BAT to miss vaping goal as tobacco faces uncertainty

Cigarette makers can no longer rely on steady growth as e-cigarette faces issues such as recalls and regulatory crackdowns

By BLOOMBERG

GENEVA • British American Tobacco plc (BAT) said revenue from smoking alternatives will miss expectations this year as it issued a more pessimistic outlook for the tobacco industry’s new products than rival Philip Morris International Inc.

The maker of Lucky Strikes lopped 10% off its target for revenue from electronic and non-combustible cigarettes this year. BAT now forecasts £900 million (RM4.98 billion) after it recalled a device in the US and Japanese demand for so-called heat-not-burn tobacco has gone flat.

The stock fell as much as 1.3%, trading near its lowest level in four years.

So-called heat-not-burn technology like BAT’s Glo is “not a complete substitute for smoking”, Ben Stevens, BAT’s financial director, said in a phone interview. “It’s not going to sweep the world as some of our competitors say it will.”

The contrasting assessments of the prospects for cigarette alternatives underline the industry’s volatile turn.

Big tobacco is facing its biggest disruption in years amid a plethora of alternatives to smoking, and cigarette makers are finding they can no longer rely on predictable, steady growth as the new product category faces issues such as recalls and regulatory crackdowns.

BAT shares, which have almost tripled over the past decade, are on track for their first annual decline since 2008.

Uncertain Future
The uncertainty the industry is now facing is self-evident: Even the biggest tobacco companies can’t agree where their future lies.

Philip Morris, which is expanding its IQOS heat-not-burn device around the world, has predicted that one day demand for smoking alternatives will be so strong it will stop making traditional cigarettes.

BAT’s new target for next-generation nicotine delivery, while lower than before, still represents a doubling of revenue, both in vaping and in heat-not-burn, Stevens said.

BAT has forecast the segment to bring in more than £5 billion of revenue by 2022.

Japan is the market where heat-not-burn has had the biggest success, and the amount of cigarettes sold there has dropped by about 20% over two years. Now, however, it’s getting harder to persuade more traditional consumers to adopt new habits, which include recharging an electronic device that heats up tiny tubes of reconstituted tobacco.

The growth in Japan, which has yet to be reproduced in another market, is attributable to factors that aren’t all present in other countries, Stevens said.

Japan prohibits electronic cigarettes with nicotine, so there are fewer alternatives to smoking, plus the country gives a tax advantage to heat-not-burn.

South Korea is probably the market with the next-biggest potential, the financial director said. Heat-not-burn tends to succeed more in places where menthol cigarettes are popular and where smokers feel a bigger sense of consideration for people around them, he added.

While Philip Morris’ main focus is on heat-not-burn, BAT is pursuing a more diversified strategy. BAT is expanding more in oral tobacco and vaping, which it expects to remain more popular in the US and Europe.

The big question is how much the traditional tobacco industry will shrink. BAT still gets 94% of its revenue from its combustibles business, and Stevens said that will remain “significant” for a “long time ahead”.