Is British American Tobacco (BAT), that redoubtable peddler of cigarettes, stacking up customers for its next-generation products fast enough? BAT’s revenue and profit line still smoulder reassuringly from cigarette sales. Even though volumes are steadily declining, BAT has enormous pricing power in its brands — understandable, considering the addictive nature of nicotine. I am not an ardent antismoker, even if my lungs heave these days when I smell cigarette smoke. But I certainly have no doubt that cigarette sales will diminish until traditional tobacco has little more than a cult following — which might be mainly spotty teenagers lighting up a rebellious flame.
Will that take five years? Probably not — and especially not in emerging markets, where the habit is not frowned upon quite so severely as it is by more health-conscious societies. But in another 10 years, I reckon cigarette smoking will be extremely marginalised and even pricing power will not be able to compensate for diminished volumes. As a small shareholder in BAT — mainly as a hedge against my mother’s infernal Peter Stuyvesant habit and because of my dogged dividend determination — I am watching the growth of its noncombustible customers closely.
Anecdotally, I do see more people doing noncombustibles (especially on the morning school run, when I see huge plumes of vapour billowing out of car windows). I’ve never tried a vape or anything similar, so I don’t really know the attraction.
But the numbers suggest noncombustibles are gaining traction. In BAT’s 2021 first-half pre-closed period trading update, the group added 1.4-million noncombustible product consumers in the first quarter. These are vapour brands, tobacco-heating products (THP) and the rather adult-sounding "modern oral" category. That means BAT’s noncombustible customers are shifting close to 15-million. I know from previous investor presentations that BAT’s noncombustible side does not yet make a profit, but trying to gauge a possible breakeven point is difficult since there is a paucity of information around the losses at bottom line. On paper, however, it would seem that rival Philip Morris International (PMI) has stolen a march on BAT. PMI’s first-quarter figures, released in April, showed its noncombustible sales topping 19-million customers, with smoke-free products accounting for close to 30% of revenue. BAT might be lagging, but the group’s vast geographic market sprawl (including some vibrant emerging markets) might allow for a catch-up.
Closing the gap
In the trading update, BAT CEO Jack Bowles spoke of a "clear pathway to new category profitability by 2025". To that end, BAT is still pencilling in £5bn of new category revenue by 2025 and 50-million consumers of noncombustible products by 2030. While BAT is perhaps a little scant on financial figures for its new category, at least the group does address its categories in glorious detail. I’ll just mention the blazing highlights. BAT’s Vuse/Vype vapour brands reached 31.4% category value share in the top five markets in April, and Bowles reckons Vuse/Vype is closing the gap on market leadership. In THP, glo reached a 16.9% share in Japan, and modern oral brand Velo held more than 40% in the US market, 57.6% in Sweden and 63.3% in Norway.
In its last financial year, new category revenue grew 50% in the second half, Bowles reported — hailing this as a "great springboard moving forward". The reference to record growth for consumer acquisition suggests that the first half should see a vibrant gain in new category revenues, and hopefully a marked reduction in operating losses.
I would take huge heart if BAT disclosed the interim loss in the new category hub. It’s unlikely, but with the market still taking direction mostly from the sale of traditional cigarettes, BAT surely has nothing to lose by taking down the smokescreen around its new category numbers.
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