Imperial Brands (IMB) has revealed that plans are under way to change the make-up of its brand portfolio. Chief executive Alison Cooper confirmed plans to sell off some products via a number of “divestment opportunities” to create a more concentrated portfolio. But she wouldn’t say which brands are slated to go, what types of products are on the chopping block, or if any buyers have been lined up. In theory, one could assume Ms Cooper is targeting some of the group’s more traditional cigarette brands, particularly in light of plans to focus on “next-generation products” (NGPs).
Health-conscious millennials don’t seem to think smoking is as cool as past generations. The number of cigarettes sold by the two main UK-listed tobacco companies, British American Tobacco (BATS) and Imperial Brands, has been on a steady decline over recent years, while growing excise duties and illicit trading across less developed markets have damaged volumes further. This has pushed these companies into developing alternative, yet complementary, products – often another form of nicotine delivery or an energy product.
One such alternative product is the e-cigarette, a practice otherwise known as vaping. Public health charity Action on Smoking and Health (ASH) estimates that there are around 2.9m vape users in the UK, or close to 6 per cent of the adult population. Most people are using them to help quit cigarettes as they still get the hit of nicotine but without the smoke particles. Others use them alongside traditional smoking.
| Prevalence of e-cigarette use in the UK | ||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| Number of vape users | 700,000 | 1,300,000 | 2,100,000 | 2,600,000 | 2,800,000 | 2,900,000 |
| % of adult population | 1.7 | 2.7 | 4.2 | 5.4 | 5.7 | 5.8 |
| Year-on-year rate of change | 86% | 62% | 24% | 8% | 4% | |
| Source: Action on Smoking and Health (ASH) | ||||||
Cigs going up in smoke
Across the wider cigarette market, the volume of sticks sold fell 5.7 per cent during the six months to March 2018. So in that context, the 2.1 per cent decline in volumes sold by Imperial Brands over the same period doesn’t seem quite so bad. But over at British American Tobacco this picture was more complicated. The acquisition of Reynolds boosted the volume of cigarettes it sold during 2017, increasing by 3.2 per cent to 686bn. But strip out the contribution from Reynolds, and volumes actually fell 2.6 per cent.
The steady decline in volumes has these tobacco companies looking at how to make the most money out of a shrinking pool of smokers. The answer seems to lie in encouraging them to spend more on premium brands. Volumes of cigarettes under Imperial Brands’ premium “growth” options increased by 4.6bn units, compared with declines in the more basic options. It’s not unreasonable to assume that the disposals Ms Cooper has alluded to will focus on the cheaper end of Imperial’s brand portfolio.
Smoking accessories also face an uncertain future. In March, Imperial offloaded a range of additional tobacco products, including roll-your-own brands, tubes, tips, cigarette papers and other accessories in the US. Ms Cooper said the disposal of these American assets was part of a wider strategic review.
Similarly, at British American Tobacco, the focus is on the “strategic portfolio”, which now includes its “global drive brands” (GDBs) and “key strategic brands”, along with various contributions from Reynolds. British American Tobacco’s share of its key markets improved by 40 basis points last year, driven mainly by a 110 basis point improvement in GDB share (excluding the US). In fact, GDBs now account for more than half of cigarette revenues and tobacco heating product sales outside the US. Market share in America is also improving, albeit at a slower pace.
Hope lies with the next generation
Instead of giving up nicotine entirely, smokers are buying what they believe is a healthier alternative. Public Health England and the Royal College of Physicians have determined that vaping is substantially less harmful than smoking. It’s thought the most harmful part of smoking cigarettes is the toxins and smoke particles that are emitted when the sticks are burnt. It makes sense, therefore, that companies are developing products that heat tobacco, but don’t burn it.
Imperial Brand’s Ms Cooper said such products present a “significant growth opportunity”, and the aim is that they will become a “material part” of the group’s future sales and profits. More specifically, Imperial believes vape products are the largest and most developed opportunity within NGPs. It reckons the market is currently worth around $4bn (£3bn), but could increase to $30bn by 2020.
Imperial Brands has tapped into this market with its electronic cigarette brand blu. The biggest markets for distribution are currently the UK and US, but it is also sold in France, Italy, Germany and Russia. Imperial aims to be selling blu in a total of 10 markets by the end of the current financial year, and in a total of 20 markets by FY2019. Heated tobacco products are a smaller category of NGPs, and have proved particularly popular in Japan.
Since 2012, British American Tobacco has invested around $2.5bn in its own NGPs, sometimes referred to as “potentially risk-reduced” products. The acquisition of Reynolds not only boosted tobacco volumes, but also transformed British American Tobacco into the world’s largest vaping company. By the end of the current financial year the group is aiming for £1bn in sales from NGPs, increasing to £5bn by FY2022. This will largely be generated by its main vaping brand Vype, with some contribution from tobacco heating product glo, as well as other oral tobacco and nicotine products.
