British American Tobacco recruited 1.4 million new users of vapes, heated tobacco and nicotine pouches in the first quarter, as it seeks to make cigarette alternatives profitable by 2025.
Shares in the London-headquartered tobacco company gained more than 2% in early stock market trading, after it reported a strong performance in both cigarettes and “non-combustible” products such as Vype, its flagship vapour brand.
BAT has set a target of 50 million users of non-cigarette products by 2025, as it aims to burnish its credentials as a modern tobacco company promoting so-called “reduced risk” choices for nicotine users.
The company said growth in cigarette alternatives had accelerated. But sales will have to continue picking up pace if BAT is to achieve its goal, after the 1.4 million increase took it to 14.9 million, less than a third of the target.
It also wants to achieve annual revenues of £5bn from three new products – Vuse vapes, Velo oral nicotine pouches and Glo heated tobacco – by the same date.
That will require significantly higher growth than it achieved last year, when it reported sales in that category of £1.4bn, up 15% year on year.
In a trading update for the six months to 28 June, chief executive Jack Bowles said the company was “accelerating our transformation” towards less harmful nicotine delivery methods.
The shift in emphasis has not been without controversy.
Earlier this year, the Guardian and the Bureau of Investigative Journalism revealed that the company has spent £1bn to harness the marketing power of social media influencers and celebrities to push its non-cigarette products.
The findings raised concerns that its nicotine products are likely to prove popular with young people, including children. The company said all of its products were marketed towards adults trying to wean themselves off traditional cigarettes.
Nearly 90% of BAT’s revenue is still derived from cigarettes, with revenue from “combustibles” in 2020 slightly down at £22.8bn compared with total revenue that was also slightly lower than 2019 at £25.8bn.
In its trading update, BAT showed that its fortunes still depend to a large extent on cigarettes, pointing to the benefit it enjoyed from resilient pricing in the US and recovering sales in emerging markets such as Pakistan, Bangladesh and Vietnam.
The company said it expects to feel the effect on its income from the wave of Covid-19 sweeping India, where it is the largest shareholder in ITC.
BAT holds a stake of nearly 30% in the company, from which it earned £386m in dividends last year.
BAT gave no further update on the impact of Covid-19 on its business. At the end of 2020, it said it had sold 638bn individual “sticks”, 4.6% lower than the year before but slightly better than an industry-wide decline of up to 5.5%.
Most of the impact was down to supply chain disruption rather than reduced appetite for smoking, it said, with the long-term impact on sales likely to be “relatively limited”.
BAT loaned Covid-19 testing equipment to the UK government during the year and also won plaudits for the work of its subsidiary, KBP, on developing a vaccine, which is yet to come into use.