British American Tobacco Plc (BAT) has made a significant move by devaluing some of its US cigarette brands by approximately £25 billion ($31.5 billion), leading to the most substantial decline in shares in nearly four years.
Diminishing Brand Value
The decision to take a non-cash impairment reflects the projected decline in the worth of these brands over the next 30 years. This estimation is a response to the increasing trend of smokers quitting, opting for more affordable brands, or transitioning to smoking alternatives.
Revenue Growth and Market Challenges
Adding to investor concern, British American Tobacco revealed that organic revenue growth for the current year is expected to land at the lower end of its previously projected range. Moreover, the outlook for the coming year suggests growth rates in the low single digits.
Morgan Stanley analysts Rashad Kawan and Sarah Simon pointed out the “disappointing” mid-term guidance, underscoring the hurdles in the US cigarette market. They highlighted the mounting competition in emerging categories like vapes, nicotine pouches, and heated tobacco.
Market Response and Competition
Following this announcement, British American Tobacco experienced a significant stock drop in London, plunging by as much as 9.3%, marking the sharpest intraday decline since the onset of the pandemic in March 2020. Notably, the company’s shares have fallen approximately 30% this year, surpassing the decline seen in Marlboro maker Philip Morris International Inc., which stood at triple the rate.
Transition to Smoking Alternatives
With the dwindling demand for cigarettes, British American Tobacco and its competitors are engaged in a fierce battle for market share in the realm of tobacco alternatives. BAT disclosed that its alternatives division, which includes Vuse vapes and Velo nicotine pouches, is on track to break even in 2023, ahead of schedule, and is anticipated to turn profitable next year.
Despite this, BAT faces a competitive landscape. It predicts that alternatives will only constitute about half of its sales by 2035, a goal trailing by about a decade compared to its larger rival, Philip Morris.
Challenges and Regulatory Scrutiny
British American Tobacco’s Vuse vapes face formidable competition from disposable vapes, primarily produced by emerging players, many of which are based in China. Notably, disposables now claim over 50% of the US vape market, posing a challenge to established players.
Meanwhile, governments in key countries like France, the UK, and the US are contemplating stricter regulations on disposables and vape flavors due to concerns about underage usage. British American Tobacco has announced plans for a media campaign to deter underage vaping.
Industry Evolution and Company Strategy
Major cigarette companies have been grappling with a changing landscape, pressured by governments’ anti-smoking initiatives and declining consumer demand in crucial markets. For instance, Philip Morris separated its US cigarette operations more than ten years ago, responding to investor demands for higher dividends and increased share buybacks.
BAT’s CEO, Tadeu Marroco, has initiated management changes in recent months to revitalize the company’s sluggish performance. However, despite these efforts, analysts from RBC Capital Markets have expressed concerns over the grim outlook for 2024, indicating potential disappointment among investors who may have been expecting news of a share buyback.