New tobacco and nicotine products weaken cigarette companies on the stock market

British American Tobacco's announcement of a €29 billion asset writedown of its US cigarette brands has highlighted the tobacco giant's fragility. The stock market declines of major cigarette manufacturers in 2023 have cast doubt on investors' ability to successfully transition to new tobacco and nicotine products.

The statements made by British American Tobacco (BAT) CEO Tadeu Marocco on December 6, 2023, have worried the markets. He announced that smokeless tobacco and nicotine products (e-cigarettes, nicotine pouches, heated tobacco) are not expected to represent 50% of its revenue until 2035, while its rival Philip Morris International (PMI) maintains that they will constitute two-thirds of its revenue by 2030.

Tadeu Marocco also announced on the same day a write-down of BAT's assets of 31.5 billion dollars (29 billion euros), attributable to its cigarette brands in the United States.[1]BAT had in fact acquired Reynolds American in 2017 for $49 billion (€45 billion), in order to take over the Camel and Newport brands. Although they are currently very profitable, the lifespan of these US cigarette brands has in fact been estimated at 30 years, a first in the history of the tobacco industry. This is explained in particular by the decline in smoking prevalence in the United States, which fell from 21 % in 2005 to 11.5 % in 2021, and by the disinterest of young consumers in cigarettes, in favor of new nicotine products.

BAT and other cigarette companies are subject to stock market fluctuations

This announcement was immediately followed by a drop of 8.% in BAT's share price, a loss of 5 billion dollars (4.6 billion euros).[2]It also led to a decline in its competitors, of 3 % for Altria and 2 % for Philip Morris International (PMI)[3] and Imperial Brands. Over the full year, the stock market value loss extended to 31,% for BAT. The year 2023 also significantly affected the stock market value of the other tobacco multinationals that make up the "Big Four" (PMI, Japan Tobacco International and Imperial Brands).

Market value of tobacco multinationals

(Reuters Graphics)

The markets thus seem to be beginning to punish the various strategic choices of the major cigarette manufacturers. BAT would be penalized both by its debt in the cigarette sector and by its delay compared to PMI in the heated tobacco segment. The proliferation of disposable e-cigarettes ("puffs") has also undermined its business model of e-cigarettes based on refills ("pods"). The emergence of a myriad of small puff producers has put cigarette manufacturers in the face of unusual competition, while they have long operated in a market closed to competition, until now conducive to commercial cartels and price increases for tobacco products.[4].

Uncertainty in the markets for new tobacco and nicotine products

PMI, which occupies 70.% of the heated tobacco market compared to 18.% for BAT and has become a leader in the snus and nicotine pouches market with the acquisition of Swedish Match, seems for the moment to be better able to complete its declared transition to new tobacco and nicotine products. However, smoked tobacco products continue to represent the bulk of PMI's revenues. The heated tobacco strategy is nonetheless risky and could at any time come up against regulatory or fiscal tightening that would significantly limit this market. The ban on flavors for heated tobacco sticks in the European Union is an illustration of this.

For its part, Imperial Brands announced in 2021 that it was abandoning new tobacco and nicotine products, in which it was lagging, to refocus on conventional tobacco products. The group's stock market value is holding up well and is significantly lower than those of PMI or BAT, but this refocusing strategy could prove less risky, even if it appears to be limited in time.

E-cigarettes – disposable or not – nicotine pouches and other new products could also face regulatory restrictions, as is currently the case in Australia and the United Kingdom, or even complete bans.[5]These numerous uncertainties contribute to a certain reluctance among investors towards tobacco multinationals, fueled by a ethical movement financial disinvestment in industries deemed harmful. In France, the new socially responsible investment (SRI) framework, for example, includes a social criterion that excludes investments in the tobacco industry sector[6]These regulatory developments also explain the renewed offensive by the tobacco industry against the Framework Convention on Tobacco Control (FCTC), a few weeks before the holding of its tenth Conference of the Parties (COP 10).[7], while the World Health Organization (WHO) has just renewed its warnings on electronic cigarettes.

Keywords: British American Tobacco, Philip Morris, Japan Tobacco Imperial, Imperial Brands, tobacco industry, stock market, market value, new nicotine products, finance

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[1] Karaian J, Cigarette Maker Cuts Value of Camel and Other US Brands by $31 Billion, The New York Times, published December 6, 2023, accessed December 19, 2023.

[2] CNN/Reuters, British American Tobacco wipes $31.5 billion off value of US cigarette brands, CNN Business, published December 6, 2023, accessed December 19, 2023.

[3] Sherman N, Tobacco giant sees sunset for US cigarette business, BBC News, published 6 December 2023, accessed 19 December 2023.

[4] Rumney E, Big Tobacco's transition under fire as WHO targets vaping, Reuters, published December 14, 2023, accessed December 19, 2023.

[5] Donnellan A, Big Tobacco's smoke-free rush may soon burn out, Reuters, published December 15, 2023, accessed December 19, 2023.

[6] SRI label supported by public authorities, label benchmark, Directorate General of the Treasury, published on December 12, 2023, consulted on December 19, 2023.

[7] The FCTC COP 10, which was scheduled to be held in Panama in November 2023, has been postponed to February 5-10, 2024.