British American Tobacco (BAT), the manufacturer of well-known cigarette brands such as Lucky Strike and Dunhill, has publicly admitted that its U.S. ventures might become economically futile within the next few decades. This admission comes in the wake of a $31.5 billion non-cash impairment on Wednesday, ascribing a 30-year lifespan to these tobacco brands' value.
Declining Smoking Rates and Shift to Alternatives
As global smoking rates decline, BAT is shifting its focus towards alternatives like vapes and oral nicotine products. Velo, a BAT product, is currently leading the market in Europe. Despite these efforts, the company is facing significant obstacles in the U.S., where authorities have rejected some of its vape products and the market is being undercut by illegal disposables.
Competitive Landscape in the Heated Tobacco Market
BAT is trailing behind its primary competitor, Philip Morris International (PMI), in the heated tobacco market. PMI's IQOS currently enjoys a 70% market share, dwarfing BAT's 18.2% in key markets. BAT's target is to derive 50% of its revenue from new categories by 2035, a transition slower than PMI's goal of two-thirds by 2030.
Impact on Stock Value and Shareholder Buybacks
The slower transition has negatively impacted BAT's stock value, and it has not been able to resume shareholder buybacks due to its need to reduce its leverage ratio further. In stark contrast, another tobacco company, Imperial Brands, has refocused on traditional cigarettes, resulting in better stock performance due to healthy dividends and share buybacks.
BAT's recent announcement has disappointed investors, leading to a less than stellar performance of the company's shares compared to its rivals'. The industry is closely watching to see how BAT navigates this challenging landscape, as it strives to secure its future in a rapidly changing market.