Next Generation Products: British American Tobacco
Like its competitors, British American Tobacco (BAT) has been investing in tobacco and nicotine products that, unlike cigarettes, have potential for growth in developed markets. These products are known as Next Generation Products (NGPs), and include snus, e-cigarettes, and heated tobacco products (HTPs).
NGPs are often publicly linked to tobacco companies' harm reduction strategies. For example, BAT has promoted its NGP investment under the phrase “transforming tobacco” and the slogan “creating a better tomorrow”, claiming the investments are a testimony to the company’s commitment to offer “…an unrivalled suite of potentially reduced-risk products that address the varied preferences of today’s consumers”.
In 2018, BAT stated that it had invested more than US$1 billion since 2012 in “building a whole new area of the business focused exclusively on Next Generation Products”. The company added: “These new products offer us another opportunity to further grow our business, while also having the potential to reduce smoking-related disease because they are considered to be less risky than normal cigarettes”.
BAT has the most diverse NGP portfolio of the large international tobacco companies.
Yet the company’s 2018 annual report indicates that cigarettes remain at the heart of the company’s business:
“As we develop new and potentially reduced-risk product categories, our conventional cigarette business remains strong and continues to grow. This enables us to invest in the development of better and more innovative products, while continuing to deliver strong results and dividends to our shareholders.”
- 1 Snus
- 2 E-Cigarettes
- 3 Heated Tobacco Products
- 4 NGPs: An “Additive” Opportunity for BAT?
- 5 Expectations Going Up in Smoke?
- 6 TobaccoTactics Resources
- 7 Relevant links
- 8 TCRG Research
- 9 Notes
Snus is a smokeless tobacco product, traditional to Sweden, and is sold as a paste or in a tiny pouch that is placed between the gum and upper lip for a period of time.
- To read more about this product, click here.
In 2005 BAT started its snus activities with limited trial markets in South Africa, Scandinavia, Canada, and Japan. Three years later the company acquired Swedish snus manufacturer Fiedler & Lundgren.
In 2011, BAT “scaled back” its snus activities to Scandinavia only, “to review our [BAT’s] approach to developing new reduced risk product categories”.
However, in 2017 BAT’s snus activity picked up again. Following its acquisition of Reynolds American Inc (RAI) in the United States (US), the company gained ownership of Camel snus in the US. In Europe, that same year, BAT acquired Swedish snus company Winnington AB, adding Epok to its portfolio. In late 2018, BAT introduced tobacco-free nicotine pouches to its portfolio, marketing them as Lyft in the United Kingdom (UK) and Sweden (see image 1), and Velo in the US. Media reports and the company’s social media posts indicate that these nicotine pouches are being promoted in lower and middle income countries, including Ukraine, Belarus and Kazakhstan; Tanzania; and Kenya.
In 2019, BAT started reframing its language around snus, creating a distinction between its old ‘snus’ brands and new brands like Epok and the nicotine pouches, calling these “modern oral products”. The Swedish Lyft website states, “Lyft is our answer to a new, urban generation that strives for innovation and staying true to themselves in this multifaceted life. We want you to experience a discreet everyday stimulation that is always by your side. Are you in?”, offering site visitors a free sample when they share their contact details and date of birth. A BAT presentation from March 2019 pointed to a potential global market for these products: the “large existing base of oral products consumers around the world”. In December 2019, BAT stated that Velo had over 9% of the market in the US, and in Russia Lyft was “the fastest growing modern oral brand” that year. However the company’s Finance Director, Tadeu Marroco, also said that “Everything is doing well in Russia. We have a strong portfolio of combustibles there”. Once again BAT’s statements underline the importance of traditional tobacco products to its business.
- For more information about the company's snus investments, go to Cigarette Companies Investing in Snus.
- Read more about what an e-cigarette is here.
Invested in Licensed Medical Products
In 2010 BAT set up a company called Nicoventures to focus entirely on the “development and commercialisation of regulatory-approved [TobaccoTactics emphasis] nicotine products”. The company’s media release said that this move was a “natural extension of British American Tobacco’s approach to tobacco harm reduction…” Soon after, Nicoventures entered into a distribution agreement with entrepreneurial healthcare company Kind Consumer Limited to commercialise the latter’s non-electronic nicotine inhaler, Voke. After a lengthy application process the product was licenced as a medicine.
However, in early 2017 BAT pulled out of the partnership. BAT’s Scientific Director David O’Reilly conceded that BAT was never fully committed to ensuring that its products were compliant with medical grade safety standards:
“We were never really interested in prescription products. At that time, the medicinal route was the only route to market, but smokers do not see themselves as patients. Now there are additional routes to market, and we are devoting significant time and resources to extending consumer choice and delivering even better next-generation tobacco and nicotine products”.
