Wednesday, December 19, 2018

Is the cigarette market burning out?


UK-based British American Tobacco (BAT) has suffered a 10 per cent revenue decline during the first 6 months of the year, provoking predictable questions of whether the market is burning out.

In reality, BAT have a strengthening sterling to blame for the drop (on a consistent currency basis, revenue actually rose by 3 per cent), but the headline will do the company no favours in smoking out those who are quick to judge what is a declining industry in the UK.

Unfortunately for cigarette retailers, there is no smoke without fire. Britain‘s tobacco-product industry reached a peak in 1974 but now continually suffers a steady deterioration year-on-year as health warnings, increasing awareness and advertising prohibitions have helped to stub out sales.

Imperial Tobacco announced the impending closure of their Nottingham factory in April, consequently ending cigarette production in the UK – a symbolic death of an industry which was once a stalwart of the nation.

But, curiously, despite having their headquarters in the UK, BAT are far more focused abroad and only possess an approximately 8 per cent share of the British market. Their main brands include Kent, Lucky Strike and Pall Mall – none of which feature in the top 10 UK cigarette brands (according to public health charity ‘ASH‘). Non-reliance on the UK market is undeniably a blessing for BAT, who have focused energy on regions such as Mexico and Indonesia where they continue to enjoy strong performance; all of this suggests that retailers of tobacco in the UK and other health-conscious European nations such as France are struggling in this department but those further abroad could still be thriving.

Whilst cigarette sales have slumped by 42 per cent in Britain over the past 14 years, there are now between 1.3m and 2m people in the UK using e-cigarettes – the invention, which was initially designed as a quitting aid, has now become a recreational product in its own right, thus catching the eye of retailers.

Recent headlines have suggested some scientists are debating whether e-cigarettes are as harmless as first thought, with long-term effects still unknown, but, whilst there is little proof of these issues, manufacturers are able to swerve many tough regulations which are usually placed on smoking products.

Even trusted high-street chemist Boots has begun to sell e-cigarettes, helping their cause to be considered safe mainstream products, whilst Lloyds pharmacy stock BAT‘s own Vype brand of e-cigarettes.

By looking to sell Vype in the UK, a market they don‘t usually focus on, BAT is clearly indicating the e-cigarette has big retail potential in Britain. But their efforts are not going entirely smoothly; a press campaign promoting Vype as ‘pure satisfaction‘ was banned, thus showing the industry will still encounter substantial problems despite its electronic evolution.

The BAT revenue decline is rather insignificant in what it says about the UK tobacco market as this is something the company largely neglect in favour of foreign exploits – it says more about the strength of the British pound. However, BAT‘s Vype venture implies there is still money to be made in the UK as smoking becomes yet another activity to undergo the electronic revolution.