All investment decisions are your own. Always do your own due diligence. With that out of the way, I hope you enjoy this write-up. Happy hunting.