One of the so-called “additional routes to market” referred to by O’Reilly was e-cigarettes.
Acquired and Developed E-Cigarettes
BAT was one of the first tobacco companies to enter the e-cigarette market (after RJ Reynolds and Altria, see: E-cigarettes: Industry Timeline) with the launch of its Vype e-cigarette on the UK market on 30 July 2013. The e-cigarette was developed by a company called CN Creative, which had been acquired by BAT the year before.  From 2015 to 2019, BAT bought several other small e-cigarette manufacturers (CHIC, Ten Motives, VIP, Twisp), and in 2017 inherited the popular Vuse e-cigarette when it acquired tobacco conglomerate Reynolds American Inc (RAI). In 2019 Vype and Vuse were its flagship brands, both marketed in various formats (see image 2 for Vype brand extensions). But BAT has indicated that “Building a strong global brand is a key priority”, and that it intends to consolidate to one global e-cigarette brand, Vuse.
To date, the e-cigarette is BAT’s most widely sold NGP, albeit not with the biggest profit margin (see below). “Key markets” are the UK, France, Germany, Canada and Mexico (where it launched in February 2019). In addition, BAT has been selling its e-cigarettes in the US, Guatemala, Colombia, Germany, Ireland, Poland, Hungary, Kuwait, Bahrain, Greece, Italy and New Zealand.
Read more detailed information on BAT’s e-cigarettes business here:
- E-Cigarettes: British American Tobacco;
- E-Cigarettes: BAT's Vype and Vuse; and
- companies involved in BAT’s e-cigarette business: Nicoventures and CN Creative.
Changed Risk Claims
BAT has reframed the language and health claims it has made for e-cigarettes over time. In 2014, BAT stated on its website that smoking its e-cigarettes was “substantially less risky than smoking tobacco”. By April 2016 it had started to refer to its e-cigarettes as “vapour products” which, along with its HTPs, it now deemed “less risky alternatives” to conventional cigarettes. By mid-2018, BAT had begun using the term “Potentially Reduced Risk Products” (PRRPs) on its website and in company documents. It defined these in 2019 as products which “have been shown to be reduced-risk; are likely to be reduced-risk; or may have the potential to be reduced-risk, in each case if switched to exclusively as compared to continuing to smoke cigarettes.” (a disclaimer adds that no such claims are made in the US without FDA clearance).
Heated Tobacco Products
In 2015, BAT launched its first HTP product, iFuse, a hybrid product that heats an e-liquid to around 30°C, which creates a vapour that is passed through a tobacco pod (similar to JTI’s PloomTech). BAT’s flagship HTP product glo (which heats tobacco sticks to around 240°C) was test marketed in Sendai, Japan, in December 2016. In 2017, the product was rolled out nationally in Japan and also introduced in other countries. Glo, like HTP market leader IQOS (PMI), uses a battery operated device to heat tobacco sticks (in BAT’s case called Neostiks and sold under its cigarette brand Kent and new brand Neo).
In 2019, glo was available in three versions (see image 3): the glo Pro, glo Nano, and the glo Sens. The Sens is a hybrid like the iFuse. Glo is not as widely distributed as BAT’s e-cigarettes. Its key markets are Japan and South Korea (together forming the bulk of the global market for HTPs), although BAT has also reported trial markets in Ukraine, Kazakhstan, Serbia, Croatia, the Czech Republic, Poland, Greece, and more recently, Italy, Romania, Canada, Russia, Bulgaria, and Switzerland. In late 2019, BAT said it was “getting more and more traction in glo across Eastern Europe”. In March 2020, The Guardian reported that BAT was advertising glo on Facebook in Poland and Romania, in contravention of the platform’s policy. It was also promoting its e-cigarettes through its social media accounts, after a clamp-down on the use of social media influencers. For more information see E-Cigarettes: British American Tobacco.
According to the Financial Times, in 2019 BAT had “ambitions to build its global heated tobacco share from 10 per cent to 25-35 per cent by 2024”. Based on Euromonitor data (sales of tobacco sticks, figures rounded) in 2018 its market share rose to 13% from 5% the previous year. In the same period, JTI’s share rose to around 5%, while PMI’s fell by nearly 14%. While announcing BAT’s half year results in August 2019, CEO Jack Bowles stated that HTP revenues were up 15%, although total HTP revenue had only increased by 4%, as device sales had been “scaled back in anticipation of the launches of glo pro and glo nano”.
