BAT’s Dual E-cigarette Strategy Delivers Over $6 Billion in Profit in H1 2019

According to Bloomberg, British American Tobacco (BAT) reported profits exceeding analyst expectations in the first half of 2019, as cigarette alternatives mitigated the ongoing decline in cigarette sales. Adjusted operating profit at constant currency rose by 5.9% to £5.21 billion (approximately $6.32 billion), surpassing analyst expectations of £5.14 billion.
 
Revenue from cigarette alternatives such as heated tobacco and e-cigarettes grew by 27%. The company stated that excluding currency effects, its target for annual growth of 30% to 50% remains achievable. Piper Jaffray analyst Michael S. Lavery noted that BAT faces a daunting task of competing with Philip Morris International's iQOS and Juul. The company expects that products launched in the second half of the year will accelerate growth.

1. History of British American Tobacco

British American Tobacco was founded in 1902 through a merger of the Imperial Tobacco Company of the UK and the American Tobacco Company. In the 1960s, the company ventured into paper, pulp, cosmetics, and food industries, initiating a diversification strategy, but later refocused on tobacco.

In 1994, BAT acquired the American Tobacco Company.

In 1999, the group merged with Rothmans International, then the fourth largest tobacco company globally. In 2000, it acquired Imperial Tobacco Canada, gradually expanding its scale.

In 2013, the company established China Tobacco British American Tobacco International Limited in Hong Kong through joint investment with a subsidiary of China National Tobacco.

In 2017, the company acquired the remaining 57.8% stake in Reynolds American Tobacco Company.

In terms of R&D investment in new tobacco products, BAT has been investing £50 million annually in "next-generation tobacco products" since 2014, matching its investment in traditional tobacco.

Currently, BAT operates globally, with products sold in over 55 countries and regions, and factories in 42 countries. Recently, BAT announced an investment of €800 million in its Romanian factory over the next five years to produce specially designed tobacco sticks, Neostik, for use with the heated tobacco device glo.

2. BAT's New Tobacco Strategy

Due to the momentum of heated non-combustible and vapor-type e-cigarettes, BAT is actively positioning itself in this area.

1. Vype

Vype is produced by BAT's subsidiary NICOVENTURES, with e-liquid manufactured in Manchester, UK. At the beginning of 2019, BAT launched two new Vype e-cigarette devices in the UK—Vype iSwitch and Vype iSwitch Maxx.

According to BAT's researchers, these two products utilize the company's Vype puretech technology, which is a superior heating technology featuring an ultra-thin stainless steel blade about the thickness of a hair. Its surface area is ten times larger than traditional coil and wick heating systems, providing a more precise and measurable way to heat e-liquid. Multiple patents have been filed to protect its intellectual property.

2. Glo

Glo began sales in Sendai, Japan, in December 2016 and was launched in Canada in 2017. Its heated non-combustible device features a high-quality aluminum alloy casing and a sturdy plastic base. Internal materials include heat-resistant plastic, a vacuum tube that keeps the exterior cool to the touch, rapid heating technology, and a high-quality lithium battery.

Glo is sold in multiple cities worldwide; as of December 2018, BAT's heated device—glo—was available in 16 markets globally.

3. Glo iFUSE

The new hybrid product "Glo iFUSE" combines e-cigarette technology with fresh tobacco leaves. Glo iFUSE integrates e-cigarette technology with carefully selected tobacco leaves, making it a patented new tobacco product. When using this product, the heating coil heats the e-liquid, and the mixed tobacco leaves produce vapor. As the vapor passes through the tobacco leaves, the aerosol temperature drops from 35 degrees Celsius to 32 degrees Celsius, allowing the energy exchange to infuse the tobacco flavor into the vapor.

4. Vuse

Vuse is a brand under Reynolds American, the second-largest tobacco company in the U.S., launched in 2013. In 2017, BAT acquired the remaining 57.8% stake in Vuse for $49.4 billion, currently holding a 10% market share in the U.S. e-cigarette market.