BAT Plans Catch-Up in Japan Smokeless Tobacco Device Fight

  • Japan is key battleground for heat-not-burn tobacco devices
  • BAT to expand Glo nationwide to seek market share from iQOS

British American Tobacco Plc is planning a smokeless offensive in Japan, the country that has taken to heated tobacco cigarette alternatives most quickly, to catch up with runaway market leader Philip Morris International Inc.

BAT plans to expand sales of its Glo device across Japan at the start of the second half, the London-based company said Thursday. The product delivers a nicotine hit from tobacco without combustion, and so far BAT sells it in only one city in that country, Sendai. 

Japan has become the most prominent battleground for heated-tobacco products as the billions of dollars spent on developing cigarette alternatives begins to bear fruit. Philip Morris’s heat-not-burn product, iQOS, already has a 6.8 percent share of Japan’s entire tobacco market, leaving BAT and Japan Tobacco Inc. scrambling.

“iQOS is starting to hurt everyone," Shane MacGuill, an analyst at Euromonitor said by phone. “Philip Morris is so much further along and there is an increasing concern within BAT that they have to catch up.”

After 10 weeks on sale, Glo claimed a 5.4 percent share of tobacco sales in Sendai’s largest convenience store chain.

BAT also said it plans to introduce its heat-not-burn products in five markets this year, including Japan. Philip Morris aims to end 2017 selling iQOS in 30 to 35 markets. 

In addition to the revenue boost, heated tobacco devices have gained the attention of investors because they may accelerate the decline in conventional cigarette sales more than vaping devices have. Philip Morris said Wednesday iQOS is attracting smokers of Japan’s more profitable, premium cigarette brands and an increasing proportion of new users are switching away from rivals.

BAT, which makes the Pebble vaping device, is bigger than Philip Morris in e-cigarettes, a different form of smoking alternatives, which deliver nicotine without tobacco. The company has built up the world’s largest vapor business outside the U.S. through the acquisitions of e-cigarette makers in the U.K. and Poland. Its position in North America will be bolstered by its $49.4 billion acquisition of Reynolds American Inc., which the company reiterated it expects to complete in the third quarter.

BAT expects that Japan will end up making up 40 percent to 50 percent of the world’s heat-not-burn market, Kingsley Wheaton, head of next-generation products, said at a press conference. Vapor products are banned in that country. The company considers there will be growth in both vaping and heated tobacco, BAT Chief Executive Officer Nicandro Durante said.

Investments in new products will mean profit growth is weighted toward the second half of 2017, Durante also said.

BAT also said adjusted profit from operations rose 9.8 percent to 5.48 billion pounds ($6.8 billion) in 2016. The weakness of sterling after the U.K.’s vote to leave the European Union boosted the value of international sales.

The stock was little changed at 5,015 pence at 12:53 p.m. in London.

Among other highlights:

  • BAT sold next-generation products in 11 markets at end of 2016, plans to add another 10-11 this year and an additional 20 in 2018: CEO
  • Cigarette volume rose 0.9% in the first nine months of the year on organic basis, but a drop in the fourth quarter meant it finished 0.8% lower for the full year
  • Final dividend of 11.8 pence a share, boosting total dividend payout for the year 10%
  • Co. forecasts transactional FX hit of 2% in 2017, though also a 9% tailwind from translational impact
  • CEO says BAT probably won’t have funds for M&A for coming 1-3 years due to debt from Reynolds purchase
  • Net debt/ebitda to approach 4 times by year end: CFO
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