In mid-2018, BAT had appeared to be intending to launch a HTP called Eclipse in the US. This was the brand name of a carbon-tipped product originally developed by Reynolds American Inc. (RAI) in 2014 (later renamed Revo), which the company had shelved in 2015. In 2017, BAT said it had received a “substantial equivalence” clearance from the US Food and Drug Administration (FDA) for Eclipse, which would enable it to launch the product in the US without a Pre-Market Tobacco Application (PMTA), on the basis that it was essentially the same as RAI’s previously commercialised product. BAT had previously said it was going to submit a PMTA to the FDA for glo. PMI was granted such permission in April 2019 for its IQOS. In 2018, BAT received FDA approval for Eclipse, now renamed Neocore.
However, it is unclear what BAT’s plans are for either glo or Neocore in the US. During a presentation of the company’s 2019 Half Year Results, Bowles indicated that he was in no rush to put glo on the US market. He told industry analysts that e-cigarettes were the dominating NGP category, not HTP, and that he considered “oral tobacco” (presumably Velo) to have “a very big potential in the US”.
NGPs: An “Additive” Opportunity for BAT?
Irrespective of the product or claims of harm reduction motives, BAT’s primary goal remains the same: growing its market share and revenue in order to deliver profits and returns to shareholders.
Global Nicotine Market Growing?
At the company’s Investor Day in March 2019, BAT’s Chief Marketing Officer Kingsley Wheaton reported that BAT estimates showed that the number of tobacco and nicotine consumers had grown since 2013. A few months earlier, in October 2018, BAT’s then-CEO Nicandro Durante had hosted a briefing session for industry analysts, sharing BAT data that showed an increase in nicotine users from 345 million in 2012 to 362 million in 2017 in its markets outside the US (see image 4). The increase reversed a decline in nicotine use from 2007, as people gave up smoking, indicating that NGPs were at least partially responsible for the growth in the number of people in the “nicotine consumer pool” since then.
At the 2019 BAT Investor Day, BAT’s Director New Categories, Paul Lageweg, showed investors that BAT “was back in the growth business” and that the NGP category growth was “driven by entrants”. BAT defined “entrants” as people aged 18 and older who are entering the nicotine category, in other words, those who previously did not smoke or use other nicotine products such as e-cigarettes or snus. According to Lageweg, three million new nicotine users entered the global NGP category in 2018. The share of new entrants was particularly high in the US. This may have been due to the popularity of a product of one of its competitors, JUUL Labs, amongst US teenagers.
Of the various products in the NGP category, Lageweg suggested that a higher proportion of increased sales of e-cigarettes (58%) could be attributed to new entrants, compared to the proportion for HTPs (11%) (see image 5). Lageweg added that although growth in HTPs was driven by switchers (those that switch from smoking cigarettes), its proportion of new entrants was still growing. According to Lageweg, 50% of the increase in the snus market was due to new nicotine users.
Dual Use and “New Consumption Moments”
Emerging industry evidence suggest that a significant number of smokers may not be necessarily switching to NGPs but use these products alongside cigarettes.
In a presentation to investors in September 2019, CEO Jack Bowles and Finance Director Tadeu Marroco reported “evidence of poly-usage across the categories”. In his March 2019 presentation, Lageweg had been more specific and showed investors a graph that suggested that 65% of e-cigarette users were dual users, as opposed to 55% of HTP users. The year before, then-CEO Durante said that dual use had become “the key consumer dynamic”, with dual use growing from 13% to 23% in less than one year.
BAT has also told investors that due to dual use, “moments are being regained” (see image 6). By that, the company means that smokers now have alternative products to use when smoking is not allowed or socially unacceptable, such as in a shared office, at home with family, or in public social spaces. Another BAT presentation identified the most popular “new occasions” for e-cigarette users were “when I can’t smoke cigarettes” (86%), “In the car” (62%) and “Inside pubs and restaurants”(47%).
Expectations Going Up in Smoke?
Like its competitors, BAT has been ambitious in setting NGP targets.
In 2019, the company said that it was going to double its NGP revenue by 2023/24 to UK£5 billion. The company also claimed that the NGP business was more profitable than cigarettes. In 2019, BAT reported that HTP had the highest profit margin (81%), compared to snus (78%), modern oral (66%), conventional cigarettes (65%) and e-cigarettes (42%). Although HTP had the biggest margin, it was also the only product category for which the profit margin fell between 2017 and 2018 (by 2%). The margin on every other product increased, including that for e-cigarettes, which nearly doubled.
However, in September 2019 the company announced that it was going to cut 2,300 jobs globally, allegedly so that it could continue to invest in NGPs. One month later, the company appeared to be lowering investor expectations regarding its NGP sales. In late November 2019, BAT announced that it was “simplifying” its NGP portfolio to focus on three flagship brands only: e-cigarettes would be branded as Vuse, modern oral as Velo, and HTP as glo.
- British American Tobacco
- Cigarette Companies Investing in Snus
- E-Cigarettes: British American Tobacco
- Heated Tobacco Products
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