British American Tobacco's shift to 'new category' products gathers pace

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British American Tobacco’s shift to vapes and other ‘new category’ products gathers pace as sales grow

  • BAT forecasts revenue growth of 2-4% at constant currency rates this year
  • The company owns the cigarette brands Lucky Strike, Rothmans and Dunhill
  • It estimated the total customer base for its ‘new category’ products was 21.5m 

British American Tobacco has maintained full-year guidance following continued growth in demand for non-tobacco products.

Chief executive Jack Bowles told investors the blue-chip firm was on track to steadily increase adjusted operating margins, despite significant inflationary pressures across its supply chain, through higher pricing and brand scale.  

For the current year, the business also expects revenue growth of 2 to 4 per cent at constant currency rates, alongside a ‘mid-single figure’ rise in adjusted diluted earnings per share.

Popularity: British American Tobacco estimated that around 3.2 million more people began using its non-combustible offering during the first nine months of 2022

Popularity: British American Tobacco estimated that around 3.2 million more people began using its non-combustible offering during the first nine months of 2022

BAT has sought to bolster demand for its ‘new categories’ in recent years, while reducing reliance on traditional tobacco products.

It estimated that around 3.2 million more people began using its non-combustible offering during the first nine months of 2022, taking the total customer base for this market to 21.5 million.

The popularity of flagship brand Vuse drove much of this growth, extending its value share to over a third across the top five vapour territories, including the US, where it is the market leader in 35 states. 

Market leadership was further maintained by the modern oral brand Velo across 15 European countries thanks to healthy demand for nicotine pouches.

However, volume share in the five largest modern oral markets fell by 4.1 percentage points from the previous year due to a weaker performance in the US, where the group has decided to prioritise investment in the vapour sector.

US tobacco volumes have come under greater pressure from the normalisation of consumption patterns and soaring fuel prices caused by the relaxation of Covid-19 restrictions and Russia’s invasion of Ukraine.

Bowles said: ‘In order to offset early signs of accelerated downtrading in the industry in the second half of the year, we have recently activated commercial plans across specific brands, channels and states.’

BAT’s earnings are still completely reliant on selling cigarettes from brands including Lucky Strike, Rothmans and Dunhill, as it has yet to make a profit from its new categories arm due to the considerable investment put towards marketing and R&D. 

Profits have also taken a hit this year from the decision to suspend operations in Russia, where the group had controlled about a quarter of the local tobacco market. 

Back in March, it said it would ‘rapidly transfer’ the Russian business, although it provided no further update today on how that was progressing.

British American Tobacco shares were down 2.4 per cent to 3,328.5p during the mid-morning on Thursday, although their value has far outpaced the wider FTSE 100 Index by about 26 percentage points. 

Head of markets at Interactive Investor Richard Hunter: ‘BAT sits within a sector in the midst of transformation and is driving its own charge towards the new world.

‘As the industry recognises the longer term need to lessen the reliance on traditional tobacco, switching towards the fast-growing “New Category” products area, the signs for BAT are encouraging.

‘The group is confident of reaching its 2025 milestone of £5billion revenue and at the same time turning the unit into profitability… the group’s established scale and cash generation pulls the target closer.’